Government Criticism of the IMF

Government ministers have been saying some pretty silly things about the IMF’s estimates of the fiscal cost of the measures taken to solve the banking crisis.

First, there have been suggestions that somehow the IMF didn’t actually publish this figure and\or that their statements on this issue cannot be trusted. This confusion (or disinformation if that’s what it is) stems from the storm-in-a-teacup relating to last week’s Global Financial Stability Report (GFSR). 

On Questions and Answers last night, I pointed out that the IMF released these estimates on March 6 (I mentioned the date for a reason).  Minister Dick Roche then stated that the IMF report that I referred to did not contain the famous 13.9% figure.  Just to show I’m not making this up, click here to find the report, note the date (March 6!) and go to page 17.  As I had noted last week, the initial estimates had come from a report on the public finances and not from the GFSR.

The government’s confusion appears to stem from the fact that the 13.9% of GDP figure appeared in the famous Table 1.8 in the first draft of the GFSR but then disappeared when they altered the table.  As I described last week, the initial table in the GFSR wrongly transcribed the UK estimate from the March 6 report.  On The Week in Politics, Minister Barry Andrews stated that the IMF “made a complete mess of their assessment of the UK economy” but this didn’t really have anything to do with substantive assessments.  (He also described the wildly optimistic PWC assessment as being “more diligent” but I’ve already given my two cents on that.)  My advice to government ministers on this is to just admit that these figures were released on March 6 and forget last week’s minor GFSR screw-up.

Second, a series of government sources, including the Taoiseach, have criticised the estimates as only being correct under the circumstances in which the government had to pay out on the liability guarantee and that it’s plan is to stabilise the banks and ensure that the guarantee is never called on.  I think these statements ignore the full implications of the liability guarantee.

The IMF figures are derived from CDS spreads for the debt of the covered banks.  In other words, they provide estimates how much the government would have to pay out if the banks defaulted on their debt.  This would only happen if the banks are declared insolvent, so that all equity capital is wiped out, so the total losses on these loans would equal the equity capital plus the shortfall in paying back the debt. 

In theory, it’s true that the guarantee could operate so that the government lets the banks become insolvent and then it agrees to pay out on the guaranteed liabilities.   However, I think we all know that’s not going to happen.

Instead, if the loan losses are larger than the current level of equity capital, then the government is going to have to provide new equity capital to make the banks solvent again and able to pay back the guaranteed liabilities.  Whether the government covers the loans directly by letting the banks go to the wall or indirectly by providing the funds to re-capitalise the insolvent bank, one way or the other, the liability guarantee has put the government on the hook.  

There do appear to be some substantive issues with the IMF calculations—as Patrick Honohan noted in comments, they use CDS data from November, after the guarantee was issued, which doesn’t seem the right way to do these calculations. 

However, rather than discuss substantive points, it is unfortunately typical of the government’s public discussions of the banking issue that they attack a calculation they don’t like by a highly respected organisation variously on the grounds that the organisation (a) never published it (b) are idiots who don’t know what they’re doing (c) don’t understand the implications of blanket guarantees.

Beyond all that, in light of our fiscal problems, is this really a good time for the government to be attacking the IMF?

9 thoughts on “Government Criticism of the IMF”

  1. -The Department of Finance disputes the IMF’s calculations, arguing they are based on a “more or less mechanical application of various modelling tools, with a heavy reliance on technical assumptions”.-Irish Times, April 23, 09. The Dept. of Finance is now attacking the basic methodology of economics. Wonder why?

  2. Karl
    One thing to note is that the CDS spreads now are more or less where they were in November.
    Lets just say that finance are probably feeling a bit sensitive these days what with all the attacks coming on them.

  3. “Beyond all that, in light of our fiscal problems, is this really a good time for the government to be attacking the IMF?”

    With a set of elections on the way, then yes, it probably is a good time.

  4. The IMF is part of the problem. Which does not mean that it is wrong in what it says, it just means that it requires much scrutiny of its actions and advice. The World Bank is completely rogue. It is designed to impoverish and does this well.
    Please disregard the propaganda issued by both organizations.

    I am not an economist
    I am not an economist
    I am not an economist
    I am not an economist
    I am not an economist

  5. Karl / Brian: One of the key outcomes of the global financial crisis since early-2007 is that the CDS market itself is widely seen as dysfunctional and not an accurate representation of default risk. In essence it has become yet another bubble market where there is a wide (almost panicked) demand to buy CDS but very few sellers willing to write the insurance contracts (AIG left a very big hole to fill). One phone-call of enquiry is all that is required to raise the Irish CDS price in the market (no purchase required as it used to say on the cereal boxes). The proof of this is in the pricing of cash bonds in the secondary market (where real money is actually being put to work) and which indicates a much lower level of risk than currently implied in the CDS markets for financials, corporates and sovereigns. Perhaps someone should also tell the IMF.

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