Germany said on Tuesday that it saw a “moral hazard” in raising the resources of the International Monetary Fund (IMF), saying the increase could encourage all countries to count on a rescue by the fund.
Axel Weber, the IMF governor for Germany, said the IMF’s proposal for a massive increase in its resources so that it could function as a credible global bank of last resort for countries was fraught with risks.
The term “moral hazard” refers to a basic principle of central banking that lenders must know and believe from experience that imprudent lending will carry a high price. This is because the authorities cannot be counted on to provide insurance in the form of bailouts.
“We are not convinced that the IMF should assume a general insurance function for public sector liabilities. This would risk setting the wrong incentives both for borrowers and investors,” he said in a statement at the annual meetings of the IMF and World Bank in Istanbul.
“Moral hazard issues also arise from the vast increase in fund resources that is currently taking place,” said Weber, representing Europe’s biggest economy.
Some IMF member states have pledged to increase the Washington-based institution’s resources by more than $500-billion to boost its lending capacity to countries hit by the global economic crisis.
Germany has lent €15-billion to the IMF under this commitment. — AFP