IMF Staff Report and Conference-Call Transcript

The remarks by Chopra have been under discussion on the other thread dealing with the report of the Troika. The essential message being conveyed by the IMF is addressed to Germany, not Ireland. The relevant extract is below, the key sentence being the following.

“Specifically, the magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and, hence, debt restructuring is off the table”.

There is little indication as yet that the German body politic is willing to accept the harsh reality that the error of allowing a country such as Greece to join the euro in the first instance has no other tolerable means of correction. The matter has to be decided within weeks.

QUOTE
Now this is why we have put emphasis on support from a comprehensive consistent European plan. Our Acting Managing Director, John Lipsky, made some public remarks at the Bretton Woods Committee here in Washington yesterday, on Thursday. What he notes was that although EU leaders have taken some important steps, the crisis in the euro area is not over. More needs to be done to implement a cooperative and shared solution. So what might such a cooperative and shared solution look like? First, as I’ve already noted, Ireland needs to deliver the necessary policy action. It’s difficult but it will pay off. Indeed, the authorities fully recognize that banking reforms and fiscal consolidation are needed under any scenario.

Second, European partners need to make clear that for countries currently with programs there will be the right amount of financing on the right terms and for the right duration to foster success. In other words, the countries cannot do it alone and putting a disproportionate burden of the cost of adjustment on the country may not be economically or politically feasible. The resulting uncertainty affects not only these countries but through the high spreads and lack of market access it increases the threat of spillovers and creates downside risks to the broader euro area. Hence, these costs need to be shared including through additional financing if necessary.

Thus, a key element of a comprehensive solution is a stronger area-wide crisis management framework. This is a prime example of a cooperative response to a common good problem. The priority here is to put into effect quickly an EFSF upgrade that can deal more flexibly with the crisis we face today. In addition, continued availability of ECB liquidity support for countries that are addressing their banking system problems is critical. In Ireland’s case, the effectiveness of deleveraging and enabling banks to regain market-based funding would be supported by medium-term availability of Eurosystem financing.

Third, all euro zone countries need to support a comprehensive approach with accelerated repair and reform of financial systems through rigorous and transparent stress tests. These stress tests need to be followed where appropriate with bank recapitalization. In some cases banks may need to be restructured or closed down. It will also be necessary to upgrade EU governance frameworks in support of enhanced crisis management, notably through an EU-wide approach to bank resolution.

Finally, looking at these issues through the lens of investors, they’re understandably concerned about the implications of the advent of the European Stability Mechanism, the ESM, which starts operations in 2013. Against this background it is an uphill battle to bring back private creditors to countries that are now out of markets. This returns me to my earlier point about the need for additional financing at appropriate terms. Specifically, the magnitude and terms of the financing need to be such that private creditors are convinced that the debt burden will be sustainable even in adverse scenarios and, hence, debt restructuring is off the table.

Putting in place such a comprehensive and consistent approach is now a matter of urgency, not just for the crisis countries but for all countries in the euro zone. Countries that are implementing their required policies to address their problems need the support of their European partners and the international community. As a result of the crisis, Europe needs more integration, not less.

To conclude, the problems that Ireland faces are not just an Irish problem. They’re a shared European problem that requires a shared solution. UNQUOTE

It seems to me the IMF are failing to see an important feature of this distress.

A substantial portion of the debts accrued, both private and sovereign, let’s say in the case of the ROI, are implicitly already borrowed. Now, in the case of the portion of those for which there is a co-responsibility factor, there should be no need for new loans. Simply have the EFSF guarantee the debts, for a specified period, thereby retaining the initial bondholders as (captive) creditors, albeit that they continue to be paid interests on the loans. This means that the roll-over requirement is put on ice for some years and also that the option of foreclosing is removed. Thereby, there is no hurry to return to the markets for funds.

This option, of course, should only be employed on the grounds that the distressed nations make a serious effort to amend their ways.

