Relevant and even prescient commentary on news, politics and the economy.

The IMF and the Coronavirus

by Joseph Joyce

The IMF and the Coronavirus

A global threat such as the coronavirus should be met with a global response. National governments, however, have generally not coordinated their efforts, with the exception of those that belong to the European Union, and even there the distribution of vaccines has not gone smoothly. International agencies, on the other hand, such as the International Monetary Fund have responded more quickly. Moreover, the IMF has shown a willingness to play an active role in preparing for the post-pandemic world and to take on issues outside its usual remit.

The IMF’s past attempts to resolve financial crises have not always been successful (for an account see here). The IMF’s policy prescriptions at the outset of the East Asian crisis of 1997-98 included contractionary fiscal policy conditions for the governments that adopted IMF programs, as well as higher interest rates. There were  also structural conditions that dealt with the privatization of government-owned enterprises. While such policies may have been appropriate for a crisis that was due to expansionary macroeconomic policies, fiscal and monetary measures did not precipitate the East Asian crisis. Capital inflows had fueled bank lending and asset prices had soared, while central banks were committed to fixed exchange rates. Once foreign investors became alarmed about the exposure of private borrowers to currency and maturity mismatches, they began to exit, provoking a “sudden stop” of capital and currency devaluations.

OXI ~ 60%: What now? Greece Open Thread

Greece Interior Ministry Results
all regions voting ‘OXI’ = ‘No’

Huffington Post: Live Updates: Greece Votes In Referendum On Bailout Proposal

More links as afternoon progresses.

This article by Steve Randy Waldman at Interfluidity has been getting a lot of play around the Intertoobz since yesterday (I also linked to it in Comments on the previous Grexit post). It’s title is simple but it has a lot of depth and insight, I thoroughly recommend it. Greece

Ireland, Krugman, Kenneth Thomas

Paul Krugman points to Angry Bear Kenneth Thomas in this piece in the New York Times on the use of Ireland as somehow a success story of what are failed policies regarding employment:

Ireland Is The Success Story Of The Future, And Always Will Be

Via Mark Thoma, Kenneth Thomas analyzes the latest attempt to claim that Ireland is a success story — is this the third or the fourth time around? — and concludes that the modest fall in unemployment is all about emigration. Actually, we can reach the same conclusion by going straight to employment data:

The Lessons of the North Atlantic Crisis for Economic Theory and Policy

Re-thinking macro policy:

Joseph Stiglits, Davis Romer, Oliver Blanchard at  Columbia University, New York, and co-host of the Conference on Rethinking Macro Policy II: First Steps and Early Lessons.

The Lessons of the North Atlantic Crisis for Economic Theory and Policy

Posted on May 3, 2013 by iMFdirect

Quantcastpost by: Joseph E. Stiglitz

In analyzing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last 30 years—as liberalization policies became dominant—have given us a wealth of experience and mountains of data. If we look over a 150 year period, we have an even richer data set.

The IMF and the Return of Structural Conditionality in Europe

The IMF has increased in importance over the last few years, especially in Europe.  Prof. Joyce writes on the background of its evolution.

by Joseph P. Joyce  is a Professor of Economics at Wellesley College and the Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs.

The IMF and the Return of Structural Conditionality in Europe
(March 2012)

In 2002, the IMF promised to reduce the use of structural policies in the policy conditions attached to its lending programs. Recently, however, the IMF has incorporated structural measures into the programs for some of its European borrowers. The shift in emphasis is based on the IMF’s judgment of the need to promote growth in these economies. The IMF’s evaluation of the appropriate policies reveals a split with the other members of the governing “troika,” the European Commission (EC) and the European Central Bank (ECB), which have emphasized short-term fiscal austerity. The difference in views over what needs to be done to achieve sustainable debt positions may hinder the recovery of these countries.

Structural conditions were introduced in the 1980s to improve the allocation of resources through the use of market mechanisms in order to raise economic growth rates. Among the measures included in the IMF’s lending programs were the deregulation of private markets, the privatization of state-owned enterprises, and the reform of the civil service and labor markets. The IMF reported in 2001 that by the mid-1990s, nearly all of its lending arrangements contained some structural conditions, and that the number of such conditions per program had risen.

