Rethinking IMF Approach to Sovereign Debt Crises

This paper is important in understanding the evolution of IMF thinking on the handling of sovereign debt crises: here.

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27 thoughts on “Rethinking IMF Approach to Sovereign Debt Crises”

  1. This is all about the Fund’s adventures in Euroland, particularly in Greece where there was a mega-default anyway. In Ireland the Fund ended up financing a private creditor exit.

    The unspoken question is whether the components of common currency areas should retain their separate access to the Fund – whether the Fund’s members should be currencies rather than countries. Had Euroland been an IMF member, it would have had a BOP surplus, no outflows, a floating exchange rate and no need for an IMF programme.

  2. @Derval O’Rourke

    Derval O’Rourke Achievements

    • Gold – 60m Hurdles – World Indoor Championships 2006 (Moscow)

    • Silver – 100m Hurdles – European Championships 2006 (Gothenburg)

    • Silver – 100m Hurdles – European Championships 2010 (Barcelona)

    • Bronze – 60m Hurdles – European Indoor Championships 2009 (Turin)

    • Bronze – 60m Hurdles – European Indoor Championships 2013 (Gothenburg)

    • Fourth – 100m Hurdles – World Championships 2009 (Berlin)

    • 3 time Irish Olympian – Athens 2004, Beijing 2008, London 2012

    • Represented Europe at the IAAF Continental Cup in 2010

    Irish Senior Record Holder:

    • 50m Hurdles Indoor (6.80 – Lievin 2006)

    • 60m Hurdles Indoor (7.84 – Moscow 2006)

    • 100m Hurdles Outdoor (12.65 – Barcelona 2010)

    Magic! http://www.independent.ie/sport/other-sports/derval-orourke-announces-retirement-after-record-breaking-career-30376180.html

    @Colm McCarthy

    ‘Had Euroland been an IMF member …

    Precisely. Euro elite still haven’t figured out Systems Theory 101 – a prob at a higher level can not be sussed out or solved by crucifying at lower levels.

  3. It’s caused by the IMF’s adventures in Euroland, but it has more far-reaching implications. The IMF’s standard for intervention will no longer be a high post-intervention probability of debt sustainability for a distressed debtor country, but only an expectation that debt will be sustainable without requiring a high probability. If implemented, this standard implies lower debt write-downs for distressed debtor countries across all the IMF’s membership, not just those in the eurozone.

    This is a really bad idea. Existing IMF practice has been quite good at moving distressed debtors far enough away from the edge of catastrophe not just to avoid default but to have a good chance of broader economic recovery. Edging IMF programmes closer to the point where they can only just service their debts seems likely to be horribly destructive.

  4. References to adventures in Euroland are appropriate if the IMF is viewed as an organisation independent of political influences. Unfortunately, this view is fundamentally erroneous.

    http://www.ft.com/intl/cms/s/0/bab67356-3905-11df-8970-00144feabdc0.html#axzz35CwJPDRx

    The IMF got involved because Berlin insisted and circumstances made it politic for Washington – representing Wall Street – and the UK – representing the City of London – to agree. The reasons that caused Berlin to insist seem rather obvious (i) Wall Street and the City were seen as the major culprits and (ii) Germany did not wish to be left holding the baby, IMF involvement being a mechanism to get both responsible governments involved until the extent of German financial responsibility could be more firmly established.

    No governor of a central bank, not even Trichet, could stand against such pressures. In the event, IMF involvement seems to have worked.

  5. DOCM:

    The creditor status of German banks had, of course, nothing to do with any of this!

    The reactions to warch are those of China, Japan, India, Brazil, Gulf oil states, who have had to divvy up through the IMF to lend real money to a Eurozone with an aggregate BOP surplus. Nie wieder will be a popular line.

  6. @ CMC

    But of course! The problem for Merkel and her advisers was clearly that they did not know how big the German banking exposure was.