At the end of the duration of this option, any nation whose finances had stabilised could be facilitated to release their bondholders and go to the market to find substitutes, with the security that the EFSF would (re)guarantee the bonds.

Those nations that are out of control might have their bonds fully taken over by the EFSF, which would then decide whether to monetise the debts or to allow liquidations, and would reassess its relationship with those nations.

That potion of the accrued debts, if any, that do not have a co-responsibility factor to them are probably already borrowed from such as the EFSF and here too it would just be a matter of rolling over the facility rather than of providing new loans.

Of course, some further, comparatively minor, funding, unless interest becomes a problem, would be required while fiscal accounts are being corrected.

@ Peter Kinane

The IMF is not failing to see anything. The political leadership in Berlin is. I emphasise the location as even Stark sees merit in giving the EFSF (and its successor, the ESM) this type of flexibility. Trichet is, of course, also favourable on behalf of the ECB as an institution with regard to purchases in the secondary market. Merkel prefers to play a populist tune about irrelevant issues such as comparative retirement ages and laying the blame in one quarter only.

http://www.asymptotix.eu/content/juergen-stark-ecb-european-financial-stability-facility-efsf-could-buy-bonds

Why are we messing about with the ECB when we can get better terms from the IMF. Seems a bit masochistic.

@ Peter Kinane

The essential point is that the situation has to be viewed from a Eurozone and international, and not an Irish, perspective. What happens in respect of Ireland will not provide any leverage. What happens in respect of Greece will.

Merkel, the CDU and their increasingly euro sceptic partner, the FDP, are fixated on two issues (i) avoiding a so-called “transfer union” to the extent of ruling out sensible solutions which imply it only their imaginations and (ii) the idea of making private sector investors contribute from 2013 onwards, but not before, and of making them CO-RESPONSIBLE, i.e. on a par with the sovereigns participating in the single currency, for any solutions. This was always an unrealistic undertaking and the talk now of persuading private investors – the banks to which the IMF also refers – to maintain their exposure to Portuguese debt is simply demonstrating how unrealistic it is.

These investors will only stay the course if they consider the guarantee not to allow any member state of the EZ to default to be absolute. After all, it was the states concerned that decided to establish the single currency, not their banks. This is the pill which Berlin is resolutely refusing to swallow (and the impact of which Juncker tried to soften, very unwisely, at the last ECOFIN).

The wider international context is emphasised in the speech by Lipsky. The governments of the EZ, and those of Germany and France in particular, have shown their incapacity to look after the baby to which they gave birth to such a spectacular extent that its state of health is now, de facto, a major source of concern for the health of the international financial system in general.

@ DOCM,

Yes, I am not looking at it from an Irish perspective. Indeed, really, one would want to look at the state of all the PIGS and also at those who supposedly are in better form, to see how the ground lies. And even then one could look further afield to friends who are also in less than fine form.

But in any case, it seems it is a matter of playing for a few years time, in the hope of good fortune in the dynamics of life.

“(ii) … and the talk now of persuading private investors – the banks to which the IMF also refers – to maintain their exposure to Portuguese debt is simply demonstrating how unrealistic it is. “:

If the EZ told the creditors they had a choice between being captive, albeit supported by an EZ guarantee, or of the EZ allowing the countries to default, it might not be so “unrealistic”?

“After all, it was the states concerned that decided to establish the single currency, not their banks.”:

Their banks are in banking quite a while. Perhaps they should take some responsibility for their investments.

“The governments of the EZ, and those of Germany and France in particular, have shown their incapacity to look after the baby to which they gave birth …”:

The PIGS had their turn at the conception too. And, as above, as well as the countries, perhaps the banks should have some responsibility too.

I think Germany are right not to rush in to what may be monetary suicide in sympathy with the distressed parties. As I’ve said elsewhere, the G7 seems to have got itself into quite a spot. It might be a good idea to have a maverick. It might be the sole survivor with seeds of Western culture.

