The International Monetary Fund has been perverted by politicians and should go back to its old role

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.

http://www.mindfulmoney.co.uk/wp/mmexplainer/the-imf-is-it-up-to-the-job/

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.

Conclusion

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?

 

 

 

This entry was posted in Debt, Euro zone Crisis, Eurozone, General Economics, IMF, Quantitative Easing and Extraordinary Monetary Measures. Bookmark the permalink.
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  • Anonymous

    Shaun – a splendid piece on IMF. Like you, I agree it should return to its original mandate even though times have changed. As a matter of interest I had a look at one specific section – that dealing with the conditions governing the use of its general resources, to quote: ”
    (a) The Fund shall adopt policies on the use of its general resources, including policies on stand-by or similar arrangements, and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.” I perceive this as applying to individual countries rather than “currency zones” (EZ). Perhaps I have misinterpreted this but lending direct to the EZ appears not to be included.

  • http://www.facebook.com/people/Alex-Eames/100000616574757 Alex Eames

    Anybody else noticed the utility price rises were before winter and the falls towards the end of the usual cold period? We could still get some more cold weather though. British Gas has lowered their electricity prices, but that’s not what we use to heat the house :(

    Perhaps someone could hatch an entrapment plot (like the last one) to help oust the silver witch? Which of you is willing to act as bait? ;)

  • Anonymous

    Firepower is always destructive, whether from a big bazooka or some other delivery system.

  • Drf

    Hi Shaun,  “The International Monetary Fund has been perverted by politicians and should go back to its old role”  Absolutely, and we all know why they would not consider it going back to its old role!  The IMF as now abused gives Western politicians particularly the ability to offload their otherwise political visibility of fiscal incompetence; they can now continue to indulge in unrestrained fiscal profligacy, and not pay the eventual otherwise inevitable electoral price. The debt resulting from their National profligacy can thus just now be offloaded effectively globally. So clearly there is no chance that they would give up this political utopian utility which the IMF has now become.

  • Anonymous

    Re: utility bills. The recent marginal reductions that followed hefty rises last autumn, are simply opportunistic spin. The companies’ sales are down due to the relatively mild winter and very high energy prices. The wholesale market is also down. The government is to some minor extent on their case for overcharging. What to do? Make a token reduction to help their PR. As you say Shaun, only on one part of their business and only after the winter! Hopefully this fools nobody, well except the government who are easily misled by the sort of spinning that they themselves specialise in. There still has been a very large increase in prices against a background of generally falling input costs.

  • JW

    Hi Shaun, re utility bills, there is only one way they are going to go whilst the country follows the delusional path laid out by Mr Huhne. Meanwhile in the US , gas prices half thanks to shale gas. We are being screwed by the AGW scam.
    Re IMF, its just part of the ‘smoke and mirrors’ to enable the fiat merry-go-round.

  • Mac

    I know someone who thinks she is a ‘babe’!   I did put a few coins in the tin pot he was
    holding out in front of him! 

    We need a Dorothy to go in and click her heels!   

  • Ian_jones

    Only Germany can save the Euro and it has no intention of paying a penny more. It expects the rest of Europe to deflate its way back to competitiveness, basically impossible. The IMF can give a big kick to get the can down the road but sooner rather than later it will go bang. The longer it goes on the bigger the mess will be when it collapses.

  • Anonymous

    Ian – I agree with you. My original posting here suggested it should revert to its previous objectives (country assistance, especially poor, highly indebted ones) rather than focus on the eurozone troubles for which, I believe, it has no mandate.

  • JW

    Hi Shaun, slightly off-topic.
    Woman has been arrested in Greece for non-payment of Euro48Mn of unpaid taxes ( true). She has asked for clemency if she accepts a 75% haircut ( my advise).

  • Rods

    Hi Shaun,

    An excellent blog on the IMF, this sort of analysis is not available anywhere else on the Internet, it is a credit to you for providing us with this sort of information.

    I agree that the IMF should revert to its original role. This politicization, l’m sure will lead to IMF getting involved where it shouldn’t and losing money for the first time!

