Axel Weber, the head of the Bundesbank, said the IMF's proposal for a massive increase in its resources so that it could function as a credible global bank of last resort for countries was fraught with risks.
"We are not convinced that the IMF should assume a general insurance function for public sector liabilities. This would risk setting the wrong incentives both for borrowers and investors," he said in a statement at the annual meetings of the IMF and World Bank in Istanbul.
"Moral hazard issues also arise from the vast increase in fund resources that is currently taking place," said Weber, referring to the hazard of providing such secure insurance that the insuree believes actions have no risk.
Germany, Europe's biggest economy at the 186-nation IMF, is the only major European country to date to oppose boosting the fund's resources. It has a voting weight of 5.88 percent at the board of governors, where an 85 percent majority is required.
Some IMF member states have pledged to increase the Washington-based institution's resources by more than $500 billions (€339.5 billion) to boost its lending capacity to countries hit by the global economic crisis.
Germany has lent €15 billion to the IMF under this commitment. The head of the Bundesbank, known as a monetary policy hawk, also suggested the IMF's recent distribution of 283 billion dollars in special drawing rights (SDRs), its international reserve asset, "should be re-examined once the global financial system has recovered fully."
"This increase should be viewed as a temporary measure, taken in response to extraordinary developments in the world economy," he said. "Just as a sustained economic recovery will call for an unwinding of exceptional policy support, so the Fund should eventually prepare the 'exit' from its exceptional resources."
Weber warned that the fund's increasing buffers of resources should not "tempt" it to look for business beyond its mandate, noting the IMF is financed by the currency reserves of its members.