Wow – does a promise to lend money to the IMF mean our debt worries are over?

Alf is pleasantly surprised to learn that New Zealand has agreed to lend the International Monetary Fund (IMF) up to US$1 billion (NZ$1.34b) if the shit hits the financial fan again.

News to that effect was announced by Finance Minister Bill English.

Alf thought it more likely we would be having to go to the IMF for help in such a crisis, rather than the other way around.

But no.

New Zealand has agreed to lend the International Monetary Fund (IMF) up to US$1 billion (NZ$1.34b) if the world faces another economic crisis like the 2008/09 global meltdown, Finance Minister Bill English says.

“New Zealand’s commitment is a part of the US$550 billion expansion of the IMF’s financial resources to make the IMF better able to support the international financial system during times of significant crisis,” Mr English says.

It seems the commitment will only be called upon if needed and only if the IMF has exhausted all other options.

Coming to us – Alf suggests – would be real desperation stuff.

New Zealand is one of about 40 countries contributing to the IMF in this way.

The contribution is in line with our economic size and similar to New Zealand’s other contingent liabilities to the IMF, which total US$1.4 billion.

Included in those liabilities is US$265 million lent to the IMF as part of a range of measures to help it support countries facing balance of payments problems caused by the global economic crisis.

Having a balance of payments problem was something Alf thought New Zealand could claim.

The resultant debt problems explain why the Treasury last September was banging on about the mischief done by too much public debt (which accounts for just a small portion of the total overseas debt).

Using debt to finance increased government expenditure…means that future taxpayers will be paying for the government services enjoyed today.

With net debt projected to increase so sharply, debt financing costs increase over time, using a larger and larger share of future government income. In 2050, debt servicing would be around $110 billion (13% of GDP) annually.

The fact that New Zealand typically has higher interest rates than many other developed economies means that our financing costs are higher for a given level of debt. Furthermore, because net debt continues to increase indefinitely in the historic trends scenario, financing costs also increase exponentially.

In addition to the increased financing costs, funding the deficits through increased debt means future generations are burdened by greater debt than we currently have; it will impair New Zealand’s national debt position and our access to capital at a reasonable cost; and it leaves a smaller buffer against further economic and fiscal shocks – which are almost certain to occur over a 40-year period.

Does our agreement to help the IMF mean we have overcome those problems and concerns?

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