    Can we also have the EU reverting to its original role of developing a free trade area. If it had kept to this role, we could have had the benefits of a single market with the free movement of goods, services and people without the Euro and Eurozone, CAP, CFP, and the French model for social law like the working time directive. This is effectively the benefits that Switzerland and Norway receive as associate members. Current EU law means they have to offer any member that leaves the EU, which Greece should take note of.

    The single market is to me the only great achievement by the EU that has benefited all of its members. The French dream of a United States of Europe is never going to happen, many different languages alone preclude this, not to mention a very diverse range of cultures. In fact the world is going in the opposite direction, with more countries now existing than 10 years ago as more small groups are demanding a right to self-determination, like is happening on our doorstep with Scotland.

    Electricity prices will continue to go up due to green policies and subsidies for green energy and also EU carbon emissions taxes. No rational person would pick wind turbines or solar panels as a cost effective alternatives to current generating systems. The six company monopoly on prices with the majority of the companies in foreign Government ownership means they will be quite happy to charge the highest price they can get away with so we subsidize their taxpayers. Foreign Government ownership should never have been allowed as it defeats the whole rational of privatization! As virtually every company in the UK uses electricity in an ever increasing globalized market place this is another cost that affects our competitiveness. Many of these comments also apply to the gas companies and the gas market.

  • Anonymous

    An economic analysis of the green energy policies would be useful.

    Currently the UK government is picking technologies and subsidising them. Governments have a poor track record here.

    Some of the chosen technologies are economically infeasible without huge subsidy. we should not waste money subsidising bad technology. The money could be better spent on scientific research to produce a product that can be used to profitably generate electricity without subsidy. Business would quickly phase out coal if they had a more profitable low emission alternative.

    I think a carbon tax is a better solution – let the creativity of capitalism search for the optimal energy solution. A market will soon identify the most efficient technologies. Better still – reducing spending on subsidies AND increasing tax income will help reduce the UK budget deficit.

     

  • Anonymous

    Rods – totally in agreement with you on the IMF and also the single market. Here in Croatia we are scheduled to become part of the EU in July 2013 and, in my opinion, for such a small country the single market is a God-send. Moving to your topic of gas/electricity prices, the local provider(s) have a virtual monopoly and as a result the price of both rose by 25% last year. When you consider that the average salary per month is +/- €575 such a huge increase has caused absolute mayhem.

  • Anonymous

    Historically the IMF has been infamous for imposing tough austerity. IMF recipients tend to follow the austerity regime because they have little choice.  For example there have been Turkish protests against the IMF. However the tough austerity demanded by the IMF technocrats has had some successes. Turkey’s currency has recovered from crisis. The 1997 IMF rescue program for Bulgaria has been successful. Bulgaria has had 15 years of currency stability pegged to the DMark (and Euro) without excessive borrowing.

    Now Sarkozy and Lagarde want to use IMF money to avoid harsh austerity in France. Shaun – you are so right that the French are misusing the IMF.

  • Rods

    Hi Ray,

    My wife is from the Ukraine and my-mother-in-law was complaining last year that part of the conditions of the IMF loan was a reduction in Gas and Electricity subsidies, so prices went up substantially over 40%. She now pays about 2.3p/kwh but the average wage ~£200per month.

  • JW

    Hi Expatin BG,
    The economic analysis of generation has been with us for the last 60 years or more. Subsidies used to be called ‘fossil fuel levies’ or ‘nuclear levies’, to pay for the extra capital costs of nuclear to provide ‘diversification’ ( and in the distant past the dream that the UK would sell its nuclear technology abroad, a bit like the latest dreams of doing the same with ‘green tech’.)
    Baseload efficient plant is nuclear and gas; mid-merit is gas and coal; and peak is OCGT and pump storage. The ‘green/renewable’ stuff is and always has been completely inefficient anywhere on the merit order.
    Instead of trying to reinvent physics, the country needs the best of the conventional including nuclear.  Otherwise we face a bleak and dark ( literally) future.

