By Alex Tarrant
The risk of the International Monetary Fund (IMF) calling on New Zealand for a loan up to NZ$1.3 billion has increased in recent months as the European sovereign debt crisis intensifies and rumours swirl about the IMF intervening in the Euro situation with financial support for Italy.
Finance Minister Bill English earlier this week acknowledged there might be a role for the IMF in helping reinforce European efforts to stem the crisis, which, if no solution is forthcoming, could lead to a downturn worse than the 2008/09 crash triggered by the subprime crisis and collapse of US investment bank Lehman Brothers.
The IMF refuted a Reuters article earlier this week which said the Fund was in talks with Italy concerning financial support for what is Europe's third largest economy. The IMF said talks were only focussed on fiscal monitoring.
A source familiar with the matter had told Reuters the IMF and Italian government were in discussions around a 400 billion euro (US$530 billion) contingency package. Italy had not filed a request, but the situation was building in that direction, the source said.
Reuters reported that was more than the roughly US$380 billion from member quotas which the IMF currently had available to lend to all countries, although talks were under way among the G20 major economies on boosting the IMF's resources.
Italian newspaper La Stampa also reported last week the IMF was looking at giving Italy a loan worth 600 billion euros at a rate of 4-5% over 18 months, which was also denied by the Fund.
Could NZ get a call?
New Zealand has a quota of 894.6 million Special Drawing Rights - effectively the IMF's currency - held with the fund, worth about NZ$1.8 billion. See the IMF quotas from all countries here. New Zealand's quota makes up 0.38% of the Fund's total quota of 237.95 billion SDR's, worth just under US$380 billion.
However, following the 2008 crisis, the IMF in 2009 sought to expand the main backstop arrangement it had for its quotas, called the New Arrangements to Borrow (NAB), by tenfold to US$550 billion (since increased to US$579 billion after Poland joined).
In April 2010, New Zealand's government signed up to the massive expansion of the New Arrangements to Borrow in case the world faced another crisis like the 2008/09 market meltdown. New Zealand was one of 40 countries which promised funds, with the commitment only to be called upon if needed, and only if the IMF had exhausted all other options. See the announcement at the time from Finance Minister Bill English here.
See the April 2010 announcement on the expansion of the NAB from the IMF here.
See a transcript of a conference call held by the IMF in April 2010 on the expansion.
New Zealand agreed to lend up to 624.34 million SDRs, or US$1 billion at the time, to the IMF under the agreement if it had exhausted its quota funding. The Treasury does not have cash set aside specifically for the agreement, and given the government's deficit, it would effectively have to borrow money for any contribution. In the government's Pre-election fiscal update, this appears as a NZ$1.254 billion contingent liability on the books.
Risks building
In Treasury's Pre-election economic and fiscal update released on October 25, before the Reuters report that the IMF and Italy were in talks, Treasury states:
"The forecast level of government commitments to international financial institutions is subject to change, depending on the Government's response to any changed financial plans on the part of these institutions. The risk of government commitments to the International Monetary Fund being called has increased due to the Global Financial Crisis and recent world events, including in the Euro area."
It's been triggered
IMF access to the NAB gets activated for periods of six months, although only if it is accepted by participants representing 85 percent of total credit arrangements, and then the IMF board. Before the 2010 changes, if the Fund wanted to draw on the NAB, each individual loan had to be approved by participants.
The NAB has been activated three times, the IMF says on its website:
"First, to finance a Stand-by Arrangement for Brazil in December 1998, when the IMF called on funding of SDR 9.1 billion, of which SDR 2.9 billion was used. Second, on April 1, 2011 the Executive Board formally completed the process of activation, following the effectiveness of the expanded NAB on March 11, 2011 and a vote by NAB participants after going through their necessary internal procedures. The NAB was activated for six months in the amount of SDR 211 billion (about $339 billion) to increase the financing available to the Fund.
"The NAB was most recently activated for the maximum period of six months commencing on October 1, 2011," it says.
A spokesman for New Zealand's Treasury told interest.co.nz the trigger for a loan from the government to the facility would be a request from the IMF if the Fund had exhausted all other options available to it.
