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January 17, 2022

IMF created a new credit line to prevent financial shocks

The International Monetary Fund (IMF) said on Tuesday it approved two new lending tools that can better help European countries manage with economic recession, WSJ informs.

The new Precautionary and Liquidity Line can be used in broad circumstances, “including as insurance against future shocks and as a short-term liquidity window” between six months to two years. Any country can now borrow up to ten times its contributions to the IMF to help pay its bills. The credit line can “address the needs of crisis bystanders during times of heightened regional or global stress and break the chains of contagion,” the fund said. Europe’s sovereign-debt crisis is quickly transforming into economists’ worst nightmare – a new financial meltdown that reverberates around the globe and a decade-long recession for the euro zone. “The Fund has been asked to enhance its lending toolkit to help the membership cope with crises,” said IMF chief Christine Lagarde in a statement.

The new credit line would be available to countries that have relatively strong policies but remain vulnerable to external shocks.

The IMF also created a new Rapid Financing Instrument “to support a full range of urgent balance-of-payment needs, including from exogenous shocks,” designed to help countries such as those in the Middle East and North Africa region suffering from major political and economic turmoil. The fund’s Flexible Credit Line, which provides backstop liquidity for countries with strong fundamentals, remains in place. Mexico, Poland and Colombia are the only three countries to have taken advantage of that precautionary financing.

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