Time for the IMF to play tough

Eurointelligence points us to a piece by Alan Beattie on the political difficulties which the IMF faces in dealing with the Eurozone crisis. As we know in Ireland all too well, while the IMF has generally been on the side of the angels, it is the ECB and EC that have called the shots, with the result that the IMF’s reputation suffers by association with Troika policies that are a complete and utter disaster. The dilemma for the IMF is that a complete withdrawal from the Eurozone crisis, while the single currency collapses, won’t do its reputation much good either.

Charles Goodhart and Sony Kapoor have it right, I think: it is the Eurozone that is dysfunctional, and in the future IMF conditionality has to be directed at the ECB and other Eurozone-level bodies as much as (if not more than) it is directed at individual member states. It’s time for the IMF to decide whether it wants to prove Peter Doyle right, or prove him wrong.

45 thoughts on “Time for the IMF to play tough”

  1. On the money Kevin. There is no sentiment behind the IMF’s (relatively) benign attitude in Ireland – they just do what it says on the tin – provide conditional help to distressed sovereigns. Two changes that would help are

    – the ECB should cease to be a member of the troika. The EU and IMF are the lenders. The ECB’s meddling in Ireland has been abject.

    – the Eurozone should be the IMF member, and not the individual states.

  2. Just to back CMcC on the ECB. A large part of all the trouble we are now in is directly attributable to ECB being allowed to play as if it were itself an international organisation rather than a jumped up national central bank.

    Claiming seniority to existing holders of sovereign debt as an official lender has consistently caused serious harm to creditworthiness. The ECB has only been able to get away with it because it has been able to masquerade as an official lender similar to the IMF, and this has only been possible because the IMF has enabled the masquerade.

    Time to rip off the masks and put the gnomes of Frankfurt in their place.

  3. agree with all of above.

    any word of an emergency summit yet? As an aside, current economic conditions (low interest rates in particular) are killing defined benefit pension funds at the very moment they need to submit funding proposals to regulator.

    No bad thing that they cease to exist but going to be an avalanche of DB wind ups in the next 6 months absent a serious rise in interest rates.

  4. What if we have misunderstood the rules of the game. We all assume that the ECB/BUBA is and the core (Germany) is trying and failing to put policy in place to save the euro as currently constituted.

    What if the real policy goal has been to save the euro by ejecting all the trouble makers on the periphery?

  5. @ All

    An article plucked somewhat at random from the web but informative, nevertheless, on the international – and domestic – politics behind the facade at the IMF.

    http://www.chinausfocus.com/slider/change-ahead-china-us-relations-at-the-imf/

    It is also worth recalling that the ECB at the outset of the crisis was opposed to IMF involvement thinking, correctly, that it was for the architects of the single currency to fix any problems and design faults. Germany, as principal architect, was unwilling to go along, calling into question in the process the irreversibility of its commitment to maintaining the single currency. We now are where we are.

  6. I would say, rather, that it was for the architects of the single currency to decide whether to fix it, and if so how to fix it. In circumstances that demanded a clear separation of powers, the ECB has consistently used its weight to keep the system on the edge of collapse, taking with one hand as it gives with the other.

  7. A classic:

    “A plan to move toward a banking union won support from EU leaders at a June 28-29 summit when they pledged to allow the European Stability Mechanism, the euro area’s firewall, to lend directly to banks once nations have deepened supervisory ties. The initiative ignited debate in Germany, with some politicians and banks warning they amount to backdoor pooling of debt that will remove pressure on profligate nations.

    German Taxpayers

    Germany’s savings banks last month said setting up a deposit guarantee program would create [drumroll]:

    “a situation in which German savers could be liable for saving foreign banks.”

    Similarly, lawmakers in Berlin have demanded assurances that their contribution to Spain’s banks will be channelled through the Spanish government and will not pass directly to lenders.”

    @colm mcc

    “The U.K. last year became the first EU government to take the ECB to the European Court of Justice, complaining that the bank’s policy of refusing liquidity support to clearinghouses based outside the euro area was illegal.The U.K. last year became the first EU government to take the ECB to the European Court of Justice, complaining that the bank’s policy of refusing liquidity support to clearinghouses based outside the euro area was illegal.

    http://www.bloomberg.com/news/2012-07-24/eu-rushes-to-make-ecb-single-bank-watchdog-in-race-to-save-spain.html

  8. Maybe all our troubles are over ….the leading news everywhere that we have gazillions of oil out in the Atlantic would suggest so.
    Now if we can figure how to get the damn stuff out of the ground.
    Btw, Germany continues to do very well out of the crisis. They borrowed 30 yr money today at 2.3% or thereabouts. Why would they be in a hurry to fix the Eurozone? The drop in the euro will also help them enormously.