"Under the facility that New Zealand has agreed to, we and other countries would lend money to the IMF so that it could use the money to address short-term balance of payment issues affecting a country," the spokesman said.
"The IMF facility isn’t designed as a long-term solution to any country’s problems. The loan would be interest bearing and so the principal and interest would be repaid to New Zealand by the IMF when the short-term issue was resolved," he said.
See an IMF fact sheet regarding how it helps with balance of payments problems here.
Even though New Zealand had commited up to US$1 billion to the facility, it was unlikely to be called upon suddenly and in its entireity, and the government would have some influence over how much it contributed.
"Prior to any formal request being made by the IMF there would be discussion between the IMF and New Zealand, so that if or when a formal request was made by the IMF, it would be made in a manner that would enable New Zealand to respond appropriately. i.e. – there wouldn’t be a bald demand for money from the IMF without regard to New Zealand’s position," the Treasury spokesman said.
'It could help things'
Finance Minister Bill English on Tuesday said the New Zealand government expected to be part of any discussions regarding any IMF intervention in Europe.
"We do all have a common interest in Europe finding its way through its problems. The IMF has played a growing but still constrained role in that,” English said.
“We have some say. We’re a contributor, we’re effectively a shareholder. I think there would be a collective sense that if the IMF can reinforce European efforts, then there may be a role there. But it is absolutely vital that Europe takes responsibility for the costs and consequences for its own actions. You wouldn’t want to see the IMF moving in to replace that responsibility,” he said.
64 Comments
Thats just the start Gummy......its "only" italy and probably only part of its debt for 1.3billionNZ (or USD?)......also the USA has to pay the lion's share....what chance Obama gets that through Congress? if he cant that NZ "share" would treble.......and italy is about 1/4 to 1/3rd of the problem......we may have to tell the IMF to take a running jump.
and of course many of the "rich" states in the IMF are in the EU, so need bailling themselves and they have to find billions from somewhere, if they cant........
So its print, print, print.....might as well....no private investors are there to insist on high rates, to get a return, they have left anyway.
That 6month fixed rate from kiwibank sounds attractive.....more attractive everyday.
regards
A second euro zone official said the loans could be channeled to the IMF through its new arrangements to borrow mechanism, while Dutch Finance Minister Jan Kees de Jager said it could also involve an increase in IMF special drawing rights (SDRs), which are used in central bank reserves.
"It could be through a general increase in resources -- of the SDRs -- it could be through new arrangements to borrow, so bilateral loans, and it should come from both Europe and non European countries," De Jager told reporters on Tuesday.
http://www.reuters.com/article/2011/11/29/us-eurozone-ecb-imf-idUSTRE7AS23P20111129
No proven oil reserves at all....almost certianly none to speak of economically....ie worth drilling for.
winter power shortage, yep thats certain IMHO.......1 pretty dry year and on the second winter our manufacturing industry will be toast......its more and more likely as our demand is going up 2~4% per year...its just a Q of when....5 years, 10.......
regards
The fantasy is on your part believing in a flat earth or that a piece of enginerring you have invented while demonstrating zero engineering knowledge here will save the world and make you rich....its known as delusion.......
Actually I use public transport day to day and a small car when thats not possible......the 4wd only comes out when I need to haul hvy stuff....its not been used in 9 months.......
regards
"Note that five-year break-even spreads have dropped below zero for Italy, meaning that markets are now pricing in outright deflation. For a country with public debt stock of 120pc of GDP, that is a death sentence."
NB I think they needed + yes PLUS 5%
"The eurozone economy is in imminent danger of crashing into deflation, bringing down the whole interlocking edifice of sovereign debt and distressed lenders. And bear in mind that Europe's bank nexus — including the UK, Swiss, Scandies — is €31 trillion. Big stuff."
NZ's bill of 1.3billion for italy today is a drop in the bucket if it goes to 31Trillion
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013558/y…
and SK thinks he will fine....
regards
I realise that we probably have treaty or legal obligations to stump up with the money when asked to, but jesus I'm sick to death of helping the Europeans out. What have they ever done for us?? Nothing, that’s what! For all our faults, at least we don’t make them other countries’ problems. All the Europeans have done for us is to throw up every conceivable trade barrier to our exports, particularly our farm exports, yet when the chips are down they are the first buggers in the queue with their bloody hands out. And time and time again this nation has had to stump up, and at great cost to it, to go and help sort their sh*t out.
