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
). The IMF has introduced a bailout fund called Precautionary and
Liquidity Lines (
), 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
Deutsche Bank AG
) were down 3.2% at $33.59 and the shares of
Bank of America Corporation
) 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 (
). 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
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 (
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
awkwardsituations. And the crisis is about to hit the extreme
level, which could even shape into a bigger slump than the latest
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
Moody's Investors Service, a rating arm of
), 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.
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!
BANK OF AMER CP (
): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report