Diary of a Financier

IMF’s 2010 New Arrangement to Borrow: Portugal & the Global Inflation Story

In Economics on Fri 8 Apr 2011 at 18:52
  • EURUSD still climbing as expected.
  • Portugal’s bailout will draw on initial $115b from EU & IMF.
  • Since the April 2010 IMF 10x increase to its multilateral facility (NAB), the US will foot 20% of IMF funds to Portugal.
  • It’s criminal for the ECB to raise rates while using external resources [the IMF] as a first resort for its crisis.

Climbing another 18 pips to $1.4478 today, the Euro (EURUSD) is reacting in support of my continued outlook.  It ends the week hooked onto the snag around $1.45, which was the last uptick in January 2010 before sliding headlong to a trough at $1.20.

This afternoon, George Soros joined me in disagreement with the ECB’s rate hike amidst its members’ bifurcating economies and Portugal’s recent capitulation.  Like its Greek & Irish predecessors, the Portuguese bailout package will draw on the combine resources of the EU & IMF.  The initial request will total $115b (80b euros), but many on the Street expect around a $180b cost in the end.

On that note, Portugal submitted an official request for bailout to the IMF today.  That has severe consequences for FX markets.  I’ve been following the IMF throughout this crisis, and in April 2010 they made a bold move in expanding their borrowing facility.  From ZeroHedge:

 The IMF has just announced that it is expanding its New Arrangement to Borrow (NAB) multilateral facility from its existing $50 billion by a whopping $500 billion (SDR333.5 billion), to $550 billion. The current lending participant group of 26 entities will be increased by 13 new members all of whom will contribute token amount of capital to the NAB. The one country most on the hook in the new and revised NAB – the United States of America, will provide over $105 billion in total commitments, or 20% of the total facility. The US is currently on the hook for just $10 billion, meaning its participation in global bail outs just increased by $95 billion.

Look at how Gold & Silver reacted to that 10-fold increase in the IMF’s liquidity:

Gold

Silver

Now, with Portugal waiting hat-in-hand, here’s the list of the IMF financiers and their commitments to the multilateral NAB facility:

IMF New Arrangement to Borrow (NAB)- These are the financiers of the IMF's contribution to the Portuguese bailout.

The IMF will work with the EU to concoct a bailout, so nobody’s sure of the proportion of each party’s liability yet.  A few preliminary notes, nevertheless:

  1. A number of EU members face a double-whammy, as they’re participants on the roster of both the EU bailout package and the IMF.  You have your big boys like Germany, France & Italy… but there’s also Spain, Greece, Ireland and Portugal itself committed to both packages!
  2. Dealing with its own domestic crisis, how will Japan pay its share?
  3. I keep harping on this: “The broad strokes of US [QE2] aren’t largely responsible for food & energy inflation, because stimulus lay with the banks (i.e. the carry trade), not in the real economy (i.e. loans, wages, or dividends).”  While domestic Quantitative Easing smooths over the pothole housing has left in US GDP without flooding the real economy with dollars, this massive contribution to an IMF rescue doesn’t redeem any US GDP growth from the dollars committed.  Monetary velocity = nil. By adding more dollars to circulation, we can get inflation and a kick to commodity prices.
  4. It’s a crime for the ECB to raise rates in that environment.  They should at least maintain rates as a first resort in an attempt to manage the crisis internally.  Use monetary policy to dampen the burden on its bankrupt laggards, and leave exogenous aid (i.e. the IMF) as a last resort.  With the rate tightening en force, Germany laughs its way to the bank.

–Romeo (hattip Tyler Durden)

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