LENDING BY THE IMF TO PROGRAMME COUNTRIES AND DENMARK'S COMMITMENTS TO THE IMF
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LENDING BY THE
IMF TO PROGRAMME
COUNTRIES AND
DENMARK’S
COMMITMENTS TO
THE IMF
Thomas Pihl Gade, Sune Malthe-Thagaard
and Louise Funch Sørensen, Economics
INTRODUCTION AND SUMMARY quotas. The decision has not yet been ratified
by a sufficient majority of member countries,
The International Monetary Fund, IMF, played so several of them have chosen to contribute
and continues to play a key role in the manage- temporary loans to ensure that the IMF has
ment of the global economic crisis. In recent adequate capacity. Therefore, the fact that the
years, the IMF has granted crisis loans to sev- 2010 decision still remains to be implemented
eral countries and approved credit to poten- has no major short-term impact on the IMF’s
tially vulnerable countries via its precautionary total resources. On the contrary, it means that
facilities. The IMF extended particularly large the IMF is dependent on temporary resources
loans to crisis-ridden euro area member states, rather than permanent quota resources, which
which resulted in a high geographical concen- causes considerable uncertainty as to the future
tration of lending. Ireland’s 3-year IMF loan pro- resources.
gramme expired at the end of 2013 after robust Denmark is among the countries that have
implementation of the required programme chosen to commit themselves to contributing
conditions, while Portugal will, according to the temporary resources, including a bilateral loan.
plan, receive the last disbursement under its The reason is that Denmark is very much affect-
IMF programme in June this year. Both coun- ed by the development in the world economy
tries have announced that rather than receiving and in the financial markets. Denmark sees a
subsequent precautionary programmes, they great strength in an international organisation
will rely on financing on market terms. Greece such as the IMF that seeks to promote interna-
has also been in a position to issue government tional economic and financial stability. Further-
bonds for the first time in four years. more, a loan from the IMF often paves the way
To meet the demand for loans, the IMF for other regional or bilateral loans. Denmark’s
adapted its lending facilities and significantly financial relations with the IMF are handled
expanded its lending capacity. The main objec- by Danmarks Nationalbank. The temporary
tive of the lending facility reforms was to give loan commitments have caused a substantial
the member countries easier access to large increase in Danmarks Nationalbank’s poten-
loans, to increase the focus on precaution- tial exposure to the IMF. Its actual exposure
ary loans and to streamline the conditionality remains limited, however, as the IMF has only
attached to IMF programmes. The lending drawn on a small part of Denmark’s total loan
capacity was expanded through a number of commitment.
measures. In 2010, it was decided to double the Loans to the IMF can be regarded as highly
IMF’s permanent resources consisting of the secure, and, historically, the IMF member coun-
member countries’ financial contributions, or tries have never suffered any losses by making
DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014 41quota resources or temporary loans available.
Total lending by the IMF since 2006 Chart 1
One reason is that the IMF has preferred cred-
itor status, i.e. borrowing member countries SDR billion
200
have to give priority to repayment to the IMF
over other creditors if they are unable to meet
150
their obligations. Moreover, the IMF requires
a number of strict conditions to be met by the 100
member countries before the money can be
50
disbursed. Finally, the IMF’s ongoing accumu-
lation of reserves contributes to safeguarding
0
member countries against any losses. 2006 2007 2008 2009 2010 2011 2012 2013 2014
Precautionary Facilities (FCL, PLL)
Extended Fund Facility (EFF)
Standard Borrowing Arrangement (SBA)
LENDING BY THE IMF
Note: Stand-by arrangements, SBA, are the IMF’s ordinary loan
IN RECENT YEARS facilities for high- and medium-income countries with short-term
balance of payments problems. An SBA typically has a maturity of
1-2 years and is subject to programme conditions. The Extended
Fund Facility, EFF, is generally equivalent to the SBA, but is intend-
ed for countries facing medium or long-term balance of payments
LARGE LOANS FROM THE IMF problems. The EFF is also subject to programme conditions, but
it typically has longer duration and repayment periods than the
DURING THE CRISIS
SBA. The Flexible Credit Line, FCL, and the Precautionary Liquidity
Providing loans to member countries with Line, PLL, are precautionary loan facilities for member countries
that are generally pursuing sound economic policies.
balance of payments problems has always been Source: IMF.
