Under the envisioned lending facility, the IMF is likely to provide funds to countries such as Italy and Spain where government bond yields remain at high levels to help reconstruct their public finances, sources said.

The financing scheme is expected to be agreed on at the Group of 20 summit meeting in Cannes, France, scheduled for Thursday and Friday, and will be launched after being approved by the IMF’s board of directors.

According to the sources, the IMF will extend to financially strapped countries loans of up to 500 percent of their contribution to the IMF. Countries likely to be affected by the ongoing crisis will basically be able to obtain short-term loans immediately after applying for them.

For example, Italy, whose contribution to the IMF totals about $12.6 billion, would be eligible to receive short-term loans of up to $63 billion, or ¥4.8 trillion. The annual yield of the Italian government bond is currently at a high of 6 percent. If the yield rises further and Italy faces funding difficulties, it will be easier for the country to request financial assistance from the IMF as it will not be forced to carry out tough structural reforms.

In the late 1990s, the IMF called for strict implementation of structural reforms as a condition for loans to financially troubled countries, including South Korea, which was facing a currency crisis. This requirement made countries reluctant to request assistance from the IMF.

The IMF then established a scheme in which the fund would extend to countries with relatively healthier public finances one- to two-year loans of up to 1,000 percent of their contribution to the IMF without strict conditions.

However, countries were only given a credit line after the IMF approved loans and they were not able to withdraw funds unless the crisis facing them worsened.

Meanwhile, the European Union on Wednesday agreed on comprehensive measures to deal with the current crisis. The measures will substantially expand the lending capacity of the European Financial Stability Facility (EFSF) to buy up government bonds in case the crisis spreads to countries such as Italy.

The IMF, under the existing agreement, can only offer loans to countries and therefore cannot buy government bonds through the EFSF. The IMF believed it necessary to create its own new lending facility to contain the crisis. The IMF does not need extra resources to establish the new financing scheme as it currently has about $400 billion, or about ¥30 trillion, on hand.

(The Yomiuri Shimbun)