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. Last Updated: 07/27/2016

IMF Forms Credit Plan to Avert Crises




WASHINGTON -- The International Monetary Fund has approved new credit lines for countries with top-notch economic policies, allowing them to pre-qualify for help and avoid being sucked into an economic swamp, IMF Managing Director Michel Camdessus said over the weekend.


At a hastily arranged news conference, Camdessus said Sunday that the deal would provide unlimited financing for countries that met international standards on debt structures, banking systems, statistics and other issues.


But he hoped countries would never have to tap the funds.


"In creating this facility, our dream is never to have to activate it," Camdessus said. "The contingency reserve facility we are announcing today is for the country to establish a supplementary line of defense before they are hit by contagion."


The idea of an IMF-sponsored Contingency Credit Line, or CCL, was floated last year as Brazil, the world's eighth-largest economy, fell victim to a deepening world economic crisis.


The problem was partly contagion - Russia's decision last July to default on some debt had terrified investors and kept them away from emerging markets - but it was also linked to economic weaknesses in Brazil, including concern about high spending and problems in balancing the budget.


"If we had granted a CCL last September, we would have been making the mistake of the year," Camdessus said, noting that Brazil at that time did not meet the economic conditions now established for the new credit line.


"Brazil had not such things in place at that time. I hope sometime in the future, sometime down the road, Brazil could apply for this facility," he added.


The IMF said countries seeking to make use of the CCL would have to meet a number of criteria, including maintaining "a constructive relationship with their creditors."


The fund would have to give a country a clean bill of health in its annual economic review and the country itself would have a satisfactory economic program.


"The CCL provides short-term financing, if the need arises, to help members overcome the exceptional balance-of-payments financing needs that can arise from a sudden and disruptive loss of market confidence due to contagion, that is circumstances that are largely beyond the member's control," it said.


The new contingency facility is linked to the IMF's existing high-interest emergency lending program, which can be used after countries get into financial trouble. It charges 300 basis points more than regular IMF loans for the first year of the program, although the interest rate spread will rise in stages to up to 500 basis points over that on normal loans. The CCL was strongly backed by the United States, although it had a rough ride through several rounds of discussions at the IMF executive board.


Some countries were worried that pre-approving large loans could damage the IMF's liquidity position, while others said it would be hard to set effective economic criteria outlining the policies countries must adopt to qualify for the cash.


The IMF statement said there would be no formal access limits to the CCL, although commitments would normally be between 300 percent and 500 percent of a country's quota at the IMF. Five-hundred percent of Brazil's quota would amount to about $20.5 billion, while Argentina would qualify for $14.31 billion if it received 500 percent of quota.


Several countries, including Argentina, have already set up contingency credit lines with private banks, allowing them to receive money in a hurry if they face unexpected problems.