I did not plan to take such a dramatic note, it is probably yet premature.

Good stuff as usual from Colm McCarthy.

When comparing the IMF’s latest with the December document, I noticed that GNP seems to have gone out of fashion. Is there a story behind this?

According to Colm, Enda Kenny should have a word with Barack tomorrow about the choice of next chief at the IMF ? Hmmm. Angela Merkel is trying to head any sort of deviation from appointing Christine Lagarde, off at the pass by proposing Europe advance one candidate only for the vacancy. Haven’t seen such tactics since the fictionalised Thomas Cromwell barked at the jury in A Man for All Seasons “Considering the evidence it shouldn’t be necessary for them to retire”

I don’t know if Enda will get the chance to display his wondrous oratorical skills tomorrow in toasting Barack but if he does, he might celebrate Barack’s achievement in becoming the first Afro-American, a notion that might have seemed incredible a short few decades ago. He might pursue that angle and ask if it is now time for the IMF to embrace the possibility of appointing a non-European to the role.

Our cute hoors do really need to become an awful lot cuter.

@ KD re C Mc Carthy,

McC: “The IMF authors are saying that the EU’s intention to include, from 2013 onwards, punitive haircut clauses in government bond documents will (surprise, surprise) deter buyers of Irish government bonds.”:

Criticism of this “intention” by the IMF suggests to me that they are very free in exposing to risk the collateral of prudent Europeans.
It seems perfectly reasonable to try to be explicit that the EZ will not be on the hook for PIGS’ borrowings going forward. Indeed, it is a pity it was not much more explicit for the last ten years.

McC: “Banks will hardly be able to borrow in the markets when liquidity support is at the discretion of a central bank which has repeatedly threatened its withdrawal.”:

As in my post above, http://www.irisheconomy.ie/index.php/2011/05/21/imf-staff-report-and-conference-call-transcript/#comment-148512 , I think it would be interesting to see what percentage of our borrowings are from what could perhaps be made captive creditors for a few years and how much from the EFSF. Perhaps there is a means to avoid any need for a quick return to the market, a means which avoids monetary debasement, robbing of savers and those on fixed income and which generally is the opposite of USA policy.

Perhaps the IMF should have more reservations about how effectively the US is dealing with its self induced recession- -depression crisis than the criticism above implies. Or perhaps they figure if we all pile into their boat, their condition will not be comparatively worse than that of the EZ.

It might also look at a layer or two underlying that crisis and its affect on the rest of the G7 and associates.

Their banking policy, probably informed by Randist rubbish, is a recognised factor, and I suggest the rapid trade liberalisation is another.

It seems to me the USA recession- -depression was a major factor to the Greece crisis. They had a two industry economy, tourism and shipping. Both took a hit form the near meltdown.
Portugal, probably largely dependent on traditional industry, lost much of it to the East.
Various other EU countries probably bought substantial USA toxic assets.
Our selves and Spain may be largely the authors of our problems, albeit in part through indirect contamination by the rise of Randism.

Perhaps the IMF would find: “Considering the evidence it [should] be necessary for them to retire”

If the EZ policy makers hold their nerve, it will be interesting to see in a few years whether theirs or USA policies should be fired- -retired, though neither are addressing the rapid trade liberalisation issue, without which there can perhaps only be decline – perhaps they fear it has taken on an unstoppable life of its own.

@Ceteris Paribus
“We should watch and wait.”
We need to do more than watch and wait. We need to distinguish ourselves from the pack on the upside. We don’t have to renegotiate the plan or the timescale, but we have to beat targets, not just meet them.

Get required legislation published, analysed and enacted quickly, reform what we’re required to reform (less conversation, more action), beat the fiscal targets and beat the revenue targets.

We seem to be relying on a kindness of strangers for Greece that will automagically be applied to us without any of the strange unkindness that will apply to Greece doing likewise.