    The IMF has been disputing quota shares for decades with the only real progress being a small shift of power from the old medium-sized members – mainly European – to newcomers, especially China, but no abandonment by the US of its effective veto on major changes.

    http://fas.org/sgp/crs/misc/R42844.pdf

    Germany has now established a limit, or thinks that it has, to the national contingent liability of the euro exercise. The other powers that you mention are incapable of presenting a united front. Only the Canadian finance minister, as I recall, had the gumption to state publicly that the Europeans were big boys and should take care of themselves.

  7. Is Angela’s Corset slipping?

    ‘… Gabriel, who is also Germany’s economy minister, spoke to journalists during a tour of the Airbus facility in Toulouse. European policies have to be revisited, Gabriel said. “The focus on pure austerity policies has failed,” he claimed.

    The reporters couldn’t believe their ears. Did he really just say that? Is Gabriel in the process of turning away from the highly touted Stability Pact after years of backing German Chancellor Angela Merkel’s euro-crisis strategy? Is he trying to pick a fight with Europe’s austerity queen?

    Gabriel’s comment was just the latest indication that Merkel’s solid hold on the reins of power in Europe may slowly be weakening. After years of being the de facto leader of Europe, largely a function of Germany’s relatively good economic health even as the Continent’s economy crumbled around it, Merkel is now losing traction on a number of issues. Indeed, with her premature approval of lead candidate status for Jean-Claude Juncker in the European election campaign, she may have opened the door for her own gradual loss of power.

    The assault on Merkel is coming from three flanks. First off, she is facing pressure from her rivals inside of Europe. The governments in Rome and Paris have long believed that Merkel is too dominant and that she is pushing Europe in the wrong direction. But now, the chancellor is also losing the support of countries that once favored her course. Indeed, when EU leaders gather in Brussels, there is one issue that unites them all, regardless of their party affiliation: They believe that Merkel is too powerful.

    Merkel’s critics, secondly, will soon have an ally at the head of the European Commission. As the situation currently stands, it seems probable that Jean-Claude Juncker will become president of the EU’s executive body. Officially, Merkel supports the center-right politician from Luxembourg. But when it comes to austerity in Europe and financial policy, Juncker is far to the left of the German chancellor.

    A Miserly Bookkeeper

    The third attack is coming from within her own government. Merkel’s authority in Brussels has been partly due to her complete lack of rivals in Germany. She has, of course, always had critics in German parliament, but never a powerful adversary. Now, though, her own vice chancellor, Sigmar Gabriel — leader of the center-left Social Democrats, her coalition partners — seems to be turning on her. He is seeking to present himself as a man who wants to hold Europe together, and is making Merkel look like a miserly bookkeeper.

    http://www.spiegel.de/international/germany/european-center-left-challenging-merkel-leadership-in-eu-a-976918.html#ref=nl-international

    Wonder has Sigmar studied Systems Theory_101?

  8. A Miserly Bookkeeper

    The third attack is coming from within her own government. Merkel’s authority in Brussels has been partly due to her complete lack of rivals in Germany. She has, of course, always had critics in German parliament, but never a powerful adversary. Now, though, her own vice chancellor, Sigmar Gabriel — leader of the center-left Social Democrats, her coalition partners — seems to be turning on her. He is seeking to present himself as a man who wants to hold Europe together, and is making Merkel look like a miserly bookkeeper.

    Gabriel’s plan is not without risk. Merkel’s team has already begun quietly accusing Gabriel of acting against Germany’s best interests. And with the smooth functioning of her government dependent on a strong relationship between her and her deputy, the Merkel-Gabriel spat could ultimately become a threat to the stability of the chancellor’s coalition.

    Gabriel is aware of the dangers. But he believes that the advance of European right-wing populists can only be stopped if the economic situation in crisis-torn EU countries improves quickly — and he’s more than happy to help hold the queen of Europe in check. That also explains why he is prepared to form alliances with those who would like to see Merkel’s reign come to an end, François Hollande above all.

