The IMF and the Next Crisis
by Joseph Joyce
The IMF and the Next Crisis
The IMF has issued a warning that “increasing financial market turbulence and falling asset prices” are weakening the global economy, which already faces headwinds due to the “…modest recovery in advanced economies, China’s rebalancing, the weaker-than-expected growth impact from lower oil prices, and generally diminished growth prospects in emerging and low-income economies.” In its report to the finance ministers and central bank governors of the Group of 20 nations before their meeting in Shangahi, the IMF called on the G20 policymakers to undertake “…bold multilateral actions to boost growth and contain risk.” But will the IMF itself be prepared for the next crisis?
The question is particularly appropriate in view of the negative response of the G20 officials to the IMF’s warning. U.S. Treasury Secretary Jacob J. Law sought to dampen expectations of any government actions, warning “Don’t expect a crisis response in a non-crisis environment.” Similarly, Germany’s Minister of Finance Wolfgang Schaeuble stated that “Fiscal as well as monetary policies have reached their limits…Talking about further stimulus just distracts from the real tasks at hand.”
The IMF, then, may be the “first responder” in the event of more volatility and weakening. Theapproval of the long-delayed 14th General Quota Review has allowed the IMF to implement increases in the quota subscriptions of its members that augment its financial resources.Managing Director Christine Lagarde, who has just been reappointed to a second term, has claimed the institution of new Fund lending programs, such as the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL), has strengthened the global safety net. These programs allow the IMF to lend quickly to countries with sound policies. But outside the IMF, Lagarde claims, the safety net has become “fragmented and asymmetric.” Therefore, she proposes, “Rather than relying on a fragmented and incomplete system of regional and bilateral arrangements, we need a functioning international network of precautionary instruments that works for everyone.” The IMF is ready to provide more such a network.
But is a lack of liquidity provision the main problem that emerging market nations face? TheFinancial Times quotes Lagarde as stating that any assistance to oil exporters like Azerbaijan and Nigeria should come without any stigma, as “They are clearly the victims of outside shocks…” in the form of collapses in oil prices. But outside shocks are not always transitory, and may continue over long periods of time.
There are many reasons to expect that lower commodity prices may persist. If so, the governments of commodity exporters that became used to higher revenues may be forced to scale down their spending plans. Debt levels that appeared reasonable at one set of export prices may become unsustainable at another. In these circumstances, the countries involved may face questions about their solvency.
But is the IMF the appropriate body to deal with insolvency? IMF lending in such circumstances has become more common. Carmen M. Reinhart of Harvard’s Kennedy School of Government and Christoph Trebesch of the University of Munich write that about 40% of IMF programs in the 1990s and 2000s went to countries in some stage of default or restructuring of official debt, despite the IMF’s official policy of not lending to countries in arrears. Reinhart and Trebesch attribute the prevalence of continued lending (which has been called “recidivist lending”) in part to the Fund’s tolerance of continued non-payment of government debt.
More recently, the IMF’s credibility suffered a blow due to its involvement with Greece and the European governments that lent to it in 2010. (See Paul Blustein for an account of that period.) The IMF ‘s guidelines for granting “exceptional access” to a member stipulate that such lending could only be undertaken if the member’s debt was sustainable in the medium-term. The Greek debt clearly was not, so the Fund justified its lending on the grounds that there was a risk of “international systemic spillovers.” But the IMF’s willingness to participate in the bailout loan of 2010 only delayed the eventual restructuring of Greek debt in 2012. The IMF now insists that the European governments grant Greece more debt relief before it will provide any more financial government.
Reinhart and Trebesch write that the IMF’s “…involvement in chronic debt crises and in development finance may make it harder to focus on its original mission…” of providing credit in the event of a balance of payments crisis, its original mission. Moreover, its association with cases of long-run insolvency may “taint all of its lending.” This may explain the limited response to the IMF’s programs of liquidity provision. Only Colombia, Mexico and Poland have shown an interest in the FCL, and the Former Yugoslav Republic of Macedonia and Morocco in the PLL.
Even if the IMF receives the power to implement new programs, therefore, its past record of lending may deter potential borrowers. This problem will be worsened if the IMF treats countries that need to adapt to a new global economy as temporary borrowers that only need assistance until commodity prices rise and they are back on their feet. The day when the emerging market economies routinely recorded high growth rates may have come to an end. If so, debt restructuring may become a more common event that needs to be addressed directly.
cross posted with Capital Ebbs and Flows
“…Even if the IMF receives the power to implement new programs, therefore, its past record of lending may deter potential borrowers. ”
Kinda like the way foreclosed-upon ex-homeowners tend to stay away from new loans even when they could qualify. They’ve seen the sausage-making up close , and will never lose their revulsion to the corrupt system that ruined their lives.
The IMF , World Bank , fraud-as-a-business-plan multinational banks – it’s only the most naive who don’t now view these institutions as simply asset-strippers for the global elite. The old needs for their old jobs remain , but the trust is long gone. It’s time to shit-can the lot of them and start anew.
You read the IMF and you want to jump off a bridge. But that is the same down side story that the IMF has been selling for years.
Yes there are some big issues. Central to this is the slow down in China and the huge sell off in all commodities. These things will cause some very big pain. But don;t ignore the flip side, The amount of money global consumers have/will save on the drop in energy will be measured in Trillions. The glass is more than half empty. (and I don’t give a damn if Saudi financial reserves are collapsing)
What will the future bring? Wish I knew. But on the other side of the scale of things is the CBO 1/28 economic outlook:
CBO anticipates that the economy will expand solidly this year and next. Increases in demand for goods and services are expected to reduce the quantity of underused labor and capital, or “slack,” in the economy—thereby encouraging greater participation in the labor force by reducing the unemployment rate and pushing up compensation. That reduction in slack will also push up inflation and interest rates.
The IMF is Mr.Laggard. This tell me the global economy, led by the US is accelerating in the 1st quarter and will continue into the 2nd.
That asset stuff is funnier in hell as Blitz mentioned. They completely ignore lower asset prices related to commodities create higher savings, thus future higher spending ratios. IMF should be abolished.
Saudi financial reserves, collapsing?
There goes the excuse for the US free fire zones around the world.
Who will fund al Qaeda and ISIS?
If ISIS and al Qaeda go broke who will the pentagon find to waste trillions interminably shooting at evil doers?
Ilsm and Marko are spot on. But many of the questions-answers you are asking for are being given daily in PCR.com and wallstreetonparade.com…The oligarch’s are not done pitting one against the other and have been very successful with manipulation many and our own government into false flag trade policies, banks and Wall St…Some how you keep loosing sight of the oligarch’s global reach and power. This is also why we are seeing and badly need the political revolution we are seeing because “more of the same” politics in Washington stopped workin for us a long time ago… This is why they are trying to start a new cold war with Russia again.