Lagarde’s line softened a bit on Friday – so it looks like France and Germany may be about to gang up on Lozza BS and his unique brand of logic in order to acquaint him and his gang with the real world.

Speaking of disconnects between the real world and some people’s own version of reality, I thought Marion Finucane’s comment on her state broadcaster radio show today that the current terms of the EU based bailout were “crucifying us” spoke volumes about how much work Ireland’s leadership has yet to do – should it ever decide to exercise that role.

Apparently Marion – a radio presenter who would be unlikely to be in much demand outside Ireland – is struggling to muddle by. €570,000 in 2008, maybe its going to have to be significantly South of half a mil a year if those dastardly Germans are going to want their money back.

Osbourne’s prime interest in the IMF role is that it must not be someone that is likely to say anything anti-austerian which may embarrass the Tory government’s experiment.

They will have probably asked for and got reassurances from Lagarde that she will not start complaining of too much austerity in bailout countries being to blame for….anything really.

@Michael H.

You have been consistent in gently chiding the contributors to the site for excessive focus on big crisis-resolution questions to the neglect of more structural issues. I accept that the balance is skewed. But I would defend the strong focus on finding an exit from the crisis, even if sometimes it seems much of the real influence lies outside. At present, Ireland has a massive borrowing requirement (both for the State and the banks), and we are not creditworthy. This leaves us in a hugely vulnerable position. Even if we sometimes seem to be going around in circles, the stakes are such that a strong marcroeocnomic focus is warranted.

Paul Hunt, DOCM, yourself and others have argued eloquently that we have a better chance of getting the support we need if we are seento be tackling our various structural problems. However, I would doubt offical funders are paying much attention to our structural reforms beyond the particular structural commitments we have made in the MoU. Based on interests and expertise, certain reforms can loom large for us, but may barely register at all for those looking in from outside. This is not to say that these policy questions are not important and are getting sufficient attention, but they are not a substitute for direct engagement with the marcroeconomics of crisis resolution.

@Ceteris Paribus
“we are in the lucky position that Greece will implode first and the ECB/EU will have to compromise or the Euro is gone.”
It is only a lucky position if you believe:
1. We’ll get the same treatment as Greece.
2. That treatment will be better than the current plan.
3. It will work in Greece…

Personally, I think none of those are likely.

“Doubtful if we can beat fiscal and revenue targets with growth revised downwards and March exports down 6%.”
We must if we are to regain control of our future.

@DOCM
“The rest of the EZ does not see Ireland in the same light as Greece and Portugal”
Yah. It’s another sandy line.

Sadly, the bond markets do see us in the same light, indeed, in some ways they see us as worse (in terms of analysis in particular) as the fiscal deficit is worse, the banking system is worse, and the levels of personal indebtedness are worse.

Longer term we may be theoretically in a better position (with regards to balance of payments), but unless we can persuade short-term debt to buy Ireland, it doesn’t matter what they think of our long-term prospects.

@grumpy
After you, sir!

Okay, let me rephrase it then. It matters what they think of our long-term prospects, but not as much as what they think of our short/medium-term prospects. Clearly if we have no long-term prospects either, we are doubly stuffed, but good long-term prospects isn’t going to return us to borrowing at any duration in eighteen month’s time.

@docm

“Why should markets change their view when our new government is giving them every excuse not to?”

Markets?! Who said anything about markets.

There is a powerful and expensive group of Irish people (current and former TDs and ministers among them)who firmly believe that there is nothing more than a short term problem, if that – officially they do not even acknowledge any significant budgetary deterioration from twelve months ago.

Why put the hang out to frugal foreigners when there is so much confidence domestically. JtO is not the only patriotic Irishman.

We were getting an easy ride from DSK (probably the only ones) because his eye was on the Presidency and he was always going to leave the heavy lifting to his replacement.
We must accept that it is highly likely that LaGarde will take over and it is highly likely that the tone will be very different from now on.
Her appointment would be a real game changer.

