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January 20, 2012 / politicsbitesize

Financing world debt

The IMF is requesting £17.5bn in additional funding from the UK government in order to bolster its funds due to the eurozone crisis. In fact it is asking all its member states for an extra £600bn in total so that it can stabilise the global economy. Both the US and Canada are unhappy about providing extra funds for the European Union bailout, and the Chinese believe that the EU needs to develop better economic policies before they will invest further. Meanwhile in the UK, David Cameron is potentially facing a revolt by Tory backbenchers over the proposed additional financial support that the IMF is asking for.

The backbenchers causing the fuss are the same ones who supported the Prime Minister over his veto in Brussels at the end of last year. In order to be able to furnish the IMF with the extra capital they need David Cameron would have to win a vote in the Commons, which could be drastically hampered by this group within his party.

But the question Politics:bitesize would like answering is where will the £17.5bn actually come from? If we have a ‘spare’ few billion in sterling just kicking around why aren’t we using it to reduce our deficit? And by reducing our debt the government could restart spending on hospitals, police, pensions and education and therefore reduce the nasty cuts we are still facing. This in turn would increase our power to import and export goods, which strengthens our GDP, and eventually this turnover would feed back into the global economy as growth. In fairness this sounds like a great plan!

However, if the UK doesn’t have a few billion gathering dust in the Treasury’s coffers then the question still stands – where will we get the £17.5bn from? After recently reading Paper Promises by Philip Coggan (review to follow), which highlights the problem with debt fuelled economies like the one we are currently in the midst of, the nagging suspicion that the UK will need to borrow the money springs to mind. But from whom will the UK ‘borrow’ the money, given that the IMF is one of the world’s largest lenders? If it is from the IMF itself, or the European Central Bank, or even the Bank of England, wouldn’t this drive up the debts of both the UK and decrease the capital available to those establishments? This in turn would mean that they both need more capital to pay off the debts that will require a further round of additional finance, which then leads to the IMF asking for more money from governments and so on ad infinitum.

All this is just speculation by the author of this blog as there seems to be no simple way of finding out where the UK government is considering getting the money required by the IMF. According to a report by Reuters, a ‘group of 20 deputy officials are set to discuss boosting IMF resources, which will need leaders’ signoff, at a meeting in Mexico City on Thursday and Friday’ this week. It is possible that reports of these meetings might find a way into the international media, and if they do Politics:bitesize will be reporting on it.

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