The Chairman’s Summing Up— Borrowing by the Fund—Proposed Modalities, Executive Board Meeting 12/58, June 15, 2012

Executive Directors welcomed the opportunity to discuss the modalities for a 2012 round of bilateral borrowing by the Fund and to review the Fund’s borrowing guidelines in the context of the membership’s cooperative efforts to increase Fund resources by over $430 billion. They generally considered that the proposed borrowing modalities, which build on the framework adopted for the 2009 borrowing round and the New Arrangements to Borrow (NAB), provide a good basis for compromise. Directors recognized that a careful balance needs to be struck between lenders’ preferences and safeguarding the Fund’s balance sheet. They agreed that it would be important to move rapidly to conclude borrowing agreements.

Directors noted that the scale of potential borrowing, if fully drawn, would be unprecedented in relation to quota resources and would increase financial risks for the Fund, amid the potential for large lending with highly correlated risks. They stressed that the primary tool to mitigate risks is the strength of the Fund’s lending policies, supported by adequate junior co-financing.

Directors underscored that borrowing provides only temporary and supplementary resources and that the Fund is, and should remain, a quota-based institution. Mindful of the timetable envisaged for the 15th General Review of Quotas, Directors agreed that the initial term of the 2012 bilateral borrowing agreements should be for two years, and most supported the proposal that this term be extendable by one year after consultation with lenders, and following a Board decision approving the extensions. Thereafter, an additional one-year extension would be possible, subject to the lender’s consent and to a Board decision approving the further extensions. A few Directors would have preferred that the first one-year extension also be subject to the lender’s consent. Directors expected that any quota increases under the 15th Review would be used by the Fund to reduce and, depending on the size of the quota increase and the Fund’s liquidity, eliminate its reliance on bilateral borrowing. In this context, a few Directors cautioned against prejudging the outcome of the 15th Review, while a few others favored a stronger link through a roll-back clause to reduce a creditor’s bilateral claims in an amount equivalent to its quota increase.

Directors stressed the need to protect the Fund against mismatches between its borrowing and lending maturities. Given the similar treatment under the NAB, they agreed that the maximum maturity of claims under the 2012 bilateral agreements should be 10 years. Directors broadly concurred that lenders should indicate that they stand ready to cooperate with the Fund as needed and appropriate. In addition, or as an alternative, for those lenders who are willing, the borrowing agreements should allow for an extension of the maximum maturity of claims for up to another 5 years with the lender’s consent, in exceptional circumstances involving a shortage of Fund resources in relation to Fund obligations falling due.

Directors supported full and immediate encashability of all claims on the Fund arising under the 2012 borrowing agreements in case of balance-of-payments need of the relevant member, allowing these claims to qualify as reserve assets. They broadly concurred that the agreements should not include weekly or monthly limits on drawings, but that the case for introducing such limits could be revisited in the future, if warranted in light of developments. Directors also agreed that there should be reciprocity among agreements that would authorize the Fund to draw on the 2012 agreements to fund encashment requests related to other creditors’ claims outstanding under those agreements; these encashment drawings could be made under the 2012 agreements for as long as claims under these agreements remain outstanding. Most Directors considered that, to the maximum extent possible, the borrowing agreements should provide for revolving lines of credit as under the NAB, with a few Directors suggesting that this should be mandatory for all agreements.

Directors stressed that the new borrowing agreements should provide a second line of defense after quota and NAB resources, and consistent with this understanding, many underlined that the new borrowing agreements should only be activated when the NAB is also activated, unless there are no available uncommitted NAB resources remaining. Directors therefore agreed that the Fund’s Guidelines for Borrowing should specify that access to the new agreements should only be triggered when a modified version of the Fund’s Forward Commitment Capacity, taking into account all available uncommitted NAB resources, has reached a certain threshold level, and the NAB is activated or there are no available uncommitted NAB resources remaining. A few Directors requested that the activation of the NAB as a condition for drawing upon the borrowing arrangements be included in each agreement. Although there were a few differences of views on the appropriate level of the threshold, Directors supported setting the threshold at SDR 100 billion, and most considered that the Board should retain the flexibility to revisit the threshold level in the future if warranted. A few Directors would have preferred introducing a supermajority requirement among bilateral creditors as a precondition for any recourse to the new bilateral borrowing.

Directors supported other key substantive modalities and details for the 2012 bilateral borrowing agreements as proposed in SM/12/126 and Supplements 1 and 2. They also stressed that the key substantive terms for the 2012 borrowing agreements should be the same across all the 2012 agreements, although drafting variations not affecting the substance of these key terms could be accommodated.

Directors considered that the Guidelines for Borrowing by the Fund remain appropriate in most respects. There was broad support for the proposed modifications to reflect certain aspects of the modalities and terms of the 2012 bilateral borrowing agreements.

BUFF/12/67

June 20, 2012