Tell the Europeans to go and get stuffed! And if they push for the money, tell them to ask the French and Irish farmers for it.
Thought I would list some of the things Europe has done for us"
1. Cost us 1000's of lives in two World wars
2. Used a variety of "legal" excuses eg third county veterinary directive - as thinly disguised
trade barriers
3. Imposed various travel, visa, work & residence restrictions on us - notwithstanding our
war dead.
So as you can see they have done plenty for (or to?) us
So we sell our few remaining state assets to the greedy EU bankers who pulled the $ out of thin air and then turn around and give them that money to let them carry on flying their personal jets..........
What a crazy world........
I'd like to know whats involved in bailing out of the IMF........
regards
"The loan would be interest bearing and so the principal and interest would be repaid to New Zealand by the IMF when the short-term issue was resolved."
Hahaha!
Short -term... Hehehe.
Resolved... wahahaha <eyes watering from laughter>
Oh... <regains composure> How about asking for a guarantee of that, ... backed by gold say?
English needs to get a grip on himself !!
We borrow $1.3b from the Chinese then hand to the IMF presumably along funds from other mugs they use it to keep Italy afloat for perhaps 12 months Next month the hand will be out for Spain …………. then…….
Enough of this crap face reality let the chips fall where they are due. The longer this nonsense continues the further away we are from a true recovery currently it’s a death by a million cuts over years
Time for fortress NZ.
Shut the boarders
Reposes foreign ownership
If you want to buy our food and products - barter only
Default on all foreign loans
Would we really be any worse off?
Any further engagment with this mess can only hurt us further.
On A serious note it would be interesting to measure our present position and future prospects against this yardstick. It may put some of our past ecconomic managment and present policies into an interesting perspective.
generally I wonder....I think we'd look like CUBA....you really want that?
Just what would be the outcome if we nationalised? I assume our (do we have any?) foreign assets would be seized and some markets closed....like America.....and the dis-advantage is? America is toast anyway.
I dont know that we have to default on loans on purpose....just the above might trigger a downgrade to junk anyway, no one would lend I suspect.....or we couldnt afford to borrow.....
What then? we would have to balance the books immediately...so taxes would have to rocket up....70% seems likely for the top (new tier)... and a CGT and a land tax etc....
regards
What's this money for?
I'll tell you what it's for - to pay the interest on the massive debt the Italians have already run up. A debt that's around four years of total Government revenue! What a fiasco!
Like my old dad used to say; if the banks won't give someone a loan, you shouldn't either.
whats it for...?
It's protection money ..! that's what it's for ...in any dress you like, it's standover tacticics to ensure you have a shop front window in the future.....
N.Z. your a big growed up global partner....now cough up or else..!
The IMF figures if every global citizen chips in we can raise a downpayment on the interest while we figure out what "Too big to fail " really means.
If a grandfather (in this case Europe), cannot afford to replace the BMW then perhaps they shouldn't be driving.
We've talked in the past about privatizing profits and socializing losses, intergenerational theft, bank theft and like stories but this is Theft with a capital T and on a grand scale so why is Mr English so duplicitous in its execution.
Mark my words more money is not the answer and giving money will only feed the flames of disaster till it engulfs all of us.
Piece on why the IMF won't be able to fix Italy
http://www.business-standard.com/india/news/imf-unable-to-save-italy-/457331/
Italy’s problem is more than just simply needing cash. Italy isn’t just facing an immediate funding crunch like most IMF wards. It has a preexisting debt stock that’s about 120 per cent of GDP — it’s unserviceable, and Italy faces billions in maturing debt that must be refinanced on a monthly, and sometimes even a weekly, basis — 300 billion in refinancing needs in the first half of 2012 alone.
Were the Fund to become involved, it would have to intervene regularly in the bond markets to keep Italian yields down. Such proactive activity is not only not within the existing skill sets of IMF staff, it would deny the Fund the leverage over Rome that it needs to make the reforms stick.