    The French president has undergone a shocking about-face during his two years in office, from a vociferous defender of Socialist values to an energetic supporter of economic reform. On one point, however, he has remained constant: He believes the Stability Pact, which imposes strict rules on EU member-states’ budgets, is nonsense.’

    Nonsense! +1

  9. @DOCM & the independent FF MEP for Ireland South – Mr Crowley

    [and sundry others who might be interested ….]

    Bill Black …

    The Right and the Ultra-Right’s War on the People of Europe

    Henkel, Sarrazin, Hummler, and Bernd Lucke (a macroeconomist formerly employed by the German central bank, the founder and leader of the AfD).are representative of the Germanic economic consensus in favor of the self-destructive austerity regime that thrust the eurozone back into a gratuitous second recession and Spain, Greece, and Italy – with one third of the total population of the eurozone – into Great Depression levels of unemployment.

    http://www.nakedcapitalism.com/2014/06/eu-center-right-and-ultra-right-continuing-war-on-people.html

  10. getting fascinated with hilarious talk like “retain their separate access to the Fund”

    and Terror-Timmie Geithner acting on the behalf of giant vampire squid

    I leave it for tonight with some impressions of the vampire squad:

    http://www.spiegel.de/panorama/luis-suarez-spott-bei-twitter-nach-beiss-attacke-von-uruguay-stuermer-a-977273.html

    and the mafiosi trying to create a storm in a waterglass, against the rule of law and treaties

    Italy’s Matteo Renzi likens EU to ‘old boring aunt’

    The aunt may be old and boring, but she still can smack his sticky fingers : – )

    http://www.ft.com/intl/cms/s/0/dbc4b624-fb80-11e3-9a03-00144feab7de.html#axzz35JBWxz00

  11. Just wondering what is left in the toolbox if crisis revisits the EZ and “whatever it takes” is overwhelmed.

    The EZ still doesn’t have a deposit guarantee scheme or resolution system for dud banks.

    http://www.ft.com/intl/cms/s/0/49a481fe-8406-11dd-bf00-000077b07658.html

    “In today’s world, governments rescue such crisis-hit economies in four ways: they offer generous lender-of-last-resort liquidity, via central banks; they run huge fiscal deficits, to offset the shift of the private sector into financial surplus; they substitute public debt for private debt, in order to recapitalise undercapitalised financial systems (often after outright nationalisation); and they may adopt inflationary erosion of the value of private (and public) debt. ”

    1. LOLR in the EZ is LOL
    2. Fiscal deficits- that bird has already flown and sov balances are saturated
    3 see 2
    4 might be the only one on

  12. maybe it is best to provide a few links with short comments,

    in order to paint in broad strokes my picture of the latest IMF utterings.

    http://www.sueddeutsche.de/news/leben/auto-volkswagen-kuendigt-677-millionen-euro-investition-in-portugal-an-dpa.urn-newsml-dpa-com-20090101-140625-99-05518

    One German company Volkswagen provides for 4.2%, in the future 5%, of the Export of Portugal

    4 years ago, and adjustment of IMF quota was agreed on, China and Germany gave generous credits, but since that blocked by the US

    http://www.imf.org/external/np/sec/misc/consents.htm

  13. China and the rest of the World see very well,

    that the Anglo -Americans use all institutions, UN, IMF, Worldbank, NATO to further ruthlessly their national agendas and interest. And with America having little qualms to take it out also on close allies,

    NSA spying, BNP Paribas, the fleecing of BP as just a few examples.

    And the consequences are clear.

    The ESM was implemented against the systematic obstruction of Cameron, as of today even the Dutch and Sweden will not support him in the Causa Juncker.

    China organizes international relations systematically around US/UK,
    with sums (800 b) that dwarf the little 40 b of the Worldbank

    “China expands plans for World Bank rival”
    http://www.ft.com/intl/cms/s/0/b1012282-fba4-11e3-aa19-00144feab7de.html?siteedition=intl#axzz35JBWxz00

    American abuse of banking connections?

