The prospect of European heavyweights like Italy or Spain turning to the International Monetary Fund (IMF) for rescue loans is worrying the United States and other nations that fear they could suffer losses on funds they have extended to the IMF.
The IMF 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 from emerging nations said.
A crucial European Union summit ended on Friday with a historic agreement to draft a new treaty for deeper integration in the eurozone 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 American public is still stung by the US government’s big bailouts for banks during the 2007-09 financial crisis and fears that mounting US debts imperil the nation’s future.
With President Barack Obama facing a tough battle for re-election in November, the White House is not keen to appear as Europe’s saviour, and the administration’s message to Europe has consistently been: “Put more of your own money on the line”.
Indeed, Republican lawmakers are seeking to yank a $108 billion loan the United States approved for the IMF in 2009, a move that would undercut Washington’s ability to influence the conditions attached to IMF loans.
“If the United States wants to help Europe find a way out of its current debt crisis, we must be a strong, world economic leader, not merely the lender of last resort,” Republican Senator Jim DeMint wrote in The Wall Street Journal on Friday.