Yesterday saw some potential developments in the role of the International Monetary Fund, or perhaps I should say the size of its role. This was triggered by a press release from the Managing Director of the IMF Christine Lagarde which stated this.
To this end, Fund management and staff will explore options for increasing the Fund’s firepower, subject to adequate safeguards.
I do like the addition of “adequate safeguards” which is something that sounds good but when it is subject to analysis is in fact meaningless and is missing an “in” in front of the first word in my opinion.
How Much will it get?
This was mired in confusion as the media presented suggestions of US $1 trillion, US $600 billion, US $500 billion and then US $600 billion again. If it wasn’t such a serious subject it would be funny. Actually all those estimates were incorrect but there you go…
Equity markets seemed keen on this
It is always difficult to say exactly why an equity market rises or falls but this news did contribute to a good day on world equity markets. The US S&P 500 index rose by over 1% to close over 1300 at 1308, the Japanese Nikkei 225 index closed up 1% at 8639 and the Chinese Shanghai Composite index rose by over 1% to 2296.
How much firepower does the IMF have right now?
This is not as easy a concept as you might think but let me run through some numbers and I will put them in US dollars as so few people have any concept of what an Special Drawing Right actually is.The numbers are from the IMF website and are dated the 15th September 2010.
Quota Value US $362 billion
Ability to borrow (Net Arrangements to Borrow etc) US $ 600 billion.
Amount Lent US $ 69 billion
Amount Promised but not drawn US $213 billion
Potential Firepower US $680 billion
Since then we have had the promise of up to US $200 billion from the Euro zone as a boost to the resources of the IMF. However, as ever, there are problems with this. Within the Euro zone itself US $45 billion was due from the German Bundesbank which put strong conditions on its tranche. Moving outside the Euro zone we then saw the US,UK and Japan express doubts about the plan with the former two then outright refusing to join in. The Canadian Finance Minister was scathing of the plan.
The IMF is there to help out poorer countries in the world, and the European countries are relatively well off.
So as ever the situation is confused and mired in “fog,fog,fog” as Charles Dickens might put it.
For those who wish to know what the various acronyms mean I explained them in the article linked too below.
As you can see as the IMF currently does not know what resources it will receive from the source above it cannot give a definitive amount as to what it thinks it needs. Also the media (and I suspect equity markets) failed to spot that the IMF was using a politician’s gambit as it was declaring the same money twice! You see the Euro zone promises quoted above are part of the new proposal. There is a certain irony is there not in a troubled and uncertain contribution being counted twice in the media-sphere?
An Inconvenient truth: Isn’t the IMF trying to raise more money anyway?
Yes it is and we are on something of a revolving carousel here as plans come and go and those who do not follow the situation closely make think that the IMF is getting stronger. However the IMF is supposed to be getting an emergency quota increase, but here’s the rub. The last time I checked this fewer than 20 of the 187 IMF members had actually approved it!
If we consider the wider problem we only need to look at the United States where its Congress is mired in continuing budget debates with no apparent solution. The chances of it passing an increase in contributions to the IMF seem minuscule.
Also there is a deeper problem as my understanding is that around 20% of the quotas have never actually been paid as the currencies of some countries are considered to be untradeable and are not actually collected.
The two reasons why the IMF is presented as International Rescue
A False Premise or a politician’s fantasy
This is from a research paper from the US Congress Research Board and the emphasis is mine.
In 1967, a Presidential Commission on Budget Concepts recommended that U.S. payments to the IMF should not be treated as budget outlay but rather they should be counted as an exchange of assets which is matched by transfers of equivalent value to the United States from the IMF. Since that time, payments to the IMF have been deemed to have no impact on the Federal budget or on the Federal budget deficit.
A politician’s dream is it not? Expenditure does not count because there is a corresponding transfer of assets of equivalent value! So the recent lending to Portugal, Ireland and particularly Greece has seen assets of “equivalent value” transferred? Plainly this is an utter misrepresentation.
I have used the United States as an example but the (ill) logic of treatment of IMF contributions is quite general and includes the UK.
A Change in the role of the IMF
The old role of the IMF was to help countries with a balance of payments problem. An example of this was its assistance programme for the UK in the mid-1970s. However it’s role has been changed and it now finds itself involved in fiscal deficit and national debt crises. Sometimes they are related to balance of payments problems but they are not the same thing. We can see this in the Euro zone by looking at Portugal and Ireland. Both are recipients of IMF aid but whilst Portugal has received IMF aid before as it has had a persistent trade problem Ireland does not. Actually Ireland has had a trade surplus since 1990 and its Central Statistics Office is so sure of the situation thst its column on this subject is headed trade surplus!
So under its old role the IMF would not be involved in Ireland at all and would be a problem for the Euro zone and Ireland to deal with. Where did this go wrong? Putting a politician in charge (Dominique Strauss-Khan) and particularly one who felt he might gain personal advantage in his campaign to be the next French President by being seen as a “saviour” of the Euro zone.
Nothing was learnt from this debacle, but of course the judge and jury here are other politician’s, and as many of them have troubles too the IMF seems a friendly back-stop whose gravy-train which they are unlikely to reject both personally and on behalf of the countries they are supposed to represent. On these grounds the appointment of Christine Lagarde was a mistake before we get to the issue that her reign is likely to be too Eurocentric. Of course the failure of the “shock and awe” Euro rescue programme she was an architect of and continually lauded should have seen her excluded too.
Never mind the IMF cannot lose money
This is another fallacy and is very widespread. Just because the IMF has not lost money on a large scale in the past does not mean that it will not as it operates on a different basis and on a larger scale. Going forwards the IMF is quite a different animal and the risks of substantial losses are now much higher. Personally I think that in the Euro zone the IMF will have to bear losses on its existing lending to Greece for example, and the only question is the size of them.
The financial scandal in the UK in the early part of the last decade over zeroes and their treatment was to my mind an example of this. Because something has not happened so far many think that this means that it cannot happen. In an “expect the unexpected” world this is a false premise which is made even more dangerous by the fact that the IMF has changed and its profile is now considerably more risky than the past.
The IMF should return to its old role. This would not exclude it being involved in the Euro zone as many of the problem countries have balance of payments problems. But it would reduce the scale of its involvement and reduce the dangers of it.
Oh and if balance of payments issues were the criteria the status of the UK would look somewhat different would it not?
Reductions in UK utility bills
Has anybody else noticed that when there were price rises we saw suppliers raising both gas and electricity prices but that the recent cuts invariably involve them only reducing one of the two?