IMF prepares emergency aid for wounded economies

By Lesley Wroughton

WASHINGTON (Reuters) - The International Monetary Fund said on Thursday it was ready to lend to countries hit by the raging global credit crunch and had activated an emergency financing mechanism first used in the 1990s Asian crisis.

The Fund already sent a mission to Iceland, where the government has seized control of its largest bank, and has warned that the worst financial crisis since the 1930s Great Depression could inflict lasting economic harm on the world.

"Yesterday I activated emergency procedures of the IMF to respond quickly ... based on streamlined conditionality," IMF Managing Director Dominique Strauss-Kahn told a news conference.

"We are ready to answer any demand by countries facing problems," he added.

After several years of no major crises in emerging economies, the move puts the IMF's board of member countries and staff on alert that the Fund will have to respond quickly if a country needs financial help.

It also puts the global financial firefighter more at the forefront of the current financial crisis following months of being on the sidelines.

Panic over toxic, illiquid U.S. mortgage loans has sapped confidence in financial institutions, forced governments to pledge hundreds of billions of dollars of taxpayer money and pushed Western and other central banks to deliver their first coordinated interest rate cut.

Speaking ahead of IMF and World Bank meetings of world finance leaders in Washington this weekend, Strauss-Kahn said the main task for policy-makers was to restore confidence and calm global markets.

Group of Seven finance ministers and central bank chiefs also meet in Washington on Friday to consider their options.

The IMF's emergency facility was created in 1995 as a way of speeding up the approval of loans to countries in peril.

It was first used in 1997 to help the Philippines, Thailand, Indonesia and South Korea end crushing runs on their currencies during the Asian financial crisis.

The IMF, which played a central role in the bailouts of countries in Asia and Latin America in the 1990s, relied on lending to fund its operations. But with fewer crises over the years, it had faced a growing income deficit, prompting an agreement in April to sell some of its gold stocks and invest profits in government and corporate bonds.

The IMF has about $200 billion immediately available to lend to countries in need but can tap other sources. This is small compared to the trillions of dollars central banks and governments have poured into the financial system over the past few weeks.

UNDER PRESSURE

Emerging markets are under pressure again after strains in the United States and Europe spread. Investors are fleeing their securities for safer assets, foreign banks are cutting lending and the countries' exporters are braced for weaker demand from Western consumers.