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NZ expects to be called on to help with €130 billion Greek bailout through IMF credit lines; Could we be lending over NZ$200 million?
By Alex Tarrant
New Zealand might be called on to contribute anywhere between NZ$50 million and NZ$225 million for the latest Greek bailout through arrangements the government has with the International Monetary Fund (IMF).
There is a possiblity it may even be more than that, given the New Zealand government is in a better fiscal position than many of its global peers - something the IMF takes into account when deciding where to source funding from.
The IMF indicated on Wednesday that it intended to contribute €28 billion of the new €130 billion bailout it has arranged with the European Union for Greece. This is the second time the IMF has lent funds for a Greek bailout. The first time, in May 2010, the IMF contributed €30 billion toward a €110 billion bailout for the Greek government.
While the IMF said it would provide 28 billion euro for the support package, it told Bloomberg 9.7 billion euro of this remained from the first Greek bailout, meaning it would be putting up about 18 billion euro for the second package. This article differs from the one sent earlier in the subscription email, by incorporating the 28 billion euro figure as well as the 18 billion euro figure.
New Zealand has been a member of the IMF since 1961, and has commitments totaling NZ$3 billion to the Fund through cash sitting at the Fund, and two credit lines - promissory notes - the IMF can call on.
Treasury says that although it hasn't been approached yet by the IMF to help finance the Greek deal, given recent public announcements by the IMF, it looks likely that Greece will be drawing loans.
"So, yes, New Zealand might reasonably expect to receive calls through the IMF’s Financial Transaction Plan in the coming months which will include loans that would be destined to the Government of Greece," a Treasury spokesman told interest.co.nz.
"Prior to receipt of such a request from the IMF there isn’t anything to be gained from speculating on size but, based on past performance, any call for contributions in the months ahead involving New Zealand would be based on our quota share and normal burden sharing methodology as per the case of any new IMF loan destined for any recipient government," the spokesman said.
But let's speculate anyway
Interest.co.nz reckons New Zealand's contribution to the bailout could be anywhere in the region of NZ$200 million. But how much we contribute could depend on how the IMF wants to source the cash for the Greek bailout.
The first arrangement New Zealand has with the fund is the regular IMF quota the fund has with all of its 190-odd members. New Zealand's overall quota is for 894.6 Special Drawing Rights (SDRs). Use of quotas for IMF loans are dealt with through the IMF's Financial Transaction Plan, referred to by Treasury above.
An SDR is effectively the IMF's currency, made up of a basket of the US dollar, Japanese yen, euro, and pound sterling. One SDR today converts to NZ$1.87. That means New Zealand's IMF quota is currently equivalent to about NZ$1.677 billion.
Twenty-five percent of a country's quota always sits at the IMF as the country's 'Reserve Tranche Position', while the remaining 75% are promissory notes the fund can call upon if it needs the funding. If it calls on those promissory notes, they get added to New Zealand's Reserve Tranche Position (effectively showing the amount of actual money NZ has paid to the fund to help finance its activities).
Latest figures from the IMF show New Zealand's Reserve Tranche Position is 281.97 million SDR. Twenty-five percent of New Zealand's quota would be 223.65 million SDR, so 58.32 million SDR worth of promissory notes has also been called upon by the IMF.
That means on top of the equivalent of NZ$528.57 million of New Zealand's Reserve Tranche Position (the 25%), New Zealand is also lending the IMF the equivalent of NZ$109.32 million through those promissory notes.
New Zealand's quota makes up 0.38% of the overall quota resources available to the IMF. If the IMF were to use quota resources to provide Greece with its €18 billion bailout contribution, and if members were drawn upon proportionately, New Zealand might be asked to provide NZ$109 million on current exchange rates for the IMF to on-lend to Greece.
Going on the 28 billion euro figure from the IMF, which includes funds not yet paid from the first bailout, New Zealand might be required to lend the equivalent of NZ$171 million from today to help finance the package, it it pays proportionately from its quota.
But that's not all we're lending
The quota resources are supposed to be the IMF's first point of call when it comes to lending money to governments to help with balance of payment problems.
But lately that hasn't been the case due to political wrangling over a proposed 100% quota increase for IMF members. This has meant the IMF has been drawing on another line of credit it has with 40 developed and developing economies called the New Arrangements to Borrow (NAB) facility.
New Zealand signed up to the NAB facility in 2010, promising to provide up to 624.34 million SDR (currently worth about NZ$1.17 billion) to the IMF in times of significant financial crisis if the fund had exhausted all other avenues of funding.
New Zealand's NAB contribution is 0.17% of total NAB commitments. So if the IMF decides to use the NAB facility to source the €18 billion and it calls on members proportionately, New Zealand might be expected to provide NZ$48.8 million.
Going on the 28 billion euro figure, funds sourced proportionately through the NAB might see New Zealand lending NZ$76.7 million.
The Greek deal was finalised during a six-monthly NAB activation window, meaning the IMF would be able to call on the funds even if they were to be drawn upon after the current window ends at the end of this month.
New Zealand is currently lending 42.9 million SDR through the NAB facility (to Portugal), which is equivalent to NZ$80.4 million on current exchange rates.
But could it be more?
But based on past experience, could New Zealand be called on for more than what might be expected if the IMF sources funds through its quota system?
Last year the IMF sourced 8.6 billion SDR worth of funding from the New Arrangements to Borrow facility (even though it had not exhausted quota resources). New Zealand contributed 42.9 million SDR of this - 0.5% of what was sourced by the IMF through NAB funds.
Using this proportion of lending, New Zealand might be expected to provide NZ$144 million for the IMF's Greek bailout loan.
Meanwhile, the IMF included in the latest package for Greece 9.7 billion euro from its first bailout of the nation in 2010. That means we still haven't finished lending money for that package either.
Going on the 28 billion euro figure, and assuming New Zealand might provide 0.5% of the funds, we might be required to lend in the order of NZ$225.6 million.
And it could also be more given the New Zealand government is in a better fiscal position than many of its developed peers - something the IMF takes into account when deciding who to source funding from (see box below).
'Won't say where we get it from'
A spokesman for the IMF told interest.co.nz the fund did not publish details of where resources were drawn from for specific loan programmes.
“Resources for specific fund lending programmes are drawn from quota and New Arrangements to Borrow (NAB) resources in such a way as to achieve even burden-sharing among members and NAB participants over time," the spokesman said.
"However, it is important to note that wherever the resources come from, the risk is borne by the IMF membership as a whole,” he said.
Each country's NAB drawings are published on the IMF's website. See New Zealand's page here.
Loans for the bailout package will get released in tranches over the next few years. The EU on Thursday morning (NZ time) announced the first instalment of EU funds, totaling €39.4 billion, would be disbursed in several tranches.
How the IMF decides who pays
See the table below from the IMF's website on how it decides which members to source funding from:
This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.l
This article differs from the email version, incorporating the 28 billion euro figure as well.