The International Monetary Fund is working to develop new lending instruments for economies hit by crises that are not of their own making, IMF Managing Director Dominique Strauss-Kahn said on Tuesday.

The mechanisms under consideration include a precautionary credit line for good-performers hit by market jitters, and the other would be for a group of countries affected by financial contagion.

Last year at the height of the global financial crisis, the IMF rolled out the Flexible Credit Line for well-run emerging market economies constrained by the global credit squeeze. Mexico, Poland and Colombia all qualified for the FCL.

The FCL has remained a platinum brand, and certainly can be improved, but it will remain a reserve for a rather small number of countries, Strauss-Kahn told the Washington-based Peterson Institute for International Economics.

Strauss-Kahn said the proposed precautionary credit line, or PCL, would be available to countries that do not necessarily qualify for the flexible credit line.

While he did not offer many specifics, Strauss-Kahn said he believed a larger number of countries would qualify for the precautionary line of credit than the FCL.

The conditions for qualification would be less strict than the FCL but in return there will be some ex-poste conditionality, he added.

The second proposed instrument, currently named the Systemic Response Mechanism, would provide swap lines to a group of countries feeling the effects of contagion.

While Strauss-Kahn did not refer to any countries by name, recently there have been fears Greece's debt crisis would spill over to other fiscally-challenged economies, such as Portugal and Spain.

He said the IMF was still trying to resolve concerns by countries of stigma that goes with borrowing from the IMF. By lending to a group of countries, the IMF could avoid that problem, he added.

Part of the solution could be that the IMF could provide this to a group of countries, so not only one country would be seen as a possible target for any kind of speculation ... at least the stigma would be shared, Strauss-Kahn added.

He said the IMF was working with South Korea, host of the next Group of 20 leaders' summit in November, to try and complete the proposals.

While the IMF has long been the global lender of last resort for countries facing balance of payments needs, emerging market economies also want it to be useful to well-run economies facing swings in global risk aversion and capital flight.

Paulo Nogueira Batista, Brazil's executive director to the IMF board who also represents a group of Latin America and Caribbean countries, said the proposals for new lending mechanisms had not been spelt out fully.

Speaking in a personal capacity, he said the IMF favored looking into the FCL again to see what improvements can be made to it.

The support for the other two mechanisms is less clear in the board and we have our doubts about their feasibility.

We remain to be convinced that the precautionary credit line is not a rebranding of something that the Fund already has, he added.

Strauss-Kahn said the IMF had also not given up on possibly partnering with regional financing arrangements, such as the Chiang Mai Initiative, a network of bilateral swap arrangements among Asian economies to address short-term liquidity needs.

Strauss-Kahn said the IMF's recent collaboration with eurozone members to prevent Greece's crisis from spreading was a useful precedent for how the Fund could work with other regions.

(Reporting by Lesley Wroughton; Editing by Sofina Mirza-Reid)

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