The use of structural conditionality, however, was sharply criticized, and was viewed as particularly inappropriate for countries that faced financial crises that reflected the “sudden stop” of short-term capital flows. The experiences of China and other Asian countries were cited as evidence that there were alternative paths to growth. After the pledged to rely on the principle of parsimony by focusing on the core areas of its expertise, i.e., monetary, fiscal and exchange rate policies and issues related to the financial sector, and reducing the number of conditions. 

The IMF conducted a review of its compliance with the new guidelines in 2005. Its report found that the scope of structural conditionality had been narrowed, but there had been no reduction in the number of conditions. Similarly, the IMF’s own Independent Evaluation Office (IEO) undertook a review of structural conditionality in 2007. This report also observed that the Fund had limited the focus of its conditionality, but that there had been little change in the number of conditions. In 2009 the IMF eliminated structural performance criteria as a tool of assessing compliance with a program’s conditions, although structural reforms can be included in an overall review of program performance.
The IMF recently concluded its latest evaluation of its conditionality (IMF 2012a, IMF 2012b). The Fund’s review claims that its use of conditionality became more parsimonious during the period under review, 2002 through September 2011. The number of conditions attached to the Fund’s program fell, while the focus was confined to the core areas of the IMF’s responsibility. But the report also acknowledged that the number of conditions rose in programs undertaken at the end of the period, including the programs in Europe.

A close examination of the IMF’s programs for Greece and Portugal demonstrates how structural measures have been incorporated into their programs. Greece received a three-year Stand-By Arrangement for SDR 26.4 billion (about €30 billion or $40 billion) in 2010, but that program was replaced in 2012 by a four-year Extended Fund Facility Arrangement for SDR 23.8 billion (€28 billion or $36.7 billion) after many of the original plan’s targets were missed. At the end of last year there was an IMF review of the progress to date under the new Greek program.

This review noted that Greece’s fiscal and external imbalances are improving, but its substantial economic contraction has continued. The IMF found that the structural transformation of economy is proceeding at a slow place outside of the labor market, “…and this is making Greece’s adjustment more costly.” There was agreement with the Greek authorities that “…structural reforms to date had been uneven at best, and that a reinvigoration of the reform agenda would be critical to boost potential growth.”

The review cited a lack of movement in deregulating product markets by removing barriers to entry. The privatization of state-owned assets was another area of major concern, since the targets that had been set “…have been missed by a wide margin”, in part because of political resistance. The IMF acknowledged that the reform of Greek labor markets had been initiated, but called for further measures, such as the implementation of a new minimum wage system. The liberalization of entry to regulated professions also needed to be advanced.

Structural policies are also a part of the lending program extended to Portugal, which borrowed SDR 23.74 (€26 billion or $39 billion) through a three-year Extended Fund Facility in May 2011. A recent IMF review of Portugal’s record in the program found that structural reforms have been advanced, and gave these efforts some of the credit for the decline in Portuguese government bond yields. The government has moved to tackle excessive regulatory procedures, and adapt wage bargaining to allow differences in wages across sectors. A number of judicial reforms are also underway. But the IMF’s staff worried that “…it remains unclear whether reforms to date are sufficient to address the large external competitiveness gap or will engender an adequately strong supply response to avoid a prolonged demand-driven slump.”

Greece and Portugal are not the only European countries to have borrowed from the IMF in recent years. In 2008-09, the IMF lent to Hungary, Latvia, Romania and Serbia. These loans were extended to mitigate the impact of the global financial shock that had begun in the U.S. The borrowers did not require extensive conditionality, although there were measures to strengthen their financial sectors, particularly in the case of Iceland. Ireland accepted SDR 19.5 billion (€22.5 billion or $30.1 billion) from the IMF in the form of a three-year Extended Fund Facility in 2010. Its need for assistance was attributed to the excessive bank lending that took place preceding the global crisis rather than any structural economic shortcomings. Cyprus will also require extensive financial restructuring.

The IMF’s programs to Greece and Portugal are part of larger programs that included loans from the other European governments, which are monitored by the EC. In the past, the IMF focused on macroeconomic policies while the EC dealt with structural reforms. But, the IMF admits in its overview of conditionality,

“Over time, both the Fund and the EC have increasingly ventured into areas of structural reforms initially devoted to the other institution. EC-supported measures have been more and more focused on fiscal issues, while the Fund introduced “competitiveness” conditionality in the Portugal and Greece programs.”

