When leaders of the world's 20 major economies met in London early this month, they endorsed a new International Monetary Fund program for combating the global economic crisis.
Under the program launched in March, governments with sound economic policies can secure an immediate IMF loan in case of a threat to their financial system.
IMF deputy managing director John Lipsky told an economic forum in Washington Tuesday that the Flexible Credit Line, or FCL, is a form of insurance policy. He said the program will be funded by some of the $500 billion promised to the IMF at the Group of 20 summit.
"Think of it this way: through the new FCL, we are creating contingent liabilities - our insurance policies - and against that, we need contingent assets, and that is what the $500 billion is going to be. It is not going to be the traditional 'give us cash' and we are putting out cash," said Lipsky, "we are writing insurance policies, and we need the assets to make those insurance policies credible."
Mexico was the first country to qualify for the scheme last week, when the IMF agreed to provide it with up to $47 billion in emergency credit for a one-year period. It is the largest financial arrangement the IMF has made with a government so far.
Two other countries are negotiating for IMF credit lines: Poland applied for about $20 billion and Colombia is asking for a loan up to $10 billion. The IMF says it has confidence in all three countries because of their solid economic records.
Adam Lerrick, an economics professor at Carnegie Mellon University in Pittsburgh, Pennsylvania, speaking at the same Washington forum, said the IMF should ensure that all countries seeking loans meet the same criteria.
"What you do in a crisis is you want a lender of last resort who is going to lend freely against good collateral," said Lerrick. "What is good collateral for a sovereign government? Good collateral is sound policy, and therefore that is a very strong step in the right direction,"
The new IMF policy emphasized that once a government qualifies for the emergency loan, it does not have to meet any specific policy goals, as in previous IMF-backed programs.
Critics of the IMF say, however that they fear the agency will only provide credit lines to medium-sized economies, while poor countries who need them most will be left out.
"It is very unlikely the IMF will allow the poorest countries in Africa or in South Asia or in Latin America to access the flexible credit line," said Jesse Griffiths, a coordinator of the Bretton Woods Project, a group that monitors IMF efforts to help developing nations. "Instead, they will get the traditional IMF lending [practice], which comes with very austere conditions in terms of cutting budgets, in terms of raising interest rates, which is exactly the opposite of what they need to be doing at the current time."
Other critics say some countries are reluctant to seek an emergency loan because it could be viewed as a stigma by the financial markets.