beyondbrics

So the Brics may be riding to the rescue of the eurozone after all. But not through the high-profile exclusive mission they briefly discussed last month but through the more inclusive – and convoluted – mechanisms of the International Monetary Fund.

As the FT reported, governments are considering either funding an IMF-run special purpose vehicle (SPV) or lending to the IMF by buying special bonds. Although details have not been worked out, G20 officials are working on proposals in advance of a finance ministers’ meeting this weekend in Paris and a leaders’ summit in Cannes next month.

Guido Mantega, Brazil’s finance minister (above), a prime mover in last month’s Bric talks, told reporters on Thursday that strengthening the IMF is “the second most important issue we have to discuss” in Paris [after the eurozone crisis].

The FT said the increased firepower could be used to finance new IMF credit lines to prevent contagion from the Greek crisis spreading to Italy and Spain, or to recapitalise European banks. Nations from China to Brazil are considering increasing the International Monetary Fund’s lending resources to help stem the European debt crisis, Group of 20 and IMF officials said.

The moves follow a warning from Christine Lagarde, the IMF managing director, last month that the Fund’s $390bn reserves may be too small if global economic conditions deteriorate.

IMF members have responded to crisis before – in 2009 the G20 agreed to triple IMF resources to help bolster the world economy.

But it won’t be easy. Last month’s discussions unravelled after Mantega went public with his initiative for a Bric-led intervention in the eurocrisis – including plans for the direct purchases of the bonds of distressed countries. He was forced to back down after China, India and Russia all poured cold water on the proposals.

In 2009, the IMF refinancing discussions quickly led to sensitive questions about IMF reform – ie boosting the Bric countries’ influence at the expense of Europe. It’s inevitable that this time too, this issue will raise its ugly head. And Europe will be in a weaker position to resist as this time it’s Europe that needs the money.

“Emerging markets, in particular China, may feel the pressure at this point to make some gestures to help the West,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, told Reuters. “They do not want to invest too much given that the West’s problems are of its own making, and if they help, they want to do so in a way that brings them benefits and recognition.”

The US too will be protecting its interests. American officials have urged the European Union repeatedly to press ahead with its own rescue plans. They may want to see the EU do more before committing to increasing IMF resources – and giving the Brics more space at the top table of international finance.

Related reading:
What the eurozone crisis might mean for emerging markets, beyondbrics
eurozone file, beyondbrics