The IMF has taken a different perspective of what steps need to be taken in Europe than have the EC and the ECB, a divergence that began during the global financial crisis.  In the cases of Greece and Portugal, the IMF supports fiscal adjustment while seeking to reverse their economic contractions with structural measures. But the EC has insisted on short-term austerity that could actually worsen their debt positions. 

The different time frames and policy assessments of the IMF and the Europeans are exacerbating the situation of these countries. Political opposition to the fiscal cutbacks slows adoption of structural measures and hinders the growth that the IMF seeks to promote. Moreover, the split between the members of the “troika” does not bode well for future joint programs, even as the case of Cyprus demonstrates that there will be continued need for institutional collaboration.

European Policy Makers Don’t Understand But Markets Do

By Rebecca Wilder

European Policy Makers Don’t Understand But Markets Do

So here we are: the Italian yield curve is flat at above 7%; the government institution is in question; and the ECB is using its SMP purchase program as a carrot to drive austerity implementation in and Berlusconi out. Some would argue that the ‘market is irrational’ – Italy faces a liquidity not solvency crisis. That’s the IMF’s line, and I don’t buy it.

See Italy’s situation is simple: given the Italian debt profile and initial conditions, the Italian sovereign should be able to stabilize its debt levels – even at 8% interest rate (borrowing costs) – PROVIDED (1) it grows, and (2) the sovereign increases its primary surplus (Italy is 1 of just 2 G7 countries expected to run a primary surplus in 2011, according to the IMF). The problem is, that (1) Italy’s contracting, and (2) a higher primary surplus is more likely than not going to aggravate the recession. Something has to change to break the link – this is where I encourage you to read Nouriel Roubini’s latest.

In my view, the market is behaving very rationally. The Troika (ECB+EU+IMF) adapted the standard IMF model to the European sovereign debt crisis as a means to regain market confidence amid a sovereign liquidity crisis. The plan is to enhance fiscal discipline and become more ‘competitive’ (usually that means coincident with currency devaluation).

So fiscal discipline + new competitiveness = market confidence. Right? Wrong.

Italy’s solvency is now under question amid current IMF-style bureaucratic policy in Europe. Why they haven’t figured out the following is beyond me: austerity and competitiveness gains only works if monetary policy is easy and/or the global economy is expanding, and that’s with nominal devaluation.

Either the IMF model will fail or the Euro area will

Here’s the problem with the IMF model:

1. None of the program countries are unequivocally more competitive. Devaluation would help here, but no Euro area (EA) economy can devalue unless they exit the EA.

The table below illustrates the gains in competitiveness by key EA markets since the beginning of the peak of the last cycle, Q1 2008. Competitiveness here is broadly measured by shifts in the real exchange rate, as calculated by relative prices, relative unit labor costs, and relative GDP deflators. The red cells highlight country real exchange rate gains/losses that undercut Germany.

Broadly speaking, no country except Ireland trumps Germany in two out of three measures of real depreciation. At best, the results on which country has indeed gained competitiveness against the 6th most competitive country in the world, Germany, is mixed. Furthermore, Europe as a whole is cutting labor costs, not just the program countries, and dragging domestic demand of the EA as a whole.

Ireland is the only country to have experienced broad depreciation across all three measures and against Germany. But I would argue this: they had further to go. The chart below illustrates the CPI-based real effective exchange rate. Spanning the period January 2007 to April 2008 (the peak), the Irish real exchange rate appreciated 10% against its major trading partners. As such, the 13.6% real depreciation since April 2008 is more reflective of mean reversion rather than competitiveness gains.

2. The second part of any IMF program (first, really) is controlling fiscal balances through ‘austerity’; but this is not possible if the private sector is simultaneously deleveraging and external demand is not sufficient. Spain and Ireland seem to be on track at this point – but they won’t be for long. The inevitable EA recession will increase the required ‘cuts’ to facilitate the reduced revenues; this is both logistically and nationalistically difficult. Global monetary easing is likely to help, but it’s too late for Europe.

