(IMF) IMF Introduces Bailout Fund – A Thanksgiving Gift For Europe?

When the world economy is reeling under the European sovereign debt crisis and ever-increasing uncertainty in the continent across the Atlantic, here’s some good news from the International Monetary Fund (IMF). The IMF has introduced a bailout fund called Precautionary and Liquidity Lines (PLL), to help the troubled Eurozone countries. For investors, this heartening announcement made on Tuesday seems like the best gift this Thanksgiving season.

This brings some respite to the nervous investors and the struggling Euro zone countries including Greece, Italy, Spain and Ireland as the bailout indicates some more access to liquidity. But an analytical thinking will actually foretell an even deeper crisis that has compelled the IMF to create new liquidity lines as buffers. Furthermore, questions have been raised on the feasibility of the IMF to provide financial support to these countries when it has a weak level of fund at hand.

Despite its good intensions, the news failed to stop the major indexes of Europe and U.S. from sliding. Among others, the shares of Germany-based Deutsche Bank AG (DB) were down 3.2% at $33.59 and the shares of Bank of America Corporation (BAC) were down 2.2% at $5.37 on the NYSE.

Unwrapping the Gift

The PLL will address a broader set of circumstances and replace the IMF’s previous program, called Precautionary Credit Line (PCL). According to the IMF, a member country could seek support under the PLL if it faces either the risk or actual need for balance of payments. Previously, only a potential need for support was required under the PCL.

Under the new liquidity line, member countries with relatively good economic policies would get access to credit for six months if they are in trouble due to heightened economic or market stress. In an extreme case, if the trouble goes beyond short-term balance of payments shortfall, the credit period could be extended to 12 to 24 months.

In terms of fund corpus, while the six-month liquidity line will allow credit worth up to five times the country’s contribution to the IMF, the longer-term arrangement would cover a ten-fold need.

Moreover, for countries with urgent balance of payments needs because of externally derived shocks, such as natural catastrophes, the IMF has introduced an instant funding solution called Rapid Financing Instrument (RFI).

Antidote for Eurozone Infection?

As the debt crisis in the Eurozone gets dirtier and the infection keeps spreading through the economic systems of the continent, the liquidity line introduced by the IMF may not bring a cornucopia of help.

The sharply divided European leaders are TOO busy finding a comprehensive solution to the continent’s increasingly awkward situations. And the crisis is about to hit the extreme level, which could even shape into a bigger slump than the latest U.S. recession.

If the debt crisis spreads beyond weaker Eurozone members (Greece, Italy, Spain and Ireland) and attack stronger economies (including France), there would be no way to protect the continent from the onslaught of another recession. And thanks to globalization, none of the economies outside the Euro zone will escape unscathed.

Moody’s Investors Service, a rating arm of Moody’s Corp. (MCO), warned that it could put the top-grade rating of France on review for a possible downgrade.

If France loses its ‘AAA’ rating, a ripple effect would be felt in many other countries in the continent. That would definitely signal a worldwide recession.

In Conclusion   

A question still comes to our mind: have the European leaders done enough to save the Eurozone? If the leaders showed some genuine desire to save the continent, the crisis would have not spread like an epidemic.

Most importantly, no one deny that Europe desperately needs money from outside. But it all depends on the political stability and solidarity of its leaders. As of now, there’s no speculation on which countries would readily take on the bet.

Admittedly, the IMF initiative many not seem like the best gift this season, but investors will get some reason to be thankful for. So, at the risk of sounding cliché, it’s not the gift, but the thought that counts!

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