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NZ raises IMF commitment to $4.1B on Euro-jitters

Tuesday 19th June 2012

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New Zealand is committing to lend the International Monetary Fund another $1.26 billion in the event of global economic turmoil, ahead of announcements expected from today's G20 meeting in Mexico on measures to counter the ongoing Eurozone debt crisis.

The latest US$1 billion (NZ$1.26 billion) commitment is the second such additional commitment in two years, and brings New Zealand's total potential lending to the IMF to NZ$4.1 billion, although the global lending agency has so far only drawn down $320 million from New Zealand.

The last additional commitment, also of $1.26 billion, was in 2010 to support the so-called New Arrangements to Borrow deal, which was organised to stem European debt troubles.

The funds are a loan to the international community, are repayable with interest and may never be drawn on fully, but the request for a further commitment underlines the ongoing fragility of global economic conditions because of the political and economic crisis in the 21 countries of the Eurozone.

Despite Greek elections producing an apparently pro-euro result on Sunday night, interest rates continue to soar on the debt of other, much larger European economies, particularly in Spain.

Mounting fears of the need for a full "sovereign rescue" for the Spanish economy sent the country's interest rates to a euro-era high of 7.28 percent overnight. Interest rates above 6 percent are considered unsustainably high.

While New Zealand's IMF commitment is not earmarked for any particular part of the world, Finance Minister Bill English referred to Europe in his statement announcing the additional commitment. "It's our expectation that Europe will continue to find solutions to its problems, but the IMF has a role in underpinning global certainty," he said.

A number of G20 countries had made additional IMF commitments in April, and more are expected at the meeting of the world's 20 largest economies in Los Cabos, Mexico, this week.

The approach to New Zealand for additional commitments was made last week, English said. "The new loan facility will be recorded as a contingent liability in the government's financial statements for the year to June 30 2012.

However, it will have no impact on the government's track to surplus," he said. As a small, open economy with high exposure to international trade and "one of the most indebted developed countries in the world", it was in New Zealand's interests to contribute to measures intended to produce a "stable, prosperous global economy."

BusinessDesk.co.nz

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