among the IMF’s core responsibilities. Such
loans can be provided either as precautionary
loans to prevent a crisis or as a direct crisis as Greece, Ireland and Portugal. In 2013 and
management measure. All ordinary lending most recently in May 2014, Cyprus and Ukraine,
by the IMF is financed by its other members, respectively, also received substantial loans
including Denmark. from the IMF. The loans to those five countries
While total lending1 to programme countries belong under the IMF’s traditional loan facilities
was low during the years leading up to the cri- (Stand-By Arrangements, SBA, and Extend-
sis, it increased strongly from the beginning of ed Fund Facilities, EFF), which are subject to
the financial crisis in 2008 until today, from less a number of conditions that have to be met
than SDR 10 billion2 (just under kr. 70 billion) before the loans can be disbursed. The purpose
in the pre-crisis years to approximately SDR is to restore conditions for strong economic
150 billion (approximately kr. 1,200 billion) in growth that will support the country’s ability
2014, cf. Chart 1.3 At the beginning of the crisis, to repay the loan. Today, the traditional loans
the increase was mainly attributable to large account for almost 50 per cent of the IMF’s
loans to European programme countries such total lending, cf. Chart 1. The remaining half is
provided as precautionary loans, i.e. a form of
1 The IMF distinguishes between loan commitments and actual lending. overdraft facility, primarily to Mexico, Poland
When a loan to a member country is approved by the IMF Executive and Colombia.
Board, this is in fact a credit line, or a loan commitment, for the total
amount that the country can borrow in the course of the programme At the same time, due to the large loans to
period. Actual lending is provided gradually in the course of the pro-
gramme period. This article uses the word lending about the IMF’s Greece, Ireland and Portugal, the average size
accumulated loan commitments. of loans from the IMF has been substantially
2 The Special Drawing Right, SDR, is the IMF’s unit of account. The SDR larger than before in both absolute terms and
is a basket of currencies, currently consisting of US dollars, euro, yen
and pound sterling. This article uses an exchange rate for SDR vis-à- relative to the countries’ membership contri-
vis the krone of 841.40, equivalent to the rate as per 13 May 2014.
butions, or quotas, to the IMF. Moreover, as a
3 The article only considers lending by the IMF to high- and medium-in-
come countries. In addition, the IMF has granted loans under the result of the loans, lending by the IMF is now
Poverty Reduction and Growth Trust (PRGT) – primarily to developing geographically concentrated to a far greater
countries. Today, these loans only account for 2 per cent of the IMF’s
total lending. extent than before. More than half of the IMF’s
42 DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014Total lending by the IMF broken down by geographical area, end-March, 2014 (left), and Chart 2
geographical distribution of IMF lending, exclusive of precautionary lending facilities (right)
4 per cent 8 per cent
1 per cent
2 per cent
35 per cent
57 per cent
89 per cent
4 per cent
Europe Africa North and South America Asia Europe Africa North and South America Asia
Source: IMF.
current loan commitments are made to Europe- in the financial markets, cf. Marcussen and
an countries, cf. Chart 2 (left). Excluding lend- Sørensen (2012). Many programme countries
ing under the precautionary loan facilities, the pursued unsustainable fiscal policies, experi-
share of lending by the IMF to European coun- enced macroeconomic imbalances and failed
tries is almost 90 per cent, cf. Chart 2 (right). to implement structural reforms during the
boom preceding the crisis. The substantial loan
RECENT DEVELOPMENTS IN SELECTED arrangements from the IMF and the EU should
EUROPEAN PROGRAMME COUNTRIES be viewed against the backdrop of the risk of
A number of European countries have received contagion effects on the government bond
IMF programmes since the beginning of the market between a number of countries where
crisis in 2008, cf. Table 1. The programmes were considerable parts of the excess yield spread
granted partly because the countries were could not be explained by economic fundamen-
no longer able to cover their financing needs tals, cf. Abildgren and Malthe-Thagaard (2012).
Loan programmes from the IMF and the EU to selected European programme countries Table 1
Total loan in
Billion euro Programme initiated Programme expired IMF loan EU loan Total loan package per cent of GDP
Iceland November 2008 August 2011 2 - 2 16
Greece I May 2010 (May 2013) 20 53 73 1
33
Ireland December 2010 December 2013 23 45 68 43
Portugal May 2011 June 2014 26 52 78 46
Greece II March 2012 March 2016 28 145 173 89
Cyprus April 2013 April 2016 1 9 10 61
Ukraine 2
April 2014 April 2016 12 - - 7
Source: IMF, Eurostat and the European Commission.
1. The total loan package amounted to 110 billion euro, the IMF and the euro area member states contributing 30 and 80 billion euro, re-
spectively. The first loan package to Greece was replaced by a new loan package before all disbursements had been made. The remaining
disbursements were transferred to the new loan programme as from March 2012.
2. In addition to the loan from the IMF, Ukraine is expected to receive bilateral loans and assistance from a number of countries and internation-
al organisations, including the EU, the USA, the World Bank and others, totalling minimum 7 billion euro under the loan programme.
DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014 43Hence, it was crucial to stabilise the crisis-rid- costs (primary balance) of 0.8 per cent of GDP,4
den countries to ensure international economic thereby fulfilling the fiscal policy programme
stability. requirement for 2013. The aim is to achieve a
Ireland chose not to apply to the IMF or its surplus of 3 per cent of GDP on the primary bal-
European partners for a precautionary pro- ance in 2015. Moreover, the improvement in the
gramme on expiry of its programme in Decem- balance of payments has been a positive sur-
ber 2013. Instead, Ireland relied on the central prise, also showing a small surplus in 2013. As
government’s renewed market access. Ireland a result of favourable economic developments,
implemented the programme in a highly sat- the Greek government issued a 5-year govern-
isfactory manner that included reforms of its ment bond in the financial markets for the first
financial sector and substantial fiscal consol- time since the beginning of the crisis. The yield
idation, cf. IMF (2013). The country’s growth was 4.95 per cent, which is lower than the level
was lower than assumed when the programme immediately before the crisis. The government
was initiated, but higher than in the euro area. is still behind on the implementation of labour
But there are still major challenges: The gov- market reforms, and it is uncertain whether the
ernment deficit is large and public debt is very banks need further recapitalisation, e.g. due
high. to a high number of non-performing loans. In
Portugal’s programme is on track accord- addition, Greece’s sovereign debt is very high,
ing to the most recent review, and economic and it will take many years of focused fiscal
activity and employment have developed more policy to reduce the debt.
favourably than assumed, cf. IMF (2014). In Cyprus exceeded expectations during the
February, Portugal once again issued 10-year first year of the programme in terms of im-
government bonds and has now obtained plementing the programme requirements, of
financing until the autumn of 2015. The coun- which the public deficit target was met by a
try faces a number of challenges, however; for considerable margin. At the same time, the fall
example, labour market flexibility remains low, in growth was smaller than feared. But Cyprus
and there is uncertainty about the consequenc- still faces challenges with an increasing number
es of the outcome of some Constitutional Court of non-performing loans, declining extension of
rulings on 2014 budget measures. Neverthe- credit and rising unemployment.
less, Portugal’s IMF programme will expire in Ukraine obtained a loan programme from the
June this year. The country chose not to apply IMF on 30 April 2014. The country has been in
for a precautionary facility from the European a recession since mid-2012 and is thus experi-
Stability Mechanism, ESM, or the IMF. encing its second major crisis in just six years.
Greece is now on its second loan programme The exchange rate was overvalued as a result of
since its sovereign debt crisis. This is attrib- ongoing interventions by the National Bank of
utable to the country’s deep structural prob- Ukraine. Despite large government deficits, the
lems and the sustained crisis, cf. Mikkelsen government raised the civil service wage bill
and Sørensen (2012). Greece failed to meet a considerably in 2013, increased pensions sub-
number of programme conditions during the stantially, and maintained the lowest gas prices
first three years: The country did not sufficiently in Europe via public subsidies of approximately
implement the structural reforms and privati- 7.5 pct. of GDP in 2012, when gas import prices
sation of public enterprises agreed with the were going up. The economic crisis culminated
troika, i.e. the IMF, the ECB and the European in February 2014, when the central bank could
Commission. Furthermore, development in
the government deficit and debt was weaker
4 According to Eurostat’s press release, Greece had a primary balance
than assumed in the programme. In the course deficit of 8.7 per cent of GDP in 2013, mainly as a result of large one-
off expenses to recapitalise the Greek banking sector. The Europe-
of 2013, the tide turned, and for the first time an Commission, the ECB and the IMF have calculated the primary
in 10 years, Greece recorded a small surplus surplus of 0.8 per cent of GDP in 2013 based on the definition in
Greece’s loan programme, cf. press briefing from the Commission of
on the government budget excluding interest 23 April 2014.
44 DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014no longer defend the exchange rate due to a Finally, the IMF has made a number of modifica-
very low foreign exchange reserve covering tions to the programme conditionality associ-
only two months’ imports, according to the IMF. ated with a traditional loan programme in an
effort to make it more streamlined and focused
on the IMF’s core areas of responsibility, cf.
REFORMS OF IMF LENDING IMF 2012. Generally, the design should seek to
FACILITIES ensure fulfilment of a number of principles: 1.
national ownership of the reform programme,
In the course of the crisis, the IMF implement- 2. parsimony in programme-related conditions,
ed a number of changes in its lending facilities 3. tailoring to country circumstances, 4. effec-
to strengthen its capacity to both prevent and tive coordination with other multilateral insti-
alleviate crises. The reforms focused especially tutions such as the World Bank and the OECD,
on giving access to extraordinarily large loans, and 5. clarity in the specification of conditions.
increased the focus on precautionary lending The objective is to ensure that the necessary
and allowed more streamlining of programme reforms are implemented and thus to enable
conditionality. the country to repay the loan.
