IMF cannot afford to bail out the rest of Southern Europe

Can the International Monetary Fund afford it if the rest of Europe’s ring of fire (Portugal, Spain and Italy, in descending order of crisis) starts to crumble? My back-of-an-envelope calculations don’t look good.

Here’s the logic. The IMF currently determines how much it can lend to a country based on the “quota” that country provides towards the IMF’s own funding. The quota is usually more or less proportional to the size of that country’s economy, though the quotas haven’t been updated for a while so are a little out of date (but let’s not get bogged down with that now).

The IMF is currently lending Greece €30bn (about $39bn) towards the combined EU-IMF bail-out package for the troubled nation. This is just under 32 times its quota. It is, for what it’s worth (a lot), the biggest IMF bailout in the Fund’s 65 year history. The previous record was held by Korea which borrowed 20 times its quota in 1998.

Anyway, for the sake of illustration, let’s imagine you might need a similiar-sized bail-out of Portugal. That would cost $41bn (to be completely precise, that’s 27.4bn SDRs – the Special Drawing Right being the internal currency term used at the IMF). A similarly-proportioned bail-out of Spain would cost $144bn. And for Italy, the figure would (gulp) be $333.1bn.

Can the IMF afford anything like this combined half trillion dollar bail-out? Simple answer: no. The Fund currently has an emergency pot of only $355.2bn. And though there are more funds on the way from the US, there questions over whether the available funds would ever reach this total. And bigger questions over whether the Fund’s members would approve the deal.

Moreover, what if Britain needed a similar-sized bail-out? In that case (again, 31.6 times quota), the eventual cost to the Fund would be a stonking $506bn.

All disturbing numbers. And while some would point out, rightly, that it is inappropriate to compare the Greek bail-out in proportion to what might face other countries (for instance Italy really isn’t in quite the same place yet), it is also worth reminding that of course the IMF segment only accounts for one-third of the Greek emergency loan. At the IMF itself, I am told, no-one is particularly worried about the Fund’s capacity to deal with the problems in Southern Europe. But then I seem to remember similar statements well before Greece’s implosion.

Whatever way you look at it, the numbers seem to point out that, as far as the IMF is concerned, Europe’s straggling southern states really are too big to save.

PS Keep an eye open on Sunday for the IMF’s board meeting, at which it is due to sign off the Greek loan. It has never before turned down a loan put to it by its officials, but then the loan proposals have never been this big.