September 14, 2011

European monetary fund and the China monetary fund

Wharton finance professor Franklin Allen discusses the future of the IMF, Greece and the eurozone.

One of two things, in my view, is likely to happen. Either this situation will persist for a couple of years and then the public sector -- which will be the European Economic Union, in terms of the European Financial Stability Facility, or if it goes on past 2013, the European Stability Mechanism -- will own most of the debt. The private sector will effectively have been bought out.

The other route is that at some point the Greeks will simply say, "We've had enough of this and we're leaving." Overnight, they will go ahead and convert their debts to the extent they're local. [The local tranche is] about 80% to 90% of the sovereign debt, and presumably most of the private debt and the bank debt and so on. They'll convert from one euro to one new drachma. And then the next day, [the new currency] will float. Initially, probably, it will go down to about two drachma, two-and-a-half drachma to a euro. And what we'll see then is Greece will become more competitive quite quickly and hopefully start growing. It will not have access to capital markets for some time but experience seems to show that [the lack of access is] surprisingly short. And the fact that they'll be able to, essentially, lower their debt burden by a half or by two-thirds, on not only the sovereign debt, but also much of the private debt, I think will be a boost.

Today at Wharton - Is the End Near for the Eurozone? In an interview with Knowledge@Wharton, finance professors Franklin Allen and Bulent Gultekin offer their insight.

My concern is that the IMF will become more and more irrelevant. China has much more money than the IMF (IMF has about $500 billion and China has reserves of $3.3 trillion). The non-Europeans -- especially the Latin Americans, Africans, Asians -- will be much more willing to go to the Chinese directly or to a Chinese-backed entity to get loans than they will the IMF, and essentially the IMF will simply become the European Monetary Fund. Already, the last figures I saw show that about 80% of what they do is in Eastern, Central and Western Europe now.

IMF history

At the 2009 G-20 London summit, it was decided that the IMF would require additional financial resources to meet prospective needs of its member countries during the ongoing global financial crisis. As part of that decision, the G-20 leaders pledged to increase the IMF’s supplemental cash tenfold to $500 billion, and to allocate to member countries another $250 billion via Special Drawing Rights

On October 23, 2010, the ministers of finance of G-20, governing most of the IMF member quotas, agreed to reform IMF and shift about 6 percent of the voting shares to major developing nations and countries with emerging markets. As of August 2010 Romania ($13.9 billion), Ukraine ($12.66 billion), Hungary ($11.7 billion), and Greece ($30 billion) are the largest borrowers of the fund

IMF datasheet Sept 13, 2011

The NAB (New Arrangements to Borrow) is a set of credit arrangements between the IMF and a group of member countries and institutions, including a number of emerging market countries. The NAB is the facility of first and principal recourse in circumstances in which the IMF needs to supplement its quota resources. Once activated, it can provide supplementary resources of up to SDR 367.5 billion (about $591 billion) to the IMF. The expanded NAB came into effect on March 11, 2011, and was activated shortly after for a period of six months, in the amount of SDR 211 billion (about $339 billion). The General Arrangements to Borrow (GAB) remains in force and can be used in limited cases.

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