A frequently used method of measuring the Loan programmes from the IMF are subject
size of a member country’s loan from the IMF to regular reviews to enable the IMF to assess
is to scale it relative to the country’s IMF quota. agreed reform progress and consider any nec-
Normal access to an IMF loan is based on a fixed essary adjustments. Hence, most of the current
percentage of the country’s quota and varies disbursements are conditional upon the bor-
with the loan facility. In 2009, access to the IMF’s rower complying with the agreed programme
Stand-By Arrangements, SBA, was doubled from conditions. Overall, the conditions can be
300 to 600 per cent of the quota. At the same broken down into three types, cf. Box 1: prior
time, it became easier for member countries actions, quantitative performance criteria and
to get access to extraordinarily large loans of structural benchmarks. In addition, indicative
over 600 per cent of the quota. Such loans are targets can be used to supplement the quanti-
approved when a member country is facing an tative performance criteria for the IMF to assess
exceptional situation that threatens its financial compliance with the programme.
stability, and where immediate action is crucial.
Greece, Ireland and Portugal all obtained in- PROGRAMME CONDITIONS FOR EUROPEAN
creased loans on that background of 3,200 per LOANS FROM THE IMF
cent of the quota for Greece and 2,300 per cent The conditionality framework of a programme
of the quotas for Ireland and Portugal. is tailored to individual member countries’
Since 2009, the IMF focused increasingly structures and the nature of the crisis. The Eu-
on preventing crises, e.g. by introducing new ropean programme countries all had large gov-
precautionary loan facilities. The Flexible Credit ernment budget deficits. As a result, they were
Line, FCL, is based solely on qualification re- no longer able to issue government bonds in
quirements with the aim of signalling that the the financial markets due to unsustainably large
country has strong economic fundamentals and public debt. Consequently, the programmes of
is pursuing a sound economic policy, but only all countries contained a requirement for fiscal
needs an overdraft facility as a buffer against consolidation in the form of quantitative per-
future external shocks. Hence, the FCL facility formance criteria, including targets for improv-
is not subject to the IMF’s usual programme ing the government budget balance and a cap
conditions. The Precautionary Liquidity Line, on public debt.
PLL, aimed at countries with sound economic The variations between programme coun-
fundamentals, is also based on qualification tries are attributable to different drivers of their
requirements, but, in addition, includes certain debt problems. Broadly speaking, the countries
programme conditions. can be divided into two groups: Ireland and
DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014 45Types of programme conditions for IMF Box 1 Total number of prior actions and struc- Chart 3
loan programmes tural benchmarks
Prior actions: Actions to be taken before the IMF Exec-
Antal
utive Board approves a programme or a programme
50
review. They must ensure that the programme has the
necessary foundation to succeed or is put back on track 40
following deviations from agreed policies. The purpose is
twofold: to ensure member countries a minimum of pro- 30
gramme ownership, and to implement the programme
conditions by specifying certain measures before the 20
programme is approved.
10
Quantitative performance criteria: Targets that must be
met to complete a programme review. They always relate 0
to macroeconomic variables under the control of the ISL (2008) GR (2010) IE (2010) PT (2011) GR (2012)
authorities, such as monetary and credit aggregates, Forudgående initiativer Strukturelle referencepunkter
international reserves, fiscal balances, and external
borrowing.
Note: The parenthesis indicates the year the programme was
initiated. IS = Iceland, GR = Greece, IE = Ireland, PT = Portugal.
Structural benchmarks: These are (often non-quantifiable) Note that the number of programme conditions is to date and
reform measures that are critical to achieve programme hence may increase over the programme period.
Source: Monitoring of Fund Arrangements (imf.org).
goals. They are intended as markers to assess pro-
gramme implementation during a review. They vary
across programmes: examples are measures to improve
financial sector operations, build up social safety nets, or conditions, the European Commission covered
strengthen public financial management.
the more extensive structural reforms. The ECB
Indicative targets: They supplement quantitative perfor- focused on financial stability and transmission
mance criteria for assessing programme progress. Some-
of monetary policy in the euro area. As regards
times they also replace quantitative performance criteria
when there is data uncertainty about economic trends. structural conditionality, the Commission’s
As uncertainty is reduced, these targets are turned into measures were often more detailed than those
quantitative performance criteria, with appropriate
launched by the IMF.
modifications.