  9. @ BeeCeeTee

    IMHO, you have the situation back to front cf. the Bloomberg article linked to by Grumpy.

    The key political question is whether the ECB will regulate all EA banks (Barnier says that the Commission will propose that it will) or just the limited number that are systemically important. Germany is opposed to anything other than the latter. The Governor of the Banque de France stated in a widely noted interview in Handelsblatt that were this to be the case, the exercise would be pointless.

    For an institution that draws regular brick-bats from contributors to this blog, the countries of the EA seem to pay it considerable respect.

    The likelihood of a rapid agreemnt on a basic text seems to me to be very high not because governments like doing it but that they have little choice. It would be adopted by way of Regulation (as the relevant treaty text provides) and be binding in the legislative structures of the EA states immediately.

  10. @DOCM,
    There are multiple key political questions about the ECB, most of which are not about being in favour of or against the existence of the institution, but about shutting it firmly into the box it belongs in as central bank for euro area countries. Centralising banking regulation, kicking the ECB off the Troika and preventing it from bullying euro area governments are all logical parts of that agenda.

  11. @ DOCM

    “the countries of the EA seem to pay it considerable respect”

    They dont necessarily respect it, they simply want its money-printing powers, so they give it what it wants or needs. There’s a subtle difference between respect and kissing @ss.

  12. @ BeeCeeTee

    You still do not seem to get it. Governments, and notably the German, are being put in a situation of having to cede more power to the ECB because(i) the present dire situation demands it and (ii) it is the only institution that has retained some semblance of credibility. They have already fully ratified power in the treaties to enable them to do so. They have hitherto been unwilling to avail of it.

    “Kicking the ECB off the Troika” and stopping from “bullying euro area governments” are meaningless phrases. The politics behind the facade of the ECB are just as strong as those behind the IMF. Such institutions could not conceivably function ina political vacuum. What they have to do, however, is act within their agreed legal mandates. The UK, in one instance, thinks that the ECB is failing to do so and is taking what it considers to be the appropriate action i.e. taking the matter to the ECJ.

  13. @ BeeCeeTee

    Consider this comment from the Bloomberg article.

    “The day a Spanish bank can put a big fat sign in its window that says ’regulated by the ECB,’ the risk of deposit flight declines,” Erik Nielsen, global chief economist at UniCredit Bank AG in London.”

    @ BEB

    See my earlier comment. The ECB is no more a monolithic structure than the IMF but a reflection of the countries that established it. Any other view is, frankly, IMHO, naive.

  14. @DOCM,
    Looks like I’m striking a nerve. Possibly the client’s nerve.

    Kicking the ECB off the Troika has the plain meaning of removing it from the Troika. You may not want to see it happen. You may think it will not happen. But as an objective it is brimming with meaning.

    More later.

  15. @ DOCM

    The Tories are aiming for an economic boom to coincide with the election in 2015.

    Boom boom

  16. @DOCM

    History seems to repeating itself. You are the sole remaining defender of the ECB’s behaviour, just as you were for the loathsome Bini-Smaghi and the part originator of Europe’s exaggerated slice of the global financial crisis Jean-Claude Trichet.

    (ii) it (The ECB) is the only institution that has retained some semblance of credibility

    I think you are here mistaking “influence” for “credibility”, the ECB has as much credibility left as George Osborne. The IMF is an inflexible and reactionary organization and yet the ECB makes it look like the Third International.

    How could any thoughtful person, in particular any thoughtful Irish person, defend the performance of the ECB? Draghi has brought a touch less sado-monetarism to proceedings but only a touch.

    J W Mason’s analysis (h/t Kevin O’Donoghue) is the nice overview of the subject and as he put it:

    It’s hard to suppress a lingering suppression that central bankers are, after all, bankers.

    And then you think, isn’t there an important sense in which finance embodies the interests of the capitalist class as a whole?

    It is hard to see the IMF overcoming their class loyalties and confronting the ECB/EU over their failed policies. That really is up to us. Sadly with a shower of dim EPP premiers in most of the GIPSIs such a confrontation seems unlikely.

  17. @ DOCM,

    “It is amazing what a country such as the UK can achieve when it is not burdened by membership of the euro.”

    Things could have been a lot worse if they were in the euro. How do you think the UK’s banking system would have fared in the euro?

  18. Tánaiste Eamon Gilmore at the MacGill gabfest, once feared that Ireland faced an “existential” crisis and now things are almost grand.

