IMF FIREWALL - WILL IT BE ENOUGH TO KEEP AWAY VIRUS OF CONTAGION?
By Ruma Dubey
Till today morning, a ‘firewall’ to us mere mortals meant a barrier which kept our internet network secure. But since then, thanks to the G20 summit, the definition of the firewall has been extended to ‘IMF Firewall’. Does this mean a barrier being put up by IMF?
Actually, yes. But not trader barriers; this will be a barrier created with funds contributed by the G20 members to prevent future financial crisis. This fund will be used by the member countries of the G20 only if they desperately needed and if all other resources have been depleted. Till then, the funds will be invested and earn interest. When countries access money from this fund, it will be
Participating countries with no way out of a financial crisis would access the so-called firewall fund through a temporary loan, with conditions, and not purchase agreements to the IMF’s general resources account.
Here are the countries who have handed the IMF money in the latest agreement and their contribution:
1. Euro Area – $200 billion
2. Japan $60 billion
3. Korea $15 billion
4. Saudi Arabia $15 billion
5. UK $15 billion
6. Sweden $10 billion
7. Switzerland $10 billion
8. Norway $9.3 billion
9. Poland $8 billion
10. Australia $7 billion
11. Denmark $7 billion
12. Singapore $4 billion
13. Czech Republic $2 billion
14. China $43 billion
15. Russia $10 billion
16. Mexico $10 billion
17. India $10 billion
18. Brazil $10 billion
Two countries – Canada and USA have refused to contribute anything to this fund. Why? Because they feel Europe has enough resources of its own to resolve the crisis. If these two large economies feel that Europe has enough, why have the other 18 countries, most of whom are themselves not exactly brimming with money to spare, contributed?
Take a look at the contributions and it is evident that the emerging countries have contributed more. India has contributed more than even Australia and equal to Sweden and Switzerland. What this probably indicates is a subtle change in the power structure. But will this new found power be restricted only to money contribution? The emerging economies, while contributing have stated that they want to see changes at the IMF, where their voting right is not in conjunction with their power and more importantly, the money should not be reserved for Europe. But will this fund be used to bailout smaller economies or will the larger economies use this money and once again continue to dictate terms and dominate over the smaller economies? The numbers clearly indicate that there is a change in the world power structure but will the larger economies acknowledge that? USA was the country which actually got the entire world in this big mess and today, it does not want to make a contribution of a single penny? Naturally, with USA already holding the highest voting rights in the IMF, it does not need this to reiterate its position.
Another big question which comes to mind is – with Europe already in a financial bind, how will it raise money to contribute $200 billion? Contributing money to rescue itself? And is this entire IMF Firewall merely another Eurozone bailout fund, where now the rich countries are plundering the poorer economies so that they can continue to rule?
The money contributed might not be enough if there is a contagion and if there is a collapse, well, it is the very same contributing emerging economies which will suffer the most. The pledging of funds might be reassuring to the IMF but surely, the markets need more.