A proposed new IMF lending facility to avert crises in emerging market countries would only be available to those with strong performing economies, sustainable debt and transparent reporting systems, a draft of the proposal obtained by Reuters says.
The draft reveals that the IMF is still grappling with design details of the proposed Reserve Augmentation Line, which will be discussed at IMF meetings in Singapore on September 19-20, amid divisions among member countries if it is a necessary tool.
Fast-growing emerging economies have built up vast foreign reserves as a safe-guard against future crises, but the fund sees the instrument as a way to make itself useful to them again.
The prospect of a crisis prevention mechanism also comes amid increased warnings by the IMF of a sudden correction in global economic imbalances, the large U.S. deficits versus the surpluses in emerging Asia and oil producing countries.
Any new instrument should be designed to provide a commitment device for policies directed at reducing vulnerabilities, to send strong signals to markets regarding policy momentum, and to reinforce confidence that substantial financing is available if needed, the draft paper notes.
Still, one of the biggest concerns in the design of the facility is that the pre-approved IMF funding could encourage reckless behavior among borrower countries and their creditors, the IMF said.
It can arise if fund involvement shields either the debtor or the creditor from facing possible negative consequences of their own actions, the fund said.
The IMF stressed it should be made clear from the outset that the instrument would not protect private creditors from losses in cases where a country has unsustainable debts.
Experience shows that private creditors have taken a hit in past emerging market solvency crises, the IMF said pointing to debt crises in Russia and Argentina.
A similar instrument, the Contingent Credit Line, was scrapped by the IMF in 2003 after it found no takers. Potential candidates worried that it would be viewed by markets as a sign of weakness in their economies.
Since the CCL, some member countries have questioned if a new instrument is at all necessary because IMF membership itself provides a degree of assurance that financing will be made available in times of economic crises.
Still, the fund said the instrument could reduce uncertainty over the amount of financing and conditions under which countries will be able to borrow.
It also questioned if emerging economies with large foreign reserves would use such an instrument.
As recent volatility in equity, debt, and currency markets demonstrates, it is prudent to consider the potential needs of members in periods when market access may be more constrained, the IMF said.
The emergence of new (reserve) pooling arrangements, some of which the fund is engaged in, also points to the desire by members for access to additional liquidity as a cushion against capital account-driven shocks, it added.
The IMF said the instrument would need to provide users - and markets - with assurances that IMF funding would be available if needed on a scale that is relevant to their risks, as long as their policy program remains on track.
The IMF cautioned that it wants to avoid shifting too far in the direction of a rating agency as it assesses if a country qualifies for the instrument or not.
A system where pre-qualification is not made public could be considered to reduce such negative signals, but this would compromise the objectives of providing a commitment device and signaling as well as reinforcing market confidence that large scale liquidity support is available, the IMF said.