    Lets move to France given the Jean Paul Sartre allusion and the code that anyone expecting real reform in Ireland, is a fool.

    The delusion is sustained by growth forecasts that meet a purpose but will not be realised. So do not be surprised when the situation demands Bord Snip Nua II.

    Remember back in May, the exhilaration among impressionable folk that François Hollande had changed the agenda and holed the austerity float below the waterline. Post the regency of DSK, the IMF also jumped on the bandwagon and there was quick-action back-pedalling from the abject cheerleading role for the imperious George Osborne.

    On Tuesday, UK Labour leader Ed Miliband declared the political “tide is turning” against the economics of austerity, after a meeting in Paris with the French president. He said he and Hollande agreed that Europe needed a “different way forward” to deal with the debt crisis.

    Plus ça change and all that and as Mario Cuomo said you “campaign in poetry, but govern in prose.”

    Reuters says today that French President François Hollande, the champion of a moderate stimulus plan for Europe, is at home turning his back on the sort of infrastructure investment he hopes will revive European growth.

    His cash-strapped Socialist government is considering scrapping all but the most needed projects as it is forced to weigh questionable economic benefits in an era of belt-tightening.

    Yet, more investment in infrastructure lies at the centre of the €120bn European financing package that the French leader spearheaded in his first months in office.

    “A stimulus plan focused on infrastructure projects that only makes the deficit worse bears medium-term risks that outweigh the weak boost to growth in the short-term,” said economist Denis Ferrand at think-tank Coe-Rexecode.

    It should be remembered that the ECB often reluctantly acted because political leaders didn’t want to. Maybe it shouldn’t have given any emergency liquidity when the inter-bank markets froze up and then continued it for some banks?

    The ditches maybe full of possibly good hurlers, but as President Hollande’s apparent epiphany shows, the solutions required are more than just dealing with banks. Billions have joined the global workforce and even in slow growth periods, there are commodity restraints.

    In Europe, easy credit boosted false gains in standards of living.

    Pre-2008 is not coming back but many of the hurlers on the ditch give the impression that their comfortable status quo can be sustained only if the politicians showed some backbone. That indeed would be good but it will not be enough.

    President Zuma maybe a little worried about Chinese domination in Africa but today, France, a former colonial power, cannot even sell its second-hand car bangers there, never mind sell its new Peugeot models in China.

    Irish Examiner:

    Tánaiste Eamon Gilmore has said that he feared for the financial survival of the state in the early days of the coalition government.
    The Labour leader also said that plans for universal health insurance by the embattled health minister were progressing and that the new system would benefit patients.

    Speaking in Glenties, Co Donegal, at the MacGill Summer School, he also said now was the time for the country to break out of the cycle of economic crises to safeguard the future for Ireland’s children.

    Mr Gilmore said in the early days of meetings of the Government’s special economic unit of ministers that the crisis that Ireland faced was “existential”. He added: “There were days when I feared for the financial survival of the State. Today, while the problems we face are still grave, we are in a much stronger position.”

  19. The present ECB is simpy a ‘clone’ of the Bundesbank – with a few tweaks and whistles for the others (not German).

    Its ‘narrow’ nationalistic remit, which is 100% Gemanic, has proven to be insufficiently ‘strong’ and ‘flexible’ enogh to identify, manage, and implement solutions to the wider EZ Financial System Crisis, whose origin may be traced to poor lending decisons by banks in core EU states, including Germany. Both the parent Bundesbanke and its cloned offspring (a bargained compromise) failed in this regard.

    The generally efficient economic institutional model in Germany cannot simply be imposed on the rest of Europe – a lesson that Chancellor Merkel does not seem to yet grasp – with her emplhasis on ‘fiscal corsets’ and her failure to acknowledge Bundesbanke and ECB failures .. or to communicate same with her Citizenry. She played Deauville to coincide with 3012 election in Germany and did not seem to realise that in so doing she destroyed a good few sovereigns.

    The present ECB cannot overcome its design flaws – entities such as ESfS, ESM, or whateve they come up with at the 109th summit are patchworks …

    Europe needs a Neu CBEU (Central Bank of Europe), A Proberly Functioning CBEU, and a remit that provides it with requisite power.

    Demolish it and start again.

  20. .. er .. 2013 election.

    @MH

    An Tánaiste’s existentialism, like all sound recovering political Marxists, is more Kirkegaardian than Sartre’s …. but then again FG policy towards to the debt debacle is also Kirkegaardian – ‘Have faith – don’t rock the boat, flog a few serfs, and the future will provide!