Eventually the population will appeal to the economic malaise that is the disintegrating labor markets in program countries and fight against reform.

The divergence in economic performance is quickly turning into convergence, as the sovereign debt crisis inflicts the core economic performance. Shoot, even the ECB has acquiesced and is now calling for a ‘mild recession’.

Markets understand what policy makers in Europe do not: the European IMF-style model is not and cannot work under these conditions. Monetary policy is too tight, the global rebound has dissipated, and fiscal austerity is killing aggregate demand.

And here I get to my favorite quote of the day. From Bank of America’s Athanasios Vamvakidis (no link), a former IMF economist:

“In our view, there are two ways for a country to bolster market confidence in its economic policy: either through the intervention and support of an international institution, or through effective commitment to reform.”

Italy doesn’t need foreign capital, nor does it need effective commitment to reform. It needs a credible path of adjustment. And this involves all EA members, not just Italy. See Martin Wolf’s FT article from October 5, and Nouriel Roubini’s article today on EconoMonitor.

originally published at The Wilder View…Economonitors

Retaliating Against Currency Manipulation: A Primer

Kash at The Streetlight points us to other aspects of the world, touching upon the WTO and the IMF roles in global trade and China in particular:

Retaliating Against Currency Manipulation: A Primer

You’ve probably heard that this week the US Congress has been addressing the issue of how China controls its exchange rate with the US dollar. In particular, many have argued that China’s policy of only allowing the yuan (CNY) to appreciate very gradually against the dollar has kept Chinese products unreasonably cheap to American consumers, and American products unreasonably expensive to Chinese consumers. (See for example Paul Krugman’s column on Monday.)

And indicates a source worth reading:

if you’re interested in more details regarding the legal options and implications of possible US retaliation against Chinese currency manipulation, you can’t do better than this paper by Jonathan Sanford of the Congressional Research Service: “Currency Manipulation: The IMF and WTO“.

Simon Johnson has an excellent post

by Mike Kimel

An excellent post by Simon Johnson.

The managing director of the IMF is the impresario of any bailout. The big decisions must be negotiated with all significant stakeholders but this still leaves enormous scope for discretion.

If Ms. Lagarde becomes managing director she can directly influence the terms of IMF involvement – and based on her negotiating position to date within the eurozone, we can presume she will lean towards more money, easier terms, and above all no losses for the banks that made foolish loans.

Increasingly it looks like the eurozone leadership, under French guidance, will go for the Full Bailout option, in which all Greek debt is bought up by the IMF, by the European Central Bank, and by other eurozone entities. This debt will be held to maturity – and any creditor who did not yet sell will be made whole (those who already sold at a loss are out of luck).

This course of action will be expensive, in terms of nominal outlays and in real risk-adjusted terms, because whatever terms Greece gets must also be offered to Ireland and Portugal. The IMF may need to raise more capital or – more likely – tap its credit lines from member governments.


The French want to sway decision-making at the IMF in order to use US, Japanese, and poorer countries’ money to conceal from their own electorate that the eurozone structure has led all its members into serious fiscal jeopardy – some borrowed heavily, while others let their banks lend irresponsibly and thus created a large contingent liability.

The best way to hide the true cost is to have other people’s taxpayers foot the bill, preferably with the least possible transparency. There is a lot at stake for eurozone politicians. Ms. Lagarde will run the IMF.

The George Bush/Barack Obama bail-out policy writ larger…

Thoughts on the Eurozone, Greece, and the EMF

I was asked by Periódico Diagonal to answer a few questions related to the Eurozone, based on several articles that I wrote (here, here, and here). I don’t know if these will be published, but “enquiring minds want to know”. Here we go:

1. In a recent article you announced that the next cycle of crisis in Europe will be determined by the struggle for exports. Does that mean that the country which lags behind in this struggle for exports will suffer from falling wages?

Rebecca: What I meant was that the Eurozone might find itself in a “race to the bottom”. The prescript coming out of the IMF and the European Union is one of harsh and deep reductions in nominal income (wages) and prices in order to reduce relative prices enough to drive export income. Normally, downward pressure on internal prices via recession occurs alongside a sharp devaluation in the currency, where external demand pulls the economy back onto its feet. But the main problem across the Eurozone IS ITS CONSTRUCT, one currency “to rule them all”. Greece, nor any of the other GIIPS countries – Greece, Italy, Ireland, Portugal, and Spain – can devalue the currency in order to drive export growth.