The number of structural benchmarks and
Source: IMF. prior actions under the programmes has
increased in the course of the crisis, cf. Chart
3. However, the number alone does not nec-
Cyprus ended up becoming liable for problems essarily provide an exhaustive description of
in their financial sectors with balances of up to the scope of a programme, as some political
approximately 800 per cent of GDP. In the case measures can be more demanding and broader
of Ireland, this reflected a considerable house in scope to implement than others. In addi-
price bubble. In Greece and Portugal, the econ- tion, the programmes have different durations,
omies suffered from substantial structural prob- reflecting the depth of the countries’ economic
lems, a high level of debt, large external imbal- challenges.
ances and poor competitiveness. Furthermore, There may be several reasons why the IMF
Portugal and particularly Greece had large laid down more programme conditions at a lat-
government deficits. The number and type of er stage of the crisis. Iceland’s programme was
programme conditions also varied in several characterised by being directly associated with
areas. The former countries were requested es- the financial crisis after the banking sector’s
pecially to reform their financial sectors, while collapse in 2008. Although fiscal policy had
extensive structural reforms were needed in the also been much too expansionary, the coun-
latter countries. try’s economic structures were basically sound.
IMF (2012) evaluates the programmes for Political measures were therefore restricted to
the crisis-ridden euro area member states in the financial sector and fiscal tightening due to
view of the troika cooperation. While the IMF the large drain on the government budget as
focused particularly on short-term macrocritical a result of bank restructuring. The later pro-
46 DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014IMF resources and lending capacity Box 2 IMF resources during the crisis Chart 4
The IMF’s resources are made up of permanent resources
SDR billion
in the form of member country quota payments, and of 1000
borrowed resources in the form of the multilateral bor-
rowing agreements, New Arrangements to Borrow, NAB, 800
and bilateral loan agreements.
600
The size and distribution of IMF quotas are deter-
mined by the IMF Board of Governors in periodical re- 400
source reviews. When member countries get loans from
200
the IMF, the Fund may draw on the quotas for member
countries which, in the Fund’s assessment, have substan- 0
tial resources. The IMF publishes a quarterly compilation 2008 2009 2010 2011 2012 2013 2014 2015
of those countries. Bilateral loans
New Arrangements to Borrow (NAB)
Furthermore, the IMF has access to temporary loans Quotas
from 38 member countries, including Denmark, under the IMF Forward Commitment Capacity (FCC)
multilateral NAB loan agreements. The NAB is a second-
ary source of finance established in 1997 to supplement
quota resources during the Asian crisis. The NAB loan Note: Data for 2015 assumes the implementation of the 2010
reform in the course of 2015 and estimation of lending capacity.
facility was expanded substantially as a result of the
Lending capacity for 2014 and 2015 takes into account the loan to
global economic crisis. At the same time it was decided Ukraine of SDR 11 billion (kr. 90 billion) that was approved on 30
that the NAB should be activated for periods of no more April 2014.
than 6 months at a time, thus requiring 85 per cent of Source: IMF and own calculations.
NAB participants (measured by loan size) to approve the
activation.
In 2012, a number of countries concluded temporary
bilateral borrowing agreements with the IMF. Drawings
on the agreements are only permitted when the IMF’s multilateral New Arrangements to Borrow, NAB,
lending capacity in the form of quota resources and and a number of bilateral borrowing agree-
NAB falls below SDR 100 billion. Besides, they can only
ments, cf. Box 2. The quota resources are part
be used when the NAB is also activated. The bilateral
loan commitments amount to SDR 273 billion (kr. 2,300 of the IMF’s permanent resources and should,
billion). under normal circumstances, be its primary
The IMF’s lending capacity is not the same as the
source of financing, while a number of member
total available resources, as the IMF draws only on those
member countries which, in the Fund’s assessment, have countries, including Denmark, have temporarily
substantial financial resources. The most common indica- made NAB and bilateral loans available.
tor of capacity is the Forward Commitment Capacity, FCC,
which is a measure of the usable resources available for
As the need for loans rose during the course
the next 12 months. The FCC consists of undrawn quotas of the crisis, the IMF has had its resources
and NAB resources plus the estimated repayments on increased. Since 2008, its total resources in-
existing loans over the coming 12 months. At end-March,
the IMF’s FCC amounted to SDR 272 billion. Add to this creased from approximately SDR 251 billion to
the value of the bilateral loan agreements. approximately SDR 880 billion (approximately
kr. 7,400 billion) in 2014, cf. Chart 4.
