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Bond Issue Considered by IMF: Will This Help Improve Lending Programs?

The International Monetary Fund (IMF) is now considering selling its bonds to developing countries in order to raise sufficient capital against the worldwide economic crisis. Brazil and China are among the countries that showed interest in purchasing the securities. The tentative offer opens new doors in the way member states can contribute to the fund. The IMF, through all its years of history, has never issued bonds before.

Essentially, the fund is looking for ways to finance loans and provide aid to members during the worst-economic crisis in its history. With more uncertainties ahead, the institution is tapping into its 185 members for fresh cash infusions. However, developing countries have suggested that they want more decision-making authority within the IMF; this sets up a possible clash with developed countries in the future.

Is the Bond Issue Likely to Push Through?

According to Dominique Strauss-Kahn, “I’m sure that this vehicle will be used…we’re discussing with different creditors the way to implement it and the amount that we put in it.” He further added that bonds provide flexibility. Despite the prospects of the IMF bond issue, Brazilian Finance Minister Guido Mantega has said that the sale proposal is premature.

Brazil is demanding higher yields compared to those attached to US Treasuries before they will buy. Mantega has met with his counterparts from China, India, and Russia to discuss the situation. Contributions made by the four largest developing countries are “provisional”. That is, they want to increase their decision-making power in the IMF.

What does it mean to both Rich and Emerging Economies?

If the bond issue really pushes through, it is inevitable for emerging economies especially the four largest developing nations mentioned earlier to attain more decision-making power within the IMF. Right now, Mantega has revealed that they want their contribution to help developing countries weather the global financial slump instead of strengthening the “current structure of the fund”.

There was an implicit suggestion made by Bank of France Governor Christian Noyer that the IMF should forget this kind of “exercise”. But everyone agrees that the fund needs to be correctly capitalized in order to be operational. Though the next move of the IMF is unclear, the common aspect everyone agrees on is that institutions like the IMF and the World Bank need to contain the crisis that seems to be worse than what was previously projected.

China Pressures Washington

In this entry, we will discuss the pressure China is putting on Washington regarding the stability of their investments in the U.S. economy. Below, we will take a closer look at the investments China has in the form of T-Bills, as well as the reasons why they have recently expressed concern.

China is the United States’ biggest investor. With about $1 trillion in U.S. Treasury bonds, along with other forms of investments, it is to be expected that China is inquiring about America’s financial situation. This past Friday, China’s premiere, Wen Jiabao, asked for a guarantee that China’s investments will be safe. “We have a huge amount of money in the United States. Of course we are concerned about the safety of our assets.”

So why exactly is China concerned? Well, it’s no secret that the recession in the U.S. economy is apparent to the rest of the world. With the increase in government spending, the U.S. continues to print more and more money. What could result is inflation, which would then cause the U.S. dollar to collapse in value. As the largest holder of America’s public debt, China needs to feel confident that its investments are safe.

President Obama responded to Jiabao’s concern with confidence, commenting: “And so I think that not just the Chinese government, but every investor, can have absolute confidence in the soundness of investments in the United States.” Obama feels that the stability of the U.S. economy, along with its political system, has enabled China’s investments to continue, despite the financial crisis.

So what would happen if China pulled its investments, despite President Obama’s reassurance? Well, if China sold its treasury holdings, the value of the U.S. dollar would fall. As a result, borrowing costs in the U.S. would increase. China may be hurt in the end, as it would then be more difficult for Americans to buy Chinese goods.

Recent Credit Crisis Effects on the world

The credit crisis has deeply affected the economy over the last few months, both domestically and internationally. In November 2008, 533,000 people lost their jobs! That month proved to be one of the worst months as far as layoffs go in the history of the United States. With unemployment drastically rising, this past holiday season fulfilled its promise of being of the worst on record. In addition to this drastic decrease in consumer spending, 1 in 10 homes were facing foreclosure.

By no means were we the only nation facing an economic crisis during that time.Taiwan‘s economy is 75% reliant on exports.In November, those numbers dipped by 23%! This was the worst drop in 7 years. As a result, the Taiwanese central bank lowered the bank to bank lending rate to 2%–it’s lowest in 26 years—to account for the loss of exports.

In Q2 France’s economy was down 0.3%; in Q3 it grew by 0.1%. But what really is 0.1%? As Q3 closed out, France narrowly escaped having to use the “R” word to describe the state of their economy. A recession is two consecutive quarters with losses to a country’s overall GDP. Russia also experienced economic hardship during this past year. In November, Russia’s unimplemented was at 1.5 million. It is expected to rise to 2-2.5 million by the end of 2009. The economic crisis America faces is by no means limited to our boarders.

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