Acropolis Now: BRIC Countries Will Only Contribute to European Bailout Via IMF

Major Diss. There is just no way to make this look pretty.

The emerging, formerly Third World, nations of Brazil, Russia, India and China, three of which were at one time colonies or client states of European nations have told the now struggling European Union that the only way they will consider lending to help the Europeans ease their financial crisis is by paying in to a fund managed by a neutral, well-managed global institution. No direct loans, thanks very much.

Wow. The ironies are multitudinous and delicious. The former servant is now telling its insolvent master that it cant be trusted to manage whatever loans may be forthcoming. A responsible adult will be designated to hold the purse strings. The countries that just a generation ago were receiving sage advice from their betters are now dispensing it.

And, especially given Greece's latest head fake, it appears that the BRICs' cautionary mistrust is well founded. Reputation takes a long time to build and a hare's breath to destroy. The BRICs have their problems: corruption, poverty, inequality, mismanagement. But compared to Europe, these are blips on a screen filled with charted growth trajectories. If markets truly abhor uncertainty, then the BRICs have served notice that Europe has sustained reputational damage of sufficient moment that it will take a long time to repair. JL

Alan Beattie and Amy Kazmin report in the Financial Times:

Leading emerging market countries have shifted further towards channelling any rescue loans to the eurozone through the International Monetary Fund, reducing Europe’s chances of negotiating direct bilateral bailouts to help resolve its sovereign debt crisis.

Indian and Russian officials suggested that the IMF was their preferred way to help prop up the eurozone, rather than depositing money in a possible special purpose vehicle set up by European authorities to solicit loans.
The comments came as discussions continue within the IMF about the possible creation of new credit lines to enable large amounts of money to be provided at short notice to countries with acute liquidity problems.

Speaking over the weekend, Montek Ahluwalia, the influential deputy chairman of India’s planning commission – and former head of the IMF’s independent watchdog – said that the fund should take the lead in any rescue operation. “The principal agency that is responsible for bringing about international stability is the IMF,” Mr Ahluwalia said. “We would certainly support the IMF in providing resource support to Europe”.

Arkady Dvorkovich, economic adviser to Dmitry Medvedev, Russian president, said on Monday that Russia would consider providing bilateral assistance to the EU but suggested it should be routed through the IMF. Guido Mantega, Brazil’s finance minister, last week ruled out lending to the eurozone except through the IMF.

The IMF and its shareholder countries have been discussing creating new lending facilities, which would be aimed at bailing countries with short-term liquidity problems as a result of financial contagion from abroad. Some observers say an announcement of a new credit line is possible at this week’s G20 summit in Cannes, with a view to possible loans to Spain and Italy in the near future. The IMF this weekend declined to comment on the specifics of the discussions.

Domenico Lombardi, a former IMF board member now at the Brookings Institution in Washington, said that the credit lines under consideration appeared to be largely a relabelling of the IMF’s existing “flexible credit line” – a lending facility available with few conditions attached to countries with a strong policy framework.

“Spain and Italy are reluctant to apply for a facility that was designed for emerging markets and want rebranding to take that stigma away,” he said.

Klaus Regling, head of the European Financial Stability Facility, the eurozone’s bailout fund, has been in Asia over the past few days for meetings with governments, including China’s. But eurozone officials are playing down the possibilities of large contributions to the EFSF or a special purpose vehicle for the eurozone in the near future, saying that Mr Regling’s trip is a routine series of meetings rather than a fundraising mission.

Mr Ahluwalia said that India had not received any direct request from the eurozone for funds. India and other emerging markets have complained about double standards within the IMF, with eurozone countries having been given an easier ride than developing country borrowers in the past.

“Institutionally, it seems to me that we have constantly said that the IMF is an institution that should be strengthened and even-handed,” Mr Ahluwalia said. “Frankly the best way to make it more even handed is that when rich countries need support they go to the fund …The rules that the fund then applies will be the rules that the fund will apply subsequently.”