By Alex Tarrant
The risk of the International Monetary Fund (IMF) calling on New Zealand for a loan up to NZ$1.3 billion has increased in recent months as the European sovereign debt crisis intensifies and rumours swirl about the IMF intervening in the Euro situation with financial support for Italy.
Finance Minister Bill English earlier this week acknowledged there might be a role for the IMF in helping reinforce European efforts to stem the crisis, which, if no solution is forthcoming, could lead to a downturn worse than the 2008/09 crash triggered by the subprime crisis and collapse of US investment bank Lehman Brothers.
The IMF refuted a Reuters article earlier this week which said the Fund was in talks with Italy concerning financial support for what is Europe's third largest economy. The IMF said talks were only focussed on fiscal monitoring.
A source familiar with the matter had told Reuters the IMF and Italian government were in discussions around a 400 billion euro (US$530 billion) contingency package. Italy had not filed a request, but the situation was building in that direction, the source said.
Reuters reported that was more than the roughly US$380 billion from member quotas which the IMF currently had available to lend to all countries, although talks were under way among the G20 major economies on boosting the IMF's resources.
Italian newspaper La Stampa also reported last week the IMF was looking at giving Italy a loan worth 600 billion euros at a rate of 4-5% over 18 months, which was also denied by the Fund.
Could NZ get a call?
New Zealand has a quota of 894.6 million Special Drawing Rights - effectively the IMF's currency - held with the fund, worth about NZ$1.8 billion. See the IMF quotas from all countries here. New Zealand's quota makes up 0.38% of the Fund's total quota of 237.95 billion SDR's, worth just under US$380 billion.
However, following the 2008 crisis, the IMF in 2009 sought to expand the main backstop arrangement it had for its quotas, called the New Arrangements to Borrow (NAB), by tenfold to US$550 billion (since increased to US$579 billion after Poland joined).
In April 2010, New Zealand's government signed up to the massive expansion of the New Arrangements to Borrow in case the world faced another crisis like the 2008/09 market meltdown. New Zealand was one of 40 countries which promised funds, with the commitment only to be called upon if needed, and only if the IMF had exhausted all other options. See the announcement at the time from Finance Minister Bill English here.
New Zealand agreed to lend up to 624.34 million SDRs, or US$1 billion at the time, to the IMF under the agreement if it had exhausted its quota funding. The Treasury does not have cash set aside specifically for the agreement, and given the government's deficit, it would effectively have to borrow money for any contribution. In the government's Pre-election fiscal update, this appears as a NZ$1.254 billion contingent liability on the books.
In Treasury's Pre-election economic and fiscal update released on October 25, before the Reuters report that the IMF and Italy were in talks, Treasury states:
"The forecast level of government commitments to international financial institutions is subject to change, depending on the Government's response to any changed financial plans on the part of these institutions. The risk of government commitments to the International Monetary Fund being called has increased due to the Global Financial Crisis and recent world events, including in the Euro area."
It's been triggered
IMF access to the NAB gets activated for periods of six months, although only if it is accepted by participants representing 85 percent of total credit arrangements, and then the IMF board. Before the 2010 changes, if the Fund wanted to draw on the NAB, each individual loan had to be approved by participants.
The NAB has been activated three times, the IMF says on its website:
"First, to finance a Stand-by Arrangement for Brazil in December 1998, when the IMF called on funding of SDR 9.1 billion, of which SDR 2.9 billion was used. Second, on April 1, 2011 the Executive Board formally completed the process of activation, following the effectiveness of the expanded NAB on March 11, 2011 and a vote by NAB participants after going through their necessary internal procedures. The NAB was activated for six months in the amount of SDR 211 billion (about $339 billion) to increase the financing available to the Fund.
"The NAB was most recently activated for the maximum period of six months commencing on October 1, 2011," it says.
A spokesman for New Zealand's Treasury told interest.co.nz the trigger for a loan from the government to the facility would be a request from the IMF if the Fund had exhausted all other options available to it.
"Under the facility that New Zealand has agreed to, we and other countries would lend money to the IMF so that it could use the money to address short-term balance of payment issues affecting a country," the spokesman said.
"The IMF facility isn’t designed as a long-term solution to any country’s problems. The loan would be interest bearing and so the principal and interest would be repaid to New Zealand by the IMF when the short-term issue was resolved," he said.
Even though New Zealand had commited up to US$1 billion to the facility, it was unlikely to be called upon suddenly and in its entireity, and the government would have some influence over how much it contributed.
"Prior to any formal request being made by the IMF there would be discussion between the IMF and New Zealand, so that if or when a formal request was made by the IMF, it would be made in a manner that would enable New Zealand to respond appropriately. i.e. – there wouldn’t be a bald demand for money from the IMF without regard to New Zealand’s position," the Treasury spokesman said.
'It could help things'
Finance Minister Bill English on Tuesday said the New Zealand government expected to be part of any discussions regarding any IMF intervention in Europe.
"We do all have a common interest in Europe finding its way through its problems. The IMF has played a growing but still constrained role in that,” English said.
“We have some say. We’re a contributor, we’re effectively a shareholder. I think there would be a collective sense that if the IMF can reinforce European efforts, then there may be a role there. But it is absolutely vital that Europe takes responsibility for the costs and consequences for its own actions. You wouldn’t want to see the IMF moving in to replace that responsibility,” he said.