The background for the increase is four ma-
grammes were introduced in connection with jor agreements concluded between the mem-
the sovereign debt crisis in southern Europe ber countries since 2009:
and were attributable to problems of a more In 2009, governments and central banks
structural nature, including poor competitive- decided to contribute temporary bilateral
ness, inefficient public sectors and inflexible loans to the IMF totalling approximately SDR
labour markets. 180 billion. These loans were intended to exist
only as long as they were needed, or until
other long-term financing for the IMF was in
IMF RESOURCES DURING THE CRISIS place. At the same time it was agreed that
the resources from the bilateral loan agree-
Growth in lending by the IMF required a sub- ments should be transferred to an expanded
stantial increase in its resources. Lending by version of the existing NAB arrangement at a
the IMF is financed by quotas supplemented later stage. By increasing the NAB loans it was
by temporary credit arrangements such as the ensured that the IMF would have access to
DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014 47IMF resources broken down by countries and groups of countries Table 2
SDR billion Quotas NAB Bilateral loans Total Total in per cent of GDP
Total 198 365 305 868 2.1
EU1 59 98 149 306 3.5
USA 42 69 - 111 1.0
Japan 16 66 40 21 3.8
Emerging economies 51 80 82 212 1.5
Others 30 52 34 118 2.1
Reference values
Denmark 1.9 3.2 4.6 9.7 4.5
Nordic-Baltic constituency2 7.5 13.7 20.7 42.0 3.8
Note: Only countries drawn on by the IMF, i.e. countries included in the IMF’s Financial Transaction Plan, are included. Since the IMF does not
draw on programme countries, not all EU member states are included in the table.
1. Excluding EU member states with IMF programmes.
2. The Nordic-Baltic constituency of the IMF consists of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden.
Source: IMF and own calculations.
financing in the slightly longer term, as NAB resources from the member countries which,
loans, contrary to bilateral loans, need to be in the Fund’s assessment, have a sufficiently
activated every six months, but do not have an strong balance of payments and currency posi-
actual maturity date. tion. The IMF seeks to spread the financing bur-
In 2010, the group of countries participating den among those countries. Every quarter, the
in the NAB was expanded, and the existing bi- IMF prepares a financing plan for the coming
lateral loans were transferred to the NAB loans, quarter, establishing the distribution between
causing the NAB loan facility to increase from quota financing and other financing. The Fund
SDR 34 billion to SDR 370 billion in 2011. also prepares a transaction plan specifying the
In 2010, the IMF member countries also distribution of drawings on the countries par-
agreed to reform the quotas, doubling the ticipating in the financing plan.
IMF’s quota resources to approximately SDR Most of the IMF’s resources are made availa-
480 billion, cf. Bohn-Jespersen (2010). The deci- ble by advanced economies, cf. Table 2. Den-
sion remains to be implemented, however, as it mark and the other Nordic and Baltic member
requires ratification by a majority of the mem- countries with which Denmark shares a seat
ber countries’ national parliaments. At the same on the IMF Executive Board finance a relatively
time, the expanded NAB has to be transferred substantial part. Denmark’s contribution thus
to quotas, thereby making resources perma- amounts to 4.5 per cent of GDP. By comparison,
nent rather than temporary. the Fund’s total resources constitute 2.1 per
As a result of the delayed implementation cent of global GDP. This overweighting reflects
of the quota reform and increased demand for the fact that the Nordic countries are major
loans from the IMF during the crisis, a number contributors of NAB resources and bilateral
of countries made new temporary bilateral loans. Add to this that a country’s quota share
loans available to the IMF in 2012. They are is not calculated solely on the basis of GDP, but
only to be used if the need for loans exceeds is also based on a number of variables, includ-
the IMF’s quota resources and NAB. ing trade flows and financial openness, which
In practice, the IMF provides loans to pro- provide a more accurate picture of the coun-
gramme countries by similarly drawing on try’s relative position in the world economy.
48 DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014UNCERTAINTY ABOUT THE IMF’S es will then begin to decline, unless the bilater-
FUTURE RESOURCES al loans are extended.
The future size and composition of the IMF’s
resources are currently subject to some uncer-
tainty. Several countries have not yet approved DENMARK’S FINANCIAL
the decision of 2010 to double quota resources CONTRIBUTION TO THE IMF
to SDR 480 billion. Denmark has approved the
decision as we support a substantial increase
in the permanent share of the IMF’s resources. DENMARK CONTRIBUTES CONSIDERABLY TO
As the only major country, the US Congress THE IMF’S RESOURCES
has not yet approved the decision. This means As a member of the IMF, Denmark contributes
that the doubling has not entered into force financing of loans to member countries with
four years after the decision was made. In the balance of payments problems. Denmark sees a
short term, this has no significant impact on the great strength in an international organisation
volume of the total resources, but it means that such as the IMF that seeks to promote inter-
the IMF is dependent on temporary resources, national economic and financial stability. The
i.e. NAB and bilateral loans, rather than perma- IMF is the only global institution that has the
nent quota resources. resources and competencies to provide loans
But the NAB resources are also subject to in connection with crises or as precautionary
some uncertainty, as they need to be reacti- loans. Therefore, it is imperative that the IMF’s
vated every six months for the IMF to be able continued role in performing this important
to draw on them. The BRIC countries in par- function is not called into question. This is
ticular are dissatisfied that the USA remains part of the reason why Denmark has chosen
to approve the reform. Their dissatisfaction to contribute additional resources to the IMF.
