IMF sets new lending tool

WASHINGTON (AFP) ― The International Monetary Fund on Tuesday announced a new lending facility aimed at helping “bystander” countries protect themselves from contagion during financial crises.

The announcement of the facility, first proposed earlier this year, came as Italy and Spain fight to protect their finances while under severe pressure in bond markets already spooked by fiscal crises in Greece, Portugal and Ireland.

The new tool will be used to aid countries with “relatively strong policies and fundamentals” but whose economies are endangered “during periods of heightened economic or market stress,” the IMF said.

It allows a country with an actual or potential balance of payments problem to seek immediate aid that can be worth up to five times the value of the country’s IMF quota, or permanent contribution, over six months.

While no official mention of potential borrowers was made, the program appeared designed for countries like Italy and Spain, which have massive debt burdens but reasonably sustainable fiscal imbalances in the short term.

In recent weeks, both have faced quickly rising borrowing costs on international debt markets that threaten efforts to get their government finances in order.

Based on its IMF quota, Rome could potentially tap the new IMF fund for some 45.5 billion euros ($61.5 billion), while Spain could get 23.3 billion euros ($31.5 billion) over six months.

“The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution,” said IMF managing director Christine Lagarde.

“This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.”

The announcement gave a boost to the euro, which shot up from about $1.3500 to $1.3540 in the minutes following, before paring some of those gains down to about $1.3520 at 1800 GMT.

The Fund meanwhile said it was consolidating two other emergency aid facilities into the new Rapid Financing Instrument to support countries facing financing stresses during and after conflicts, natural disasters or emergency situations.

A Fund official said the change, which broadens the coverage of the previous facilities, arose in the wake of the uprisings earlier this year in northern Africa and the Middle East.