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?