The problem is that without proper export growth, the internal devaluation would more accurately take the form of “infernal devaluation”. Cuts to nominal income, wealth (via pensions), and other labor variables will restrict current consumption and aggregate spending to a point where such measures then pressure government deficits. It’s a vicious circle, not to mention a fallacy of composition to think that the aggregate can export its way out recession if wages are falling – spending, by definition, must be falling, too.

2. In this sense, the IMF´s advice is to decrease wages and promote privatization of common services. Are we facing the first IMF´s serious intervention in (¿most developed?) the North countries? In that case, what is the aim of these adjustment policies? Do you think they will benefit countries like Greece or Iceland? Or is it just a matter of financial balance and euro´s credibility?

Rebecca: The Iceland economy received IMF support in November 2008, but IMF lending comes at the cost of conditional fiscal austerity programs and macroeconomic measures, including trimming the government-funded pension system, reduced wages, and other related budget cuts. Iceland has muddled through, though, because it has something that Greece (nor any other Eurozone country) doesn’t have: a free-floating, non-convertible currency.

The Iceland case is very different from Greece (or any of the GIIPS), though, because it issued a lot of debt that is denominated in foreign currency. But nevertheless, the Iceland krona depreciated around 50% against the US dollar between July 2008 and December 2009, driving exports and reducing imports. In 2009, real GDP in Iceland fell 6.5%, the biggest drag came from government spending that shaved 12.2% off of GDP growth. However, the contribution coming from exports and imports was +14.2%, which more than offset the drag from the IMF’s “austerity measures”.

Greece doesn’t have this option, since it cannot devalue its currency. Greece can only reduce wages and prices enough to generate internal devaluation resulting in the prescribed export growth. That’s just not going to fly when the Eurozone as a whole is fighting for export income.

But worse yet, there’s a positive feedback loop here that will likely result in a debt deflation scenario, normally resulting in private-sector default. Let’s use Iceland, again, as an example. In 2009, private consumption dragged GDP growth a large 7.8%. In Greece’s case, the effect on consumption would be magnified, since without the benefit of external income generation the private sector must take a larger hit. As consumption falls, so too do tax receipts and the primary deficit rises once more – the positive feedback loop.

3. You say it is impossible for all European countries to decrease wages in order to increase exports because –we suppose- this would reduce, in some way, domestic demand and, therefore, trade within the European Union, seeming to be no other way out. How can we get out of this situation? Could it be the end of the monetary union -so that some countries prefer currency devaluation in order to gain competitiveness?

Rebecca: It probably won’t be the end of the EMU, but I wouldn’t be surprised if some countries defaulted, which then increases the likelihood of the “end of the EMU”. What we have is an unsustainable situation in the Eurozone, as key countries face “infernal devaluation”. Without an epic surge in export growth, the government austerity programs called upon by the E.U. (or the IMF) will force the private sector to accumulate debt in order to balance out the aggregate forces of income and spending. That’s just fact.

The Eurozone was built upon the premise that there would be a unified currency and an un-unified fiscal system. In order to balance the inherent fiscal challenges that come along with inherently different saving motives across the 16 EMU countries, strict rules were set in place: no government is “allowed” to run fiscal deficits in excess of 3% nor accumulate debt in excess of 60% of GDP. Countries are fined, but that didn’t stop them from hiding government obligations from the European Union via sophisticated derivative securities. In the end, you have a band-aid plan to satisfy markets so that Greece can attempt to rollover its near-term debt. This “bailout” comes with no specifics as to threshold levels that must be crossed in order to get the central E.U. players to offer support, which is no doubt by design. Nothing has changed here; no lessons learned; the Eurozone is still just as flawed as it was ten years ago.

What has now become obvious to those who did not see this coming, is that the Eurozone, in its construct, was never meant to withstand the financial contagion and ensuing global recession of 2007-2009.

4. The European media are suggesting this week that the European Union should “let Greece fall” as a sign of credibility. What do you think of this issue?

