IMF Mulls Fed-Like Program to Get Dollars to More Economies

(Bloomberg) -- The International Monetary Fund may launch a new program to help address the global shortage of dollars, providing a backup to the Federal Reserve’s campaign to keep greenbacks flowing around the world economy.

IMF Managing Director Kristalina Georgieva is preparing to offer short-term dollar loans to countries that lack enough Treasuries to participate in a Fed program that enables foreign central banks to temporarily exchange U.S. debt for dollars.

The initiative has the support of the U.S. Treasury and may be launched within weeks, according to people familiar with the matter. The U.S. is the fund’s largest shareholder. The IMF next week is scheduled to hold virtual meetings of members at a time when more than 90 countries have already asked for its assistance in shielding their economies from the coronavirus and global recession.

“Our board is going to review a proposal in the next days on creating a short-term liquidity line that is exactly targeted to countries with strong fundamentals, strong macroeconomic fundamentals, that may be experiencing short-term liquidity constraints,” Georgieva said in an online briefing for reporters on Friday.

“We’re short of one instrument to provide short-term liquidity to countries that are basically strong but find themselves in a tight place,” she said, noting that Indonesia was among countries urging the IMF to look into additional ways to help with liquidity in emerging markets.

A spokesman for the IMF declined to comment, while a Treasury spokeswoman didn’t respond to a request for comment.

Dollar Rush

The coronavirus prompted a worldwide rush into dollars by wreaking havoc on a global economy that is heavily dependent on the greenback as its linchpin and relies on it as a haven at times of stress. Georgieva warned on April 3 that the world recession is “way worse than the global financial crisis.”

Emerging-market borrowers who tend to rely on the IMF for aid are particularly at risk of the lack of dollars. Encouraged by low U.S. interest rates, they’ve loaded up on dollar-denominated debt in recent years. They now face a squeeze as their exports plummet, with economies shutting down worldwide to combat the pandemic.

A significantly stronger dollar can also hurt the U.S. by tightening financial conditions and making American exports more expensive on world markets.

Georgieva has repeatedly touted the IMF’s readiness to deploy its $1 trillion lending capacity to fight a virus it initially failed to identify as the massive threat to global growth it now poses.

Fed Moves

The Fed has revived or introduce a series of programs aimed at supporting the international supply of dollars. Just last week it announced a temporary facility that can then be made available to companies in those countries that hold dollar-denominated debt. It had already increased the number of central banks that can borrow dollars from it on a short-term basis.

Some analysts and former fund officials have previously raised concerns about the IMF launching a traditional “swap” program and putting IMF assets at risk. In December 2017, members of the lender’s executive board said such a facility would “depart significantly from current fund principles and policies.”

Critics say that if the IMF provides an unsecured line of credit without conditions, it risks the possibility that countries cannot repay the loan.

That shouldn’t be a problem if the IMF limits the loans to only its strongest members who have sound macroeconomic fundamentals, said Mark Sobel, a longtime Treasury official and former IMF executive director from the U.S.

“These are going to be for your best performers with a proven track record,” he said. “I don’t see the big risk.”

The IMF is probing other ways to increase its firepower. It has already asked Group of 20 leaders to support creating a sizable quantity of reserve assets called SDRs, or special drawing rights, as it did in the 2009 global financial crisis.

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