Sometimes, elevation to power can bring its own problems. It will actually be harder for her to push for Corporation Tax increases as head of the IMF than you might think. If she does push she will be seen as being unduly politically influenced by Sarkozy. The BRICS resent Europe’s power in the IMF and this could be exploited by them. She might be the last European president of the IMF!!!!

@Eureka
Even after the reformation the Pope remained a Catholic but as organisations such as the IMF take effective executive control from goverments they may change their name to IN. MY/YOUR. FACE.

Perhaps another 200 year religious war is needed however as these guys have seeded the entire western world with their minions.
Again the concept of the mysterious tabernacle must be challenged…………… the western world is such a pathetic little province.

500 years of struggle for what seems like nothing and now we have to hit the restart button again – its as if the enlightenment never happened.

Central banks and their offshoots are not sacred places where the body and blood is turned into bread and wine – they are just ornate empty halls full of sad but powerful little men.
PS I assume the IMF operatives still cling to the romantic vision of the Impossible Mission Force as most humans need a higher goal in life – poor dears , little do they know that they themselves are being set up.

http://www.youtube.com/watch?v=zk3A6WgifJo

@ John McHale

Change in the current position has to come from the politial side as the ECB is taking a very rigid approach.

Whether it’s some progress on the €50bn privatisation sales from the estimated €280bn worth of properties held by the Greek state property company or evidence of reform elsewhere, politicians need some cover.

The CDU has fallen to 3rd place in Bremerhaven and the FDP risks being wiped out at a time of economic growth.

Should the elites ignore their electorates as they were accused of doing in the past or follow them?

According to Der Spiegel, 19 of Merkel’s 20 seat majority oppose current bailout policy.

@ Eureka

The attached link to the today’s IT, and the one from the Indo, provide a suitable postscript to these exchanges.

http://www.irishtimes.com/newspaper/finance/2011/0524/1224297637312.html

Indeed, it may be that progress can be reported in the general quest with regard to improving the general level of debate in Ireland – with the continued regrettable exception of RTE – by situating it in its wider international context. This does not limit in any way a lively debate. It simply makes sense of it.

http://www.independent.ie/business/irish/change-of-tack-as-bruton-reveals-admiration-for-ecb-2655129.html

@ DOCM
Interesting pieces. A little dose of Realpolitik!
Basically we must support LeGarde because she will win. And we must support the ECB because they have won too in their little tussle with the IMF.
It is very simple – we will be funded through a combination of actual loans and soft ECB injections of liquidity.
The IMF will turn the screw until those loans are paid back.
We have no wriggle room left any more.

In Geopolitical terms however, we have had a kind of bloodless coup in which the right-wing have taken control of money. Our elected politicians are now little more than distracting side-shows. This is an odd feeling.

Maybe I’m just on a down day but it feels that democracy is actually irrelevant now. In Portugal – it doesnt’ matter who they elect, in Spain the turn out was appalling and you have thousands just opting out, in Ireland all future actions will be dicated by the IMF. A system that took centuries to put in place is being dismantled.

I was struck by how unimportant Barrack Obama has become for us as well. We wields no real power any more. It’s Geitner and Co who call the shots now.

But no point in lamenting change – we just got to figure out how to use it.

….but the building is only broke if you were on the inside seeking shelter. For scavengers on the outside it has returned to a more useful state where they can profit off the debris.

I doubt that there is a political or financial imperative to really fix this mess at all. A system is now in place which will enrich the rich, empoverish the poor and make sure that real power becomes concentrated in the hands of a very few.

History has shown how stable those kinds of systems can be.

Excellent post from NWL on what we can learn from Greece:
http://namawinelake.wordpress.com/2011/05/24/greece-on-the-verge-of-default-provides-ireland-with-useful-lessons/

It’s time to stop worrying about effects and just do stuff.

Interesting Geitner’s non-endorsement for LaGarde. He’s a Goldmann man to the bitter end. It’s not going to be plain sailing for her all the way.