Rebecca: Unless the structure of the EMU was changed for the better, meaning fiscal consolidation, the Eurozone would be no more “credible” after the default of Greece.

5. What is your opinion concerning the possibility of creating a European Monetary Fund, which has recently come up in the news?

Rebecca: It is an awful idea and ridden with disruptive side effects. In essence, the EMF would be established to prevent sovereign default from causing contagion throughout the Eurozone. If funds are dispersed immediately, the obvious result is the lop-sided power engendered to those countries that contribute, rather than borrow, from the fund. From the get-go, the EMF would generate political pressures from the creditor countries to the unduly strained debtor countries.

With such power comes abuse, as illustrated by the International Monetary Fund’s involvement during the Asian Financial Crisis. The IMF proved itself to be highly intrusive into local sovereignty and adopted a one-size-fits-all policy to its conditional lending programs. There is a reason that capital controls are the policy du jour in Asia, and consequently not part of the IMF’s “prescription”.

It is NOT unlikely that the same [abuse] would happen under the EMF.

Rebecca Wilder

Consumers around the world are generally more upbeat, but not uniformly so

Last week the IMF released its World Economic Outlook Update for the October 2009 forecast. The global economy is expected to grow 3.9% in 2010, an 0.8% upward revision. In fact, the 2010 growth projections were generally upward with little offset in 2011 (often when you get a surprise and positive economic release, the current period forecast improves at the cost of growth later in the forecast):

  • The 2010 U.S. growth Update is 1.2%-points above the October level, now 2.7%.
  • The Eurozone GDP growth Updated to 1% pace in 2010, up 233% from October’s forecast (driven by the 400% surge of Germany’s GDP growth outlook, now 1.5% in 2010).
  • Canada’s GDP growth forecast got a slight bump, up 0.5%-points to 2.6%.
  • The UK is now expected to grow at a 1.3% annual pace in 2010.
  • Russia’s Update to GDP growth is 3.6% in 2010 (that’s off of a sharp 9% drop in 2009).
  • And the IMF envisages that China maintain 10% growth in 2010, up 1%-point from its forecast just 3 months ago.

The IMF has no crystal ball, but the story is compelling: banking crisis + global recession = weak recovery. However, it is improbable that the IMF is spot on. The short IMF press release stresses the divergent path of economic recovery across the advanced and developing world. In short, much of the emerging and developing world should recover smartly, while key advanced economies, burdened by debt and financial stress, are to see a more muted recovery.

Of note is the IMF’s listed upside risk to the growth forecast (thus inflation, trade, and other related variables):

On the upside, the reversal of the confidence crisis and the reduction in uncertainty may continue to foster a stronger-than-expected improvement in financial market sentiment and prompt a larger-than-expected rebound in capital flows, trade, and private demand.

Confidence, consumer, investor, and business, is key – let’s focus on the consumer. The one that accounts for roughly 17% of global GDP – i.e., the U.S. consumer – remains afflicted by excessive debt burden and record unemployment. In contrast, consumer confidence is rebounding smartly in other parts of the world, developed and developing.

Advanced consumers showing some confidence, but the U.S. consumer confidence index remains 39% below that during the onset of the recession.

The chart illustrates various measures of consumer confidence across a selection of advanced economies (you can see the exact sources here). Consumer confidence in the U.S., U.K., Germany, and Ireland remain well short of their Jan. 2008 levels. Notably, confidence in the U.S. has moved laterally since May 2009 despite recent gains in the fourth quarter of 2009.

Confidence in some emerging economies remains muted as well.

I chose a selection of monthly confidence indicators for select emerging markets. Clearly, some biggies are missing – India and South Korea being the first on the list – but data availability and/or frequency precludes a more thorough analysis.

Consumers in Indonesia are ostensibly more upbeat than those in other emerging economies. In China, consumer confidence hovers below its Jan 2008 level. And in spite of the bubbles and wealth talk in China, confidence hasn’t been this low since 2003. In Brazil, consumer confidence is back to peak levels before the onset of the U.S. recession.

I provided a snapshot of global consumer confidence. Generally consumers do portray the ongoing confidence struggle, especially in the U.S., that plays out in the IMF’s muted growth forecast.