But most importantly, the IMF simply does not have the resources to bail out Italy, much less the euro zone as a whole. The IMF’s entire financial reserves are slightly under $400 billion (about euro 300 billion). Any credible remediation program for Italy would need to be in the range of euro 800 billion, and that’s before taking into account the costs of recapitalising Italy’s banks.
Love the acronym! NAB
the IMF in 2009 sought to expand the main backstop arrangement it had for its quotas, called the New Arrangements to Borrow (NAB), by tenfold to US$550 billion (since increased to US$579 billion after Poland joined).
The Govt loves signing us up for these big boy games. Then the big boys come and NAB
all our marbles
And could it be a good idea?
http://www.ibtimes.com/articles/257001/20111128/imf-offer-italy-800-billion-bailout-bazooka.htm
How to Solve a Liquidity vs Solvency Issue? A Bridge Loan aka Bailout...
This move means that the yield that Italian bonds trade at becomes less important for Italy and the sovereign debt crisis, though it remains critically important to banks. A possible IMF bailout would therefore be a response to the classic liquidity versus solvency issue. For Italy, if its indeed caught in aliquidity crisis, then having time to implement its reforms and getting its finances back in order would be a welcome relief for bond markets.
Italy has €33 billion of debt coming due in the final week of January and a further €48 billion in the last week of February. And, altogether has €306 billion maturing in 2012. This bailout therefore would give Italy about 2 to 3 years of breathing space in which to push through its reforms.
...
On the hook for this bailout will be the US, European nations, and other countries at the IMF (the BRICS among them). The terms would likely be similar to the loans to Greece, roughly around 4-5%. One important rub is that the IMF would have to expand its lending capability to have the funds to provide such a bailout, which would require the vote of the US Congress. The US taxpayer would in essence be giving Italy subsidized loans. We'll see if that flies at all politically.
In any case, the news about a possible IMF Italian bailout, caused riskier, higher-yielding currencies to gap higher in opening trade this week.
We therefore away further details to this initial reporting, to see if this story has any legs and if it would be possible to have such a measure pass through national parliaments.
Thats a big IF there. Italy is insolvent, no different to most other OECD countries, if you include off balance sheet liabilities. They have racked up public sector debts of 120% of GDP in the good years of unlimited credit growth and a global economic boom. The next 20 years doesn't look anywhere near as good as the last 20 years, if they can't afford to live within their means during the good times how the hell are they going to pay back any of this in the bad times. The IMF is a bank for banana republics, not mature economies. Italy needs 306 billion next year, just to rollover existing debt, plus another 6% of GDP to fund the current deficit, so about 60 billion, bang all the IMF monies gone to italy, too bad Belgium, Spain and Portugal, and thats just the developed countries, get stuffed any banana republics that would also like to cede sovereignty to the IMF.
We are all with increasing panic waiting for a really decent bailout from the aliens
A technocrat should see the links between the economy, austerity, and increased taxes, it's not conducive to growth, and the debt/GDP level increases automaticaly as GDP shrinks. Paying off the loans instead of rolling them over causes deflation, causing the realisation that debt is never repayable. Debt slave for life.
Talking to most now they're saying ECB intervention is the solution.
Not when Merkel's around though
German Chancellor Angela Merkel is set to snub investor pleas to back an expanded European Central Bank role in solving the debt crisis, as she pushes her demand for tighter economic ties in Europe as the only way forward.
Yet Sarkozy is thinking he can bring Merkel around
However, he indicated that the European Central Bank (ECB) may intervene if the crisis worsens, despite German opposition, saying he had "no doubt that with the deflationary risk facing Europe, the ECB will act".
What you have is not a problem, problems have solutions, this is a predicament. Predicaments have outcomes, position yourself accordingly.
It's in your face like a poke in the eye, yet people still keep on repeating the mantra "PRINT PRINT PRINT." This does nothing but dillute the assets on both sides of the balance sheet, that is ALL it does. Fire or Ice, hyperinflation or deflationary death spiral either way fiat is doing what it does best revert to zero.
