Put simply, the agreement at the London summit — if key countries actually carry through on their commitment to expand the IMF’s resources — allows the IMF to be able to both:
a) lend large sums, conditionally, to a host of countries in Eastern Europe that ran large current account deficit and are now having trouble rolling over their debts; and
b) lend large sums to a set of emerging economies that didn’t run large current account deficits and don’t have large stocks of external debt outstanding but still are facing a bit of pressure right now — whether from falling capital flows, falling commodity prices or falling demand for the goods — and wouldn’t mind a few more reserves.
A $250 billion IMF would have been stretched to just meet Eastern Europe’s need for emergency financing. It was too small, in some sense, to even be Europe’s monetary fund. A $750 billion IMF is big enough to be able to offer meaningful sums to the larger emerging economies — think of the $50 billion Mexico wants to be able to borrow if it needs it — and still cover a large share of Eastern Europe’s need for emergency financing.
Here is one way of thinking about the IMF’s need for resources:
At the end of 1997 — at the height of Asia’s crisis — the IMF had about $150 billion to lend, a sum that rose to around $250 billion after the IMF’s quotas were increased and the New Arrangement to Borrow provided the IMF with a bigger supplemental credit line.
At the end of 1997, emerging economies at the time had borrowed — according to the BIS — $1.045 trillion from the international banks. They also had something like $300 billion in external sovereign bonds outstanding. And they only had about $600 billion in reserves (from the IMF’s COFER data)
If the fall in bank lending to the emerging world in the years that followed Asia’s crisis had been financed entirely out of existing reserves, the roughly $200 billion fall in gross cross-border bank lending from 1997 to 2000 would have left the emerging world dangerously under-reserved. In practice, that “deleveraging” process was largely financed by a big swing in the emerging world’s current account balance. Deficits turned to surpluses, and the surpluses were used to repay debt.