reflects the fact that the decision to double Moreover, the crisis turned out to be of exten-
resources is linked to a shift in the distribution sive scope, and Denmark wish to ensure that
of the seats on the IMF Executive Board, in- the IMF has ample resources in order to con-
cluding two seats less for developed European tribute to boosting confidence in the financial
countries, primarily in favour of the emerging markets. Furthermore, loans from the IMF often
economies5. The BRIC countries’ willingness to pave the way for other regional or bilateral
keep reactivating the NAB has therefore been loans. Besides, the crisis turned out to hit Eu-
questioned.6 rope particularly hard. The European economy
The first bilateral loan agreements were is extremely important to Denmark, which was
signed in the autumn of 2012. They run for a another reason for supporting the IMF with
period of two years, but may be extended for additional financing in coordination with the
another two times one year if necessitated by other EU member states.
the Fund’s resource situation and the scope As one of few member countries, Denmark
of the crisis. In principle, this means that the has never relied on loans from the IMF. As
agreements may begin expiring as from Octo- mentioned above, Denmark contributes via its
ber this year, and that the Fund’s total resourc- membership commitment, the quota, and via
the various temporary credit arrangements, cf.
Chart 5.
5 The members of the IMF Executive Board are elected in the constit-
uencies. With the introduction of the governance and quota reform Denmark’s financial relations with the IMF
of 2010, the entire Executive Board will be up for election. As part of are handled by Danmarks Nationalbank on
the reform the member countries agreed that the number of seats on
the Executive Board for developed European countries should be re- behalf of the Danish government. Hence, Dan-
duced, primarily in favour of growth economies. This means that the
European constituencies will either consolidate further or give more marks Nationalbank pays Denmark’s quota and
time on the Executive Board to growth economies in their current contributes temporary financing.
constituencies.
Danmarks Nationalbank’s total loan commit-
6 The BRIC countries have sufficient voting power among the NAB par-
ticipants to have the right to veto the approval of the NAB activation. ment to the IMF was kr. 14 billion before the
DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014 49of other member countries, Danmarks Nation-
Denmark’s contribution to IMF resources Chart 5
albank must be consulted as to whether the
broken down by quota subscriptions
and loan commitments to NAB and bilateral loan should be extended by another
bilateral loans year. If the bilateral loan is not extended, Dan-
marks Nationalbank’s total commitment to the
Kr. billion
90 IMF will be halved.
80 Unlike drawings on the loan commitments,
70
60
Danmarks Nationalbank’s commitments to the
50 IMF are not - in themselves - included in the for-
40
eign exchange reserve, cf. Jensen and Sørensen
30
20 (2009). The reason is that the IMF’s drawings
10 on Danmarks Nationalbank’s commitments can,
0
End 2006 End 2013 After quota under certain circumstances, be redeemed by
reform
Danmarks Nationalbank before maturity. Ac-
Quotas NAB Bilateral loan
cording to the IMF’s statistical standards, such
drawings are liquid and may thus be included
Source: Danmarks Nationalbank. in the foreign exchange reserve. In practice,
the IMF draws on Danmarks Nationalbank’s
loan commitments by applying to Danmarks
crisis. At end-2013, the commitments had risen Nationalbank for resources as foreign exchange
to kr. 82 billion.7 This reflects Danmarks Nation- from the foreign exchange reserve. In return
albank’s temporary loan commitments in the for this, Danmarks Nationalbank gets a claim
form of NAB and bilateral loans. Denmark has on the IMF, which is also included in the foreign
been a party to the NAB agreement since 1997, exchange reserve. Thus, rather than changing
but raised its loan commitment from kr. 2 bil- the volume of the reserve, the IMF’s drawings
lion to kr. 28 billion in 2011. In 2012, Danmarks on Danmarks Nationalbank will only change
Nationalbank signed a borrowing agreement its composition. Most of the IMF’s lending is
under which Denmark contributes a bilateral disbursed in predetermined tranches, and
commitment of kr. 40 billion.8 Of the total loan not until the Fund deems that the measures
commitment of kr. 82 billion, just under kr. 8 adopted by the IMF Executive Board have been
billion had been drawn at end-2013, meaning implemented. Hence, Danmarks Nationalbank
that only a very limited part of the commitment is typically well acquainted with the IMF’s future
to IMF had been utilised. drawings on Danmarks Nationalbank.