  21. @ BeeCeeTee

    My reference was to the verb “kicking”. If the ECB could exit the various troikas, it would be gone like a shot cf. from Bloomberg report.

    “The ECB can become a banking supervisor yet shouldn’t play the role of a bank resolution authority with access to public funds, Jean Pisani-Ferry, director of research group Bruegel, said in a telephone interview.

    “Whatever has fiscal dimensions is not the responsibility of the central bank,” Pisani-Ferry said. “Distributing losses is not something an unelected body can do.”

  22. “The politics behind the facade of the ECB are just as strong as those behind the IMF.”

    Possible subtext: There’s more than one player that might fund professional pro-ECB PR in the blogoverse.

  23. Just how well Plan A is doing can be measured by comparing actual performance to expected as at Q1 2011

    http://www.financialregulator.ie/publications/Documents/Quarterly%20Bulletin%20Q%201%20web%20version.pdf

    Page 9

    In 2011, GDP growth is projected to be in the region of 1 per cent, rising to around 2.3 per cent in 2012. GNP is expected to be broadly unchanged this year, with a return to positive growth, in the region of 1.5 per cent, projected for 2012. These projections represent a significant downward revision to those published in the last Quarterly Bulletin, which were compiled on the basis of a much smaller €3 billion fiscal consolidation in 2011 than the one currently budgeted, and on the basis of continued market access to funding on reasonable terms.”

  24. Seafoid,
    Otto is almost certainly right. Where would gilt yields be without the bid from the Old Lady and where would commercial property be without the bid from capital flight from the EZ. The hole in the banks would be even bigger.
    The only saving grace is that the Brits would have left by now and the euro would be Kaput.

  25. @ BeeCeeTee

    Such a juvenile comment, and an earlier one, I regret to say, precludes further discussion.

  26. Spanish regional leader calls on Spain to leave the Euro as reported by AEP…
    “Mr Cascos said the government is “utterly incompetent”, but warned that the deeper crisis is a “perverse” monetary system where capital flight from countries in distress is funding creditor states at zero rates. “This can’t go on for long, or we will have to think about leaving the euro before we are thrown out,” he said.”

  27. @Kevin O’Rourke

    Der Spiegel take on your INET group bazooka here:

    The euro crisis has returned with a vengeance this week, with Greece potentially facing bankruptcy, Spain teetering towards a bailout and even Germany at risk of losing its top credit rating. A group of prominent economists are calling for a radical restructuring of Europe and the euro zone to prevent a disaster of “incalculable proportions.”

    A panel of respected European economics experts are ringing the alarm bell this week over the euro crisis — direly calling on all European leaders to move swiftly to deploy the most powerful tools available to halt the currency’s downward spiral.

    “We believe that as of July 2012, Europe is sleepwalking toward a disaster of incalculable proportions,” the New York-based Institute for New Economic Thinking (INET) stated in a report warning leaders they need to move faster and more decisively to save the common currency. Otherwise it could very well disintegrate.

    The study’s publication on Tuesday couldn’t be any timelier, given the recent dramatic developments in the euro crisis. Greece’s recession is proving to be far worse than previously expected, it is getting tougher for Spain to raise money on the markets (on Tuesday, interest rates on 10-year Spanish bonds rose to an unsustainable 7.6 percent) and Germany’s top triple-A rating is also at risk.

    http://www.spiegel.de/international/europe/debt-crisis-economists-warn-of-euro-catastrophe-a-846327.html

  28. FYI
    Spain
    Catalonia joins the shipwreck
    25 July 2012 Presseurop El País, El Mundo, El Periódico de Catalunya, La Vanguardia

    The request for financial aid addressed to Spain’s central government by the region of Catalonia will further compound the debt crisis for the entire country. The press in Madrid and Barcelona points out that it has also highlighted the budgetary excesses of Spain’s regions.

    “Catalonia asks for bailout”, headlines El País in the wake of the announcement by the President of the Generalitat de Catalunya, Artur Mas, to the effect that the region is to request financial assistance from Madrid. One of the wealthiest Spanish regions, Catalonia is also the most indebted with borrowings of 42 billion euros, which will have to be serviced by payments totalling €5.7bn in 2012. Following in the footsteps of Valencia and Murcia, it will be the third region to require funding from Spain’s €18 billion regional liquidity fund (FLA).

    http://www.presseurop.eu/en/content/press-review/2411471-catalonia-joins-shipwreck

  29. There was an interesting development on Wednesday, when Sandy Weill, the the architect of the mega-financial group Citigroup that was bailed-out by the US government in 2008, called for the break-up of big banks.

    http://plus.cnbc.com/rssvideosearch/action/player/id/3000105222/code/cnbcplayershare

    The second Depression-era Glass-Steagall Act, mandated the separation of investment banking and commercial banking, which is why Morgan Stanley and JP Morgan are two different firms.

