George Osborne is in Washington DC today for an IMF meeting. In another one of those ‘domestic politics meet financial crisis’, Osborne is under pressure from his MPs not to contribute any more cash to the IMF unless there are guarantees that the money won’t be used, as the popular phrase is in Westminster goes, to “bail out a currency” (and no, we’re not talking about the Yen). There are a whole range of confusions surrounding this entire debate, so here’s an effort to clear them up:
Where are we at?
The UK can provide £10bn without a vote in Parliament, as this cash goes back to a previous commitment. For anything more, it needs approval from its MPs, which could be sticky (see below). Osborne has so far refused to contribute the £10bn, let alone even more, until certain conditions have been met.
Is contributing to the IMF the same as giving to, say, the EFSF (the euro bailout fund)?
Certainly not. The IMF is (a) a serious organisation that has saved many countries including the UK (b) its loans rank senior to other debts and so are always repaid (c) nobody has ever lost a cent on the IMF and (d) this would actually be an opportunity to modernise a 1948 organisation by giving the BRICs a more proportionate say in return for fresh capital (if you want to keep the IMF relevant, this is inevitable).
Are Tory MPs really that opposed?
There’s been a lot of shouting to the press over this issue, but the feeling is that most Tory MPs realise that contributing to the IMF could be a sensible move provided that certain conditions are fulfilled.
So what conditions need to be fulfilled for the UK to contribute?
The UK government has set out two: the top-up needs to be global (all countries contributing not only EU ones) and the money can’t be used specifically to bail out the euro.
We would add that there also needs to be a change in tact. As we told BBC five live this morning, “The main problem is that the eurozone’s approach to the crisis hasn’t changed, despite widespread criticism including from the IMF, it still fails to address the underlying problems: the lack of growth, the lack of competitiveness in the peripheral countries and the massive risks still held by the under capitalised European banking sector. Any further contributions should be conditional on a change in tack and some acceptance that this bailout and austerity policy has failed.”
What is likely to happen?
At the moment it looks as if the IMF will reach its target of $400bn, possibly even without funds from the UK, US and Canada. The two latter countries look unlikely to contribute additional funds, so the prospect for additional contributions from the full membership looks dim.
The question is, what will the IMF need to give in return? A rebalancing of power towards emerging market members is inevitable and the BRICs are pushing for it to start in exchange for funds this time around. That means there are plenty of complex negotiations still to take place. A broad political agreement may be in place by the end of the weekend, but there will be plenty of legal and technical details to be fleshed out.
Will the increase change anything?
Not really. Ultimately dispersal of IMF funds in the eurozone crisis is reliant on similar provisions from the eurozone bailout funds. So far the format has been 2/3 eurozone and 1/3 IMF. As we have previously noted, despite EU claims, the lending capacity of the eurozone bailout funds remains €500bn. This means the maximum which will likely be able to be tapped from the IMF is €250bn (although it is incredibly doubtful the IMF would ever put up that much unless the eurozone were teetering on the brink). As is often the case, the issue of IMF funds is tinkering at the edges of the crisis, eurozone leaders still fail to address the underlying problems of the crisis or even put up a sizeable bailout fund of their own.
Should the UK contribute then?
Well, first the government should wait and see if the $400bn target can be met without a UK contribution. If that is the case all the better. If not, and if all the BRICs have contributed, the UK may need to put up its £10bn (which has already been approved by Parliament). Obviously, as we have noted the usual caveats and conditions should apply and the UK along with the IMF should continue to push for a reformed approach to the crisis.