New credit line means more IMF conditionality

15 March 1999

The G7 proposal to establish a Contingency Credit Facility has met with opposition from some European and developing countries. They are concerned that the new credit line for countries facing financial contagion which have IMF-approved policies, will implicitly guarantee repayment, encouraging excessive lending to risky countries. The G7 argues that the moral hazard issue would be dealt with by involving the private sector, but has no concrete plans to achieve this.

Objections have also been raised on the grounds that incentives for maintaining good policies may be weakened because qualification for the credit line would be based on past performance. Michael Mussa, the Fund’s economic counsellor, has suggested that the Board would have difficulty withdrawing credit lines from those countries whose policy environment deteriorates.

Countries will face pressure to qualify for the credit line in order to signal to private investors their creditworthiness. This will have the effect of extending the policy influence of the IMF into the larger developing countries even if they do not draw on the fund.

Those countries that do not qualify may find that private capital flows decline or become more expensive to compensate for the risk that they are not implicitly guaranteed. They may also find themselves more susceptible to speculative attack.

The G7 hopes that a fully fleshed out proposal will be ready by the Spring Meetings for approval by the Interim Committee. Other agenda items include:

  • proposals to strengthen the Interim Committee;
  • the codes on fiscal and monetary policy, and;
  • curbing bank lending to hedge funds.