The composition of Danmarks National-
bank’s total loan commitment will be changed LARGE POTENTIAL CREDIT EXPOSURE, BUT EX-
considerably when the quota reform of 2010 TREMELY LOW RISK ON LOANS TO THE IMF
enters into force, cf. Chart 5. The reform entails The initiatives to boost the IMF’s resources
a rise in Denmark’s quota from kr. 16 billion to during the crisis increased Danmarks National-
kr. 28 billion. However, the rise will be offset by bank’s potential exposure to the IMF from kr. 14
an equivalent reduction in Danmarks National- billion to kr. 82 billion. As such exposure is to
bank’s NAB commitment. The bilateral loan will the IMF and not to the countries to which the
mature in the autumn of 2014, so, like a number loans are granted, it is considerable.
Several factors imply that loans to the IMF
can be deemed to be very safe. First of all,
7 Only commitments to the IMF’s General Resource Account covering
the Fund’s ordinary lending are considered below. Add to this com- the IMF is given priority over other creditors
mitments such as Denmark’s participation in the IMF’s SDR system of
approximately kr. 26 billion and lending to low income countries via when loans are to be repaid – also known as
the IMF’s Poverty Reduction and Growth Trust, PRGT, of kr. 1.6 billion. preferred creditor status. This status is indicat-
8 The first bilateral loan commitment of approximately kr. 15 billion was ed by the following factors: 1. the borrowing
made in 2009 and added to Danmarks Nationalbank’s NAB commit-
ment in 2011. countries are willing to give priority to repay-
50 DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014ment to the IMF over other creditors if they are Bohn-Jespersen, Helene Kronholm (2010),
unable to meet their obligations, and 2. other The IMF’s quota and governance reform 2010,
creditors accept this situation. Although the Danmarks Nationalbank, Monetary Review, 4th
IMF’s status does not involve legally binding Quarter.
agreements with debtors and other creditors,
it is confirmed by the Paris Club.9 Moreover, the IMF (2012), 2011 Review of Conditionality –
IMF builds up reserves to be used in case of Overview Paper.
income losses and also has a substantial gold
stock. The interest margin that the IMF earns by IMF (2013), Ireland Twelfth Review, Country
providing loans finances its activities and is also Report No. 13/366, December 2013.
used to build up reserves against any losses.
It is crucial for all creditors to have good IMF (2014), Portugal Eleventh Review, Country
insight into the situation of the specific borrow- Report No. 14/102, April 2014.
ing country. The IMF gains particular insight
into the economies of its member countries Jensen, Thomas Krabbe and Søren Vester
through its ongoing surveillance of macroe- Sørensen (2009), Danmarks Nationalbank’s
conomic and financial conditions. Every year, financial accounts with the International Mone-
the IMF monitors the economies of its member tary Fund, IMF, Danmarks Nationalbank, Mone-
countries via Article IV consultations. In addi- tary Review, 4th Quarter.
tion, an in-depth analysis of the financial sec-
tors of its member countries, the Financial Sec- Marcussen, Anne Brolev and Louise Funch
tor Assessment Programme, FSAP, is performed Sørensen (2012), The process towards an EU/
every five years for 29 member countries with IMF loan programme and a debt restructuring,
systemically important financial sectors, includ- Danmarks Nationalbank, Monetary Review, 4th
ing Denmark. Quarter, Part 1.
Finally, most lending by the IMF is provided
under IMF programmes that include conditions Mikkelsen, Uffe and Søren Vester Sørensen
on the implementation of economic reforms. (2012), Write-down of Greek debt and new EU/
The requirements contribute to reducing the IMF loan programme, Danmarks Nationalbank,
risk associated with the loans, e.g. by address- Monetary Review, 1st Quarter, Part 1.
ing moral hazard problems. Indeed, the pur-
pose of the conditions is to create an incentive
for the countries to handle the problems that
led to the application for a loan. The conditions
are also designed to ensure that the loans are
repaid.
LITERATURE
Abildgren, Kim and Sune Malthe-Thagaard
(2012), A comparison of the ERM crisis in the
early 1990s with recent years’ financial and sov-
ereign debt crisis in Europe, Danmarks Nation-
albank, Monetary Review, 4th Quarter, Part 1.
9 The Paris Club is the forum in which bilateral creditors conclude
agreements on debt restructuring for debtor countries that are
unable to pay their debt commitments.
DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014 5152 DANMARKS NATIONALBANK MONETARY REVIEW, 2ND QUARTER, 2014
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