Good one. Finally, now it's starting to hit home in our pockets, we can all agree: the big Nanny State running every ruddy thing on top of a treacherous Keynesian socialism, has been a disaster. Better we'd gone for limited government and free lives, that is, the classical liberalism millions of men and women died fighting fascism for in the middle of last century. Think of the great place we could have all been ...
Are you ready to repent your evil Big State ways, Bernard?
Looks like there may be a new freedom alliance in place for the 2014 election: finally some sanity.
But we must pay our " fair share " , mustn't we ..... 'cos we're signed up to all these " improve the world " agencies which spawn out of the U.N. like alien critters exploding from the mother pod ........
...... and just where have these world agencies made anyone's live better , stopped genocidal wars in Africa or in the Balkans , re-built shattered economies post any given financial crisis .... Asia 1997-8 springs to mind .
Nope ........nowhere .......no success at all ? ......... oh !
The Kyoto - Copenhagen protocols on " climate warming " ......... meebee this time a world group of know it all busybodies will get it right , roll out the ETS , let's have some fun with that .. yahhhh !
Spoken with some current-Kiwis who think we've built up 80 years of experience , as a welfare state , of bailing out the " hopeless " .......
...... who better than NZ to ask for free money .... .. Italy knows that we'll never account for it , and that our government will happily set up a whole new bureaucracy of civil servants in Wellington , to oversee the whole shebang ........
Is this the Friday funny? Bloody hilarious anyway.
Hey I know, since we are borrowing $300m per week, then all we have to do is borrow a bit more and then loan that to the Italians. What is our interest rate, 3 or 4%? Then if we lend to the Italians at 7% we can make a cut on the way through:)
In fact while we are at it, we could fractional reserve it and lend the same money to Greece and Ireland as well.
If the NZ government even try to entertain such IMF demands then I suggest as many NZders as possible pull any $$ deposits you may have from every NZ/Aus bank fast and convert to precious metals or some other real commodity. It's over folks when bank socialism goes global. Let ALL banks rot in hell!
Maybe we need to stop buying stuff with China, as I think they are the reason the world economy is as stuffed as it is. The world economy relies on countries exchanging money with one another, but China has been selling the world stuff for the last few decades, and not spending money buying stuff themselves from the rest of the world. This is an imbalance. Instead of spending they are lending to those very countries that are having trouble paying their bills, which is unsustainable.
NZ has a property price bubble. Italy does not, the reason being that Italians simply will NOT meekly be regulated like NZ sheeple, on where they are allowed to build houses.
I pick NZ will soon be in a worse state than Italy, on all measures, for this reason.
In any case, this is all just smoke and mirrors. Deficit-funded liberal democracies are all bankrupt, and claiming to bail each other out is just shifting the deckchairs on the Titanic.
Sovereign debt is already just another layer of bubble paper money sloshing around on financial institutions balance sheets all over the world masquerading as "collateral".
Let's play the game .....be Europeans tonight...with euro in the bank and some in the wall safe...what are you gonna do on the Monday morn?....depends on how many you have don't it....the wealthy will already have extracted most of their cash from the crap banks..they will not own the piigs bond IOUs...they will have bolt holes in Switzerland or the UK or maybe Canada......the remaining euro will this week be splurged on food stuffs and winter gear because Canada is COLD and the UK is WET and COLD and Switzerland is under a blanket of snow...Some will lock the iron gates to their country estates and issue the machine pistols to family members....the dogs will be let free....the alarms double checked....they will sit it out but keep the chopper engine warm.
Italy is stuffed and when it goes poooof it will drag down the French banks and france will go pooooof and more banks will go down....domino anyone....did we forget Belgium and Portugal..small spuds both of them...
Bernanke's office walls are now covered in brown smelly stuff....panic is sinking in....the "enter" key on his Chinese made Keyboard awaits the print command to spew forth trillions in toilet paper to give to the banks in europe....This is supposed to save the euro...fat chance.
With the euro will go the Pound...even as King is cranking the BoE printer flat stick...Trillions in 'good' capital is fleeing for safe ground...gold will be stolen by the govts..count on it...Pensions will go poooof....
Time to face reality...decades of shockingly useless fatheaded govt and reserve bank stupidity in the extreme....all coming to a head....kaaaaaaabooooooom
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