  • Anonymous

    Hi Alex

    You are right about the timing bit where increases come before periods of heavy usage (aka winter) and reductions after…..well spotted.

  • Anonymous

    Hi Drf

    The problem has been transferred from the private-sector to the public one to nations and now to supra-national organisations….next step Mars?!

  • Anonymous

    Hi Expat

    “Currently the UK government is picking technologies and subsidising them. Governments have a poor track record here.”

    You might like to google Solyndra and the US governments involvement for an example of how not to do it…

  • Anonymous

    Hi JW

    Only 75% surely her bankers would advise more………..

  • Anonymous

    Hi Guys

    Off-topic but as we move East we see Russia looking stonger because it has so many commodities and oil and we see Europe’s leaders trying to Federalise it. Places in the middle like the Ukraine may well wisely fear what may happen next…

    The IMF on one side and Vladimir Putin’s hand on the gas pipe on the other is a nightmare rather than a dream I think.

  • Rods

    Hi Shaun,

    That’s why Ukraine has now sold licences for the exploration and development of shale gas to hopefully reduce and then become self sufficient in gas.

    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8736024/Shell-to-search-for-Ukraine-shale-gas.html 

    Ukraine are an exporter of electricity to neighboring countries, with about 50% being generated from nuclear power stations and the rest from gas, coal and hydro.

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  • Anonymous

    Hydro electric power is a zero carbon cost efficient way of generating electricity. Tidal flow turbines have potential to cheaply generate base load.

    The so called “green technology” needs to pay it’s way without subsidy. Take an example of an internet cafe business. In the UK the power grid is easily available, cheap and reliable – solar panels are a very expensive alternative. But an internet cafe in a sunny part of Africa might find that buying the solar panels is cheaper than paying for 10 miles of copper wire, etc to connect to an unreliable power grid.

    As to nuclear power, is it a cost efficient and profitable business proposition ?  If so we should expect many companies to press ahead with construction. However I see EDF and others sitting around making excuses and lobbying the UK govt for subsidies.

    Lastly, nuclear fusion is not reinventing physics, using fusion to profitably generate electricity is an engineering challenge.

  • Grumpy Old Paul

    I agree with your points. A few other issues are important:

    a) Investment in efficient energy usage. There is still an awful lot which can be done re economy of the internal combustion engine and domestic insulation. I agree that the record of governments in selecting technologies and companies to back is not good but they can at least implement carrots and sticks via the tax system.

    b) Security of energy supplies. The best response to people who start talking about “the AGW scam”  (such as  the grossly-overrated (not least by himself!) ex-chancellor, Nigel Lawson) is to put the argument for using sustainable sources of energy is to argue in favour of national self-sufficiency in order to reduce our reliance on insecure overseas supplies from unstable, unsavoury regimes. 

    c) I’m unsure whether, when generation costs of nuclear power are quoted, the costs of decommissioning and long-term storage are included.

    d) Companies are not necessarily better than governments at picking winners as exemplified in their frequent lack of success in expansion by acquisition or choosing new markets in which to operate. The difference is that, except when large banks are involved, the tax payer does not pick up the tab for corporate follies!

  • Anonymous

    Shaun – apologies for the very late post but this link http://www.weforum.org/content/pages/call-action
    has been issued by the IMF in the run-up to Davos. Thought you and any other readers might be interested…..

  • Anonymous

    I agree. A carbon tax will naturally encourage energy efficiency. UK petrol taxes encourage fuel efficient cars which also helps our balance of payments. Just think how much smaller the US oil usage could be if they increased their average fuel economy from 18mpg up to 30mpg.

    I don’t want to get into the GW science, which is dependent on statistics of a hugely variable climate, but I strongly dislike Brown/Huhne’s solution that involves fleecing taxpayers to support commercially inviable technology.

  • Anonymous

    Speaking of green subsidies, they are under debate in Germany. I liked this quote -

     Grossmann, the CEO of the energy giant RWE said the subsidization of solar energy in Germany was as useful as ‘growing pineapples in Alaska.’”

    http://www.spiegel.de/international/germany/0,1518,810370,00.html

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