Worries over IMF loans to Europe

The International Monetary Fund cannot be expected to step in as a substitute for a stronger commitment by Europe which needs to assume the brunt of any losses on emergency loans, a senior US official said on Friday.

Despite the International Monetary Fund’s stable record - no borrower has ever defaulted on an IMF loan and no country has ever lost money lending to the IMF - there are concerns about the IMF’s growing exposure to the euro zone.

That exposure could take a quantum leap if Italy and Spain need bailouts, a level of assistance that would almost certainly dwarf the loans already approved for Greece, Ireland and Portugal in deals engineered with the European Union.

Emerging markets, which are contemplating lending more money to the IMF, which couples monetary assistance with tough conditions that seek to ensure a country does not default, have also raised concerns in the IMF about the risks to the fund’s capital, officials said.

A crucial European Union summit ended on Friday with a historic agreement to draft a new treaty for deeper integration in the euro zone in an effort to rein in a debt crisis that started in Greece two years ago and has continued to spread.

Worries about the IMF’s risk are also brewing among congressional lawmakers.

Four US lawmakers who met with IMF chief Christine Lagarde this week expressed unease over the risk the fund would take on with a bigger role in Europe. A request for a big IMF loan for Italy or Spain would put the United States, which holds veto power over most IMF lending decisions, in an uncomfortable spot.

The IMF enjoys an understanding among its members that borrowing nations will always pay the IMF back ahead of private creditors. However, the scale of borrowing troubled euro zone countries might need raises the specter that one of the nation’s could default on an IMF loan. The IMF has about $380 billion available for lending, a figure outstripped by Italy and Spain’s debt refinancing needs. Italy needs to roll over 340 billion euros (290.5 billion pounds) in debt next year, while Spain needs to refinance 120 billion euros.

“The problem with some of these countries now is you're getting to a point where (debt) is large enough that defaulting on the IMF is attractive enough if you want to reduce your debt,” said Raghuram Rajan, a former IMF chief economist now at the University of Chicago's Booth School. “I’m not saying the euro area will act at cross purposes with the fund. But when it comes to writing down the debt, will the euro area respect the (preferred) status of the IMF?” he asked.