    Direct exchange with the real players, national central banks, like the BoE and the Bundesbank

    http://boerse.ard.de/anlageformen/devisen/renminbi-oeffnet-sich-zum-euro100.html

  14. Following DOCM, that the IMF has become a completely politizised tool,

    both the French witch and Franco-american Olivier Blanchard have repeatedly agitated for sociopath crimes against European treaties with hilarious stuff, like the multiplier.

    It is not that we take these clowns serious anymore.

    Having said all this, ….. : – )

    This paper represents the public admission of

    a) that it is not some deluded staff at the IMF who make the decisions,
    but the creditors

    b) that some funny simplistic white/black model of OK vs bankruptcy does not describe the reality, and that incalcitrant customers like Greece need constant long term guidance (isnt that a really nice wording : – ) and not one single step

  15. http://www.rte.ie/news/2014/0625/626436-banking-inquiry/

    “The banking inquiry has been told that, on legal advice, it will not be able to discuss the Cabinet meeting during which the bank guarantee was discussed due to Cabinet confidentiality.”

    http://news.bbc.co.uk/2/hi/uk_news/northern_ireland/7650041.stm

    081003 Brian Cowen, arriving at a conference in Trinity College, Dublin yesterday: “We’re in extraordinary economic circumstances. We face stark choices. If we do not make the right ones, it will have catastrophic consequences.”

    http://www.ft.com/cms/s/0/70b38194-f568-11e3-91a8-00144feabdc0.html
    “If the €2bn of cuts are implemented in the next budget, due in October, the total adjustment the country will have made since 2008 as it seeks to restore its fiscal health will come to €32bn.”

  16. @Prudent Hans

    Mother: What did you bring her Hans?

    Prudent Hans: Nothing but sticky fingers Mother.

    (with apologies to the Grimms)

  17. Here is some evolution of French thinking, confusion between two concepts, money and credit.
    http://www.atlantico.fr/decryptage/lourde-erreur-diagnostic-economique-qui-plombe-zone-euro-nicolas-goetzmann-1623397.html

    The diagnosis of Government: banks do not lend

    On Tuesday, June 10, 2014, Arnaud Montebourg said: “It is necessary that France decided to move its banking system” The vision here defended by the Minister of Economy is that the French financial sector would be guilty of not paying. enough to businesses, including the smallest of them. This lack of funding is the cause of the current economic slump. The question is essential if this is really critical.

    Last week, the European Central Bank announced (among others) the establishment of a new plan to support the economy, called TLTRO (Targeted Long Term Refinancing Operations).

    This plan aims to offer attractive financial sector if it wants to resolve lending to non-financial companies. In other words, the “real economy.” This action of the ECB has been welcomed both by Arnaud Montebourg, Michel Sapin, Manuel Valls by François Hollande. A measure which joins the aforementioned sentence Arnaud Montebourg of Tuesday, June 10, as it aims to increase the supply of credit available to businesses. Which is here pointed to by all is a problem of access to credit, that is to say, credit supply.

    Such a vision is yet to be taken lightly. Perhaps because it is a fundamental cause of the inability of Europe to emerge from the crisis. Confusion between two concepts: money and credit.

    Follow the link for more.

  18. Here is the continuation of the post above. essentially they are saying the short term conditions of the ECB have neutered their efforts to stimulate growth in the EZ.

    http://www.atlantico.fr/decryptage/ltro-0-qe-1-pourquoi-c-est-quantitative-easing-bce-dont-avons-vraiment-besoin-nicolas-goetzmann-1623424.html

    LTRO 0 – EQ 1: Why is a quantitative easing of the ECB we really need
    Europe and the United States have diverged in their monetary approach to fight against the crisis. Quantitative easing in the U.S. and credit support in the euro zone have produced opposite results. Despite its failure, Europe persists only in a way which seems hopeless.

