G-7 Backs Debt Help for Poor Nations, Splits on IMF Fillip

(Bloomberg) -- The world’s top industrial economies backed plans to help shield emerging and developing markets from the fallout of the coronavirus pandemic, although divisions remain over whether to provide the International Monetary Fund with more resources.

The Group of Seven finance ministers and central bankers said they are prepared to offer a limited moratorium on debt repayments from poor countries. They also backed the IMF’s proposed new liquidity program to rapidly address a shortage of dollars in emerging markets.

“The scale of this health crisis is generating unprecedented challenges for the global economy,” the group said in a two-page summary of the meeting released Tuesday, highlighting particular concerns for some of the world’s poorest nations.

The G-7 also called for “urgent contributions” to an IMF fund for catastrophes and poverty reduction. U.S. Treasury Secretary Steven Mnuchin led the meeting, which was held virtually after a face-to-face meeting was called off due to the pandemic.

Related: IMF Works to Speed Support for Record Developing-Nation Requests

But a rift continues in the group over increasing the IMF’s funding to cope with the virus, with Mnuchin blocking a request for more money, according to French Finance Minister Bruno Le Maire.

Group of 20 finance ministers and central bankers are scheduled to hold a call on Wednesday.

U.S. Opposition

IMF Managing Director Kristalina Georgieva has reiterated her institution’s willingness to use its $1 trillion lending power, but has also warned that she may need governments to bolster its resources if the crisis continues for longer than expected or if there’s a second wave of the disease.

The fund, which in its World Economic Outlook Tuesday predicted the “Great Lockdown” recession would be the steepest in almost a century, this week approved debt-service relief for 25 countries for six months via its Catastrophe Containment and Relief Trust.

The IMF has asked Group of 20 leaders to support creating more of the reserve assets known as special drawing rights, or SDRs, as it did to the tune of $250 billion in the 2008 financial crisis. France says around twice as much should be created now, but that would require 85% of IMF votes, where the U.S. is the biggest shareholder.

“The U.S. response for now is negative,” Le Maire told reporters early Tuesday ahead of a call with G-7 phone call.

The U.S. supports much of the IMF’s work to provide quick and targeted assistance to countries in need, a Treasury Department spokeswoman said in response to a request for comment on Mnuchin’s opposition to boosting the organization’s funding.

Debt Moratorium

Le Maire told reporters Tuesday that countries working within the Paris Club framework have agreed on a moratorium for 76 nations that are eligible for aid from the International Development Association of the World Bank. For the first time, the Paris Club agreement includes China and other Group of 20 countries.

The G-7 stands “ready to provide a timebound suspension on debt service payments due on official bilateral claims for all countries eligible for World Bank concessional financing,” according to the group’s statement.

The agreement covers $12 billion in payments on bilateral government loans and $8 billion in payments due to private creditors, Le Maire said. There are another $12 billion of payments to multilateral organizations due in 2020 that could be added to the moratorium, he added.

The IMF’s Georgieva has received full support to make available short-term loans to small groups of countries to avoid a cash crunch. It would essentially serve as a backup to a Federal Reserve campaign to keep greenbacks flowing around the world economy.

The Fed dollar swap lines to foreign central banks require Treasuries in exchange, but the IMF facility would offer the same for nations that don’t hold enough U.S. debt to participate in the Fed’s program.

“The advantage of an IMF short-term liquidity loan is that they can use the resources that are already allocated. It can be put in place fairly quickly,” said Nathan Sheets, chief economist at PGIM Fixed Income.

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