    The Glass-Steagall Act was repealed by Congress in November 1999, a measure that has been termed the “Citigroup Authorization Act.” Robert Rubin had pushed for repeal of the Glass-Steagall Act as Treasury secretary. He resigned in July 1999 and was succeeded by Lawrence Summers, later head of President Obama’s National Economic Council. President Clinton called Rubin the “greatest Secretary of the Treasury since Alexander Hamilton” – – President George Washington’s Treasury secretary – – and the former Cabinet officer, who had spent 26 years at Goldman Sachs before joining the Clinton Administration, took a senior position at Citigroup. Rubin who earned $17.0m at Citi in 2008, was not aware of the detail of $55bbn of collateralized debt obligations (CDOs) and other subprime-related securities on the group’s balance sheet. “The answer is very simple,” he told Fortune Magazine. “It didn’t go on under my nose.”

    The New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43bn in mortgage-related assets!

    On January 2, 2009, Citigroup said that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. The Wall Street Journal said Rubin made $115m in pay since 1999, excluding stock options. Rubin told the Journal his pay was justified and that there were higher-paying opportunities available to him. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” he said. Asked if he had any regrets, Rubin said: “I guess that I don’t think of it quite that way,” adding that “if you look back from now, there’s an enormous amount that needs to be learned.” 

  30. @Colm McCarthy

    The IMF and EU have provided the funds to ensure Ireland’s liquidity for the life of the bailout program.

    The ECB ensures the continued liquidity of the Irish banks and also plays a part in capping gov yield levels. Hardly an abject or disinterested party.

  31. A dose of Monthly Review for a bit of perspective

    “The economic slowdown in the developed, capital-rich economies is long-standing, associated with deepening problems of surplus capital absorption or overaccumulation.”

    http://monthlyreview.org/2012/02/01/the-global-stagnation-and-china

    Check out Chart 1 that compares OECD growth rates over 30 years .
    Now that the FIRE model is broken where is the growth going to come from? and what would be the point if there are no capital absorption opportunities?

    Here is Izzy from the FT, that well known centre of left wing extremism, on the same theme

    http://ftalphaville.ft.com/blog/2012/07/10/1078071/the-negative-fear-bubble/

    Capital must be destroyed in order for liquidity to be usefully deployed once again — especially if it is to deliver investment returns.
    Hence, why wars are so hugely useful for dealing with economic depressions. They permanently and effectively destroy capacity. Not just the surplus capacity that plagues the system, but core capacity, which serves a genuine economic need. Indeed, it’s the need for the capacity to be reinstalled that in many ways justifies a return on investment again.

  32. @ Seafóid: “Now that the FIRE model is broken where is the growth going to come from?

    Eh! “I tink dat der iz dis ting nown as a feenix.”

    “Terrific! That should do the trick. Order up some Phoenixes from the local TakeAway”.

    I guess if you are in the drivers’s cab of a runaway train and the platform buffers come into sight, you might just be heard to say, “Golly gee, I believe that a we may have about to experience an arresting moment”.

  33. @ Nick

    “The IMF and EU have provided the funds to ensure Ireland’s liquidity for the life of the bailout program. ”

    How long will the bailout programme last, in your opinion ?
    Spain doesn’t want a bailout because it knows there is no likelihood of exit from same.

  34. @DOCM,
    Such a “move along please, nothing to see here” comment.

    As long as you give the appearance of being a PR professional working the blog, you and whoever presumably funds you will be part of the story and worthy of comment.

  35. The EZ is one very dysfunctional institution.
    Draghi announces a plan of action. Next day the Bundesbank shoots it down.

    I saw the new HQ for the ECB is part of a major construction project on the edge of central Frankfurt M.

    Considering, the unrelenting sabotage campaign being conducted by the Bundesbank against the ECB and every member country of the EZ it is time that the ECB was pulled out of Frankfurt. A couple of good locations would be in the triangles formed by Lyon, Geneva, Torino or Vienna, Bratislava, Brno. Quite simply it makes no sense locating the ECB in a country whose central bank is sabotaging the EZ. The message to send is that there is a price to be paid if the sabotage continues.

    Youth unemployment is still getting worse in Spain and Greece, when does the civil war start?

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