  19. ‘Despite its failure, Europe persists only in a way which seems hopeless.’

    The useful idiotic ideological eejits of capital are still in control.

  20. Hypo Alpe Adria: Bavarian outcry is hypocrisy says Austrian newspaper

    Several investors of Hypo Alpe Adria Bank – which was nationalised in 2009, including the German state of Bavaria, are threatening to take legal action in view of Austria’s plans for a debt restructuring. The left-liberal Austrian daily Der Standard also has its doubts about whether the measure is legally watertight: “The problems begin with the bail-in put forward on the EU level by the finance minister, by means of which a restructuring contribution can be demanded of future investors. Provisions that will come into force in 2016 will make it very difficult to win legal disputes before the Constitutional Court or the European Court of Justice. … But things look different with the Bavarians. Münchner Landesbank helped cause the Hypo debacle and then shirked all responsibility. However it knew more about Hypo’s bad loans than the other bond underwriters. The Bavarians’ outrage borders on hypocrisy.”

  21. Michael,

    since Joseph Ryan brought that up also recently, also in connection with Depfa loans.

    First I am no expert on the Alpe Adria saga, and I am not doing research on it.

    Just the picture I have in this moment:

    1. Nobody will lose his shirt over it, or some critical credit rating. Sovereign ratings are at least 2 steps removed from whatever happens, in stark contrast to the irish situation.

    2. You will not understand the thing without the names of Haider and Mollath, and the history of the Habsburg empire.

    After the fall of the Berlin Wall, there were plenty of opportunities for banking in Eastern Europe, of which much was formerly part of the Habsburg empire. We in Germany were busy with ourselves and our east, so plenty of banks like GE and the Austrians, Swiss say plenty of opportunities, including peddling mortgages in Euro and Swiss francs to hapless customers : – )

    Well the catchup of many of those countries did not go as hoped for, based on the results of countries like Ireland until 2003, and many credits were not yet non-performing, but the writing was on the wall.

    Hypo Alpe Adria was kind of state bank of Carinthia, with a “Landeshauptmann” Jörg Haider / FPÖ, not exactly the kind of globalist , post-national : – )

    But somehow they managed to sell their crap to the Bavarian Hypo / Landesbank in 2007. Many shady by-deals, a luxury car mechanic, Mollath got nervous about the cash packages his wife was transfering on behalf of various bavarian politicians, threatened to go public, and was disappeared in a psychatric ward for 7 years, by bavarian judges with connections to the prime minister office, him refusing to get pumped with silence drugs, and now making a very reasonable impression, since being out of psycho prison.

  22. To describe the FPÖ simply as right wing nuts falls short of reality.

    On a vacation a dozen years ago in Austria, a husband and wife told me pretty openly, he is member of the “social democratic” SPÖ, because he needs to, working in the national railway, she is member of the “christian democratic” ÖVP, because that is advantageous to get building permits, especially if you have to cut the corners of peculiar rules, and both voted FPÖ, because they hate the clientelism of the 2 traditional parties.

    Since then Jörg Haider also died in a somewhat strange car accident.

    Mollath seems to have some old documents, his wife kept for him, although she brought him into the ward with some false abuse charges.

    Huber and Beckstein, as non- “upper bavaria” (Munich) party leader and prime minister were voted out of office, and therefore off the supervisory board of Hypo / Landesbank.

    And what the current lawsuit is about, is that Bavaria forced Austria to take back the Hypo Alpe Adria for the price of 1 Euro (and hidden 2 billion of loans, the Austrians now want to default on with creative arguments) or let it just go bankrupt, as a systemical critical bank in the carinthian province.

    Between friends : – )

    None of this seems to be ISDA relevant for me, most participants just fret about who the bigger a-hole is and have no real problem to draw this out into eternity, until people die peacefully and certain crimes go unpunished.

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