Monday, April 27, 2009

IMF Borrows From Brazil

Bloomberg reports that the IMF is considering selling bonds to several developing countries as a way of combating the global slump. Clearly, China and Brazil are among the countries that expressed interest in helping the Fund by buying these bonds. It should be clear that the IMF has never issued bonds before.

The IMF is seeking more cash to finance loans and aid to member countries during the worst economic slump in the fund’s 64-year history. As the institution taps some of its 185 members for additional cash injections, emerging economies say they want more decision-making power at the fund, setting up a possible clash with the rich nations that run it.

The idea behind these bonds is that the interest rate would be pegged to the value of the IMF’s basket of currencies, known as Special Drawing Rights or SDRs.
While Brazil’s president Lula agreed with the loan during the G20 meeting, Minister Mantega told Bloomberg that: “Brazil would want higher yields than those attached to U.S. Treasuries to buy the new IMF securities”. The Brazilian minister also said that the Brazil favors the loan as long as it is used to help emerging markets weather the global credit crisis rather than to strength the current structure of the IMF.

The loan will not decrease Brazil’s international reserve position, since it is mainly a loan. However the key aspect behind the idea is that with the current structure of shares and chairs, emerging markets like China and Brazil are underrepresented in the IMF structure.

According to Bloomberg the IMF said it has received $324.5 billion in commitments from G-20 members since mid-March. Leaders of the G-20 agreed to triple the fund’s lending capacity to $750 billion when they met in London on April 2.

For Brazil, the loan to the IMF has a special meaning because the country was a debtor for a long time during the 80’s.

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