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20 Apr, 2012 11:40

BRICS: No rights - no cash

BRICS: No rights - no cash

The BRICS countries seem to be unwilling to make a donation to boost the IMF’s financial strength. They want to cement their positions first, getting a greater say, before pumping cash into the fund’s strategic stockpile.

Brazilian Finance Minister Guido Mantega laid out the terms for a deal after a meeting with other BRICS nations – Russia, India, China and South Africa.

"We are not ready to set a figure, because there are preconditions that have not been fulfilled by the countries – whether they will comply with the agenda of reforms," he said.

Leaders of the world’s major emerging economies have recently been saying there would be no additional IMF financing to fight the European sovereign debt crisis unless they gain greater voting power at the Fund.

In a joint statement released after the countries’ leaders meeting in India in March the BRICS nations said there was an urgent need to “better reflect economic weights” and “enhance the voice and representation of emerging market and developing countries” at the IMF.

Support from China, Russia and Brazil is critical to strengthening the firepower of the IMF as it continues its quest for money to boost its strength with Managing Director Christine Lagarde scrupulously adjusting the sum she needs in accordance with every new IMF report estimating the risks to the euro zone economy as “high” or “very high”.

Over the last 3 weeks the required sum was subject to three changes.

The IMF wanted to boost its funding by $600bln as there’s increased concern about the euro zone debt crisis, highlighted by soaring Spanish borrowing costs.  Last week Lagarde scaled down her request to $400bln plus additional resources as threats to the global economy diminished. Now the euro zone is the "epicentre of potential risk" for world economic recovery according to Lagarde, the IMF again decided that it was utterly unwise to give up a request for a larger amount. With the US saying a hundredth time it would not contribute, the IMF had already rolled back its target of $500 billion.

Some economists worry the IMF and European crisis funds might not be enough if markets turn sour on Spain and Italy.

 “This is absolutely a cataclysm for the euro zone. No matter how large the safeguards are, no matter how big the bazooka the IMF is currently assembling, nobody can afford to pay for Italian or Spanish government debt. It’s simply impossible. We are pushing the nations on the Mediterranean fringe of Europe into anarchy,” says Patrick Young, Executive Director with DV Advisors.

So far the euro nations and Japan, which became the first non-European nation to offer a helping hand, have committed to pitch in $320 billion.

The IMF describes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability and facilitate international trade.”

Voting power in the IMF is based on a quota system. This system follows the logic of a shareholder-controlled organization: rich countries have more say in the making and revising of rules. Since decision making at the IMF reflects each member’s relative economic standing in the world, wealthier countries that provide more money to the fund have more influence in the IMF than poorer members that contribute less. Emerging economies represent a large portion of the global economic system but this is not reflected in the IMF's decision making process through the nature of the quota system.

Christoph R. Hoerstel, a German government consultant, told RT “without a bigger say in the IMF there’s clearly no incentive for the BRICS nations to give their good money and just kick it out of the window, as Europe has done in the past”.

“I can’t see how other nations far away from the euro zone should pay money for a system that is not well-made,” he maintains.

Now that the IMF is desperate for money, it is relying heavily on the BRICS. Finance ministers and central bankers from the G20 advanced and emerging economies were holding a dinner on Thursday, ahead of a longer session on Friday. IMF funding was at the top of the agenda and the BRICS are likely to be inclined to contribute, though under certain terms.

Russian Deputy Finance Minister Sergei Storchak said “Russia will contribute $10 billion in the IMF, in line with earlier commitments, though the BRIC group have insisted the G-20 not reveal the breakdown of how much in additional funding each provides.”

Christine Lagarde acknowledged during her news conference that giving emerging economies a greater say is a priority and said it was an issue she will raise in one-on-one meetings with IMF member countries.

"We are going to ask the membership to finish the job in terms of quota resources and in terms of governance," she said.

“The IMF has no choice but to agree to the demands put forward by the BRICS. Especially after the US said it’s not ready to pay any money. It’s a very bad situation right now for the IMF, which now finds itself in a not very good negotiating position. Simultaneously, that’s a number 1 chance for BRICS,” concludes Christoph R. Hoerstel.