And all the pundits thought that the IMF would be on the hook for just €10 billion... The IMF has just announced that it is expanding its New Arrangement to Borrow (NAB) multilateral facility from its existing $50 billion by a whopping $500 billion (SDR333.5 billion), to $550 billion. The current lending participant group of 26 entities will be increased by 13 new members all of whom will contribute token amount of capital to the NAB. The one country most on the hook in the new and revised NAB - the United States of America, will provide over $105 billion in total commitments, or 20% of the total facility. The US is currently on the hook for just $10 billion, meaning its participation in global bail outs just increased by $95 billion. And the bulk of these bailouts will certainly be located across the Atlantic. What is most troublesome is the massive expansion of the NAR. If the IMF believes that over half a trillion in short-term funding is needed imminently, is all hell about to break loose.
Never one to present a realistic picture Dominique (or is that Mrs, Pisani?) Strauss-Khan said: "The expansion and enlargement of the NAB borrowing arrangements
provides a very strong multilateral foundation for the Fund’s efforts
in crisis prevention and resolution, as an essential back-stop to the
Fund’s quota resources. This will help ensure that the Fund has access
to adequate resources to help members that are vulnerable to financial
If memory serves us right, the Fund's current resources give it acces to about a third of a trillion, so as of today the IMF has recourse funding to just under a trillion. Something big must be coming.
Some more details on the NAB from the just released PR:
The NAB is a standing set of credit arrangements under which
participants commit resources to IMF lending when these are needed to
supplement quota resources. The expanded NAB will become operational
when it receives formal acceptances from the required proportion of
current and potential participants, which will require legislative
backing in some cases.1
“The expansion of the NAB will make an important contribution to
global financial stability, but it is not a substitute for a general
increase in the Fund’s quota resources. The Fund is, and shall remain,
a quota-based institution. It is important now that member countries
rapidly take the necessary steps to make the increased resources
available,” Mr. Strauss-Kahn underscored.
The NAB is a credit arrangement between the IMF and a group of
members and institutions to provide supplementary resources to the IMF
when these are needed to forestall or cope with an impairment of the
international monetary system. The NAB is supplementary to quota
resources, which are made up of the quota subscriptions
each country pays upon joining the Fund, broadly based on its relative
size in the world economy. IMF members’ quotas currently total SDR
217.4 billion (about US$330 billion). Like quota allocations, the NAB
is reviewed on a regular basis.
The recent unprecedented shock confronting the global economy has
led to a sharp increase in the demand for IMF financing. To ensure that
the IMF continues to have sufficient resources to meet demand, leaders
of the G-20
agreed in April 2009 that immediate financing from members of US$250
billion would subsequently be folded into an expanded and more flexible
NAB, increased by up to $500 billion. This call was endorsed by the IMFC.
The G-20 leaders reaffirmed their commitment on September 25, 2009 to a
tripling of the resources available to the IMF, from a pre-crisis level
of about US$250 billion. At its meeting in October 2009, the IMFC
welcomed the expected agreement to expand and enhance the NAB. Pending
the entering into force of the expanded NAB, member countries have
pledged more than $300 billion in immediate bilateral financing should the Fund require additional resources for lending.
We have a few questions:
1) Just where will central banks suddenly find access to over three hundred billion in SDRs (which is what this facility is based on)? Also, we are curious just how this SDR expansion will impact dollar levels. As the dollar is the primary component in the SDR basket (17%), banks will have to sell more dollars than other currencies on a pro rata basis to increase their SDR holdings. What will happen to the DXY when $85 billion new dollars flood the market via assorted CBs but mostly the FRBNY?
2) Who came up with the expansion factor? Why is Japan's allocation increasing by 18.7x, that of the US by 10.4x, while that of the Bundesbank only by 7.2x? We thought the IMF is more of a eurocentric bailout facility? Why does it fall upon the US taxpayers to disproprtionately bailout Greece?
3) What is the joke with having Greece join the group of new participants? The IMF sure has a sick sense of humor.
4) Curious how this comes the day before Greece is supposed to auction off some ultra-short term debt. If this facility is enacted, watch for socereign credit curves to hit 60 degrees, with near-term risk disappearing, once again courtesy of Joe Sixpack. We hope you pay your taxes by the April 15 deadline.
5) Funny money will galore. At this point nobody will allow anyone or anything to fail.
Here is the full table of old and existing contributors. Congrats US - you are once again leading the charge in the world bailout.