Just following up on PO’Neill’s post (here) on the IMF loan to Serbia, where he says:

Finally, since this request would seem to shave another $2 billion of whatever headroom the IMF thought it had for such programs, getting them more space to lend might soon be a priority agenda item at the London Summit.

This is absolutely the point. The Financial Times today quotes Simon Johnson, a former IMF chief economist now at the Massachusetts Institute of Technology, to the effect that : â€œWe are seeing the consequences of the lack of IMF resources. Programmes are probably undersized because the IMF is worried about running out of money.â€ and Ken Rogoff, another former chief economist, who said: â€œThe IMF doesnâ€™t have nearly the resources to backstop all of eastern Europe.â€

Mr Rogoff echoed calls from Robert Zoellick, World Bank president, for the EU to take a leading role in rescuing eastern Europe. But the European Commission has already spent nearly â‚¬10bn ($12.6bn, Â£8.8bn) of its â‚¬25bn rescue fund on Hungary and Latvia, and EU governments have yet to provide more resources.

According to the FT the IMF, which has $142bn in quickly available resources and $50bn it can raise rapidly, recently finalised an agreement to borrow an extra $100bn from Japan and is seeking a further $150bn from other member governments. The question no one seems to be thinking about is the “what if” one of possible defaults. If the IMF borrow $100 billion from Japan, and the loans are defaulted on, then who covers the debt, or do we just turn the IMF into another “bad bank”? I don’t think people are being at all responsible here.

Ukraine, Belarus and Serbia all have shrinking and rapidly ageing populations, the possibility of defaults here are high, in each case, and it is quite possible we will see continually shrinking GDPs which will effectively turn these countries into IMF economic protectorates (in the absence of some other multilateral agency being created in the mid term to handle the problem).

Hungary and Latvia both look like being dangerously close to default come 2012 if emergency measures are not taken soon (the IMF programmes as currently structured simply cannot work, in either case), and they could quickly be followed down the same road by Bulgaria and Romania. Basically we need some sort of order putting back into this whole situation before things simply get out of hand, simply talking about reform of the IMF quota system is absurd at this point. Europe needs to act, and act decisively. Above all we need something which is sorely lacking from our leaders at the moment, a feeling that they are able to rise to the scale of the problem and start to act, rather than simply react. If you think what we have so far is bad, you just wait till you get to see what comes next.