As Notes From Underground has been publishing for five-and-a-half years, a recurring theme has been the ineptness of the IMF. While there are many fine economists and researchers working for the IMF, its history is laden with policies that were devastating for the nations that used its facilities as an act of financial desperation. As the global lender of last resort, the FUND demanded onerous policies of raising interest rates, devaluing currency and undergoing fiscal austerity as a prerequisite for an IMF bail out. The recipients of most IMF loans were “third world” nations that had run out of alternative creditors. The IMF was the “only game in town.” During the height of the Asian crisis of 1997-1998, many of the Asian Tigers shunned IMF advice and money and operated outside the bounds of the Bretton Woods-IMF system.
The traditional playbook was cast aside and each nation went its own way to seek forbearance from global creditors. The quick recovery from the Asian crisis placed the IMF into the global financial background and the IMF was relegated to an advisory role for the G7 and G20, and a lender with the client base of a traditional payday loan operator. During the height of the 2008 financial crisis, it was not the IMF rescued the global financial institutions. When British banks failed they were bailed out by the domestic authorities (no role for the IMF). Under the direction of Christine Lagarde, the IMF did become involved in the Greek restructuring of 2012 as it joined with the ECB and European Commission in what became known as the TROIKA, and made a large financial loan in order to maintain the solvency of the Greek government.
I wrote in 2012 that this was a mistake and was the result of politics as the Europeans were trying to ensure that the French and German banks would not be the bag holders for any type of major Greek default. ECB and IMF funds flowed into Greece via bond purchases by the ECB and Greek government debts were covered by IMF loans. This was done under severe conditions for fiscal austerity. The IMF wanted taxes raised and government spending cut to ensure that IMF loans would be repaid as the government ran a primary surplus. The Greek government operated under the draconian guidelines of the IMF but as the economy shrank the outstanding debt continued to increase even as austerity did create a primary surplus. (Again, the IMF playbook proved to be a burden.) By late 2014, the Greek electorate said NO to more austerity and voted in a government planning to negotiate for better terms on the money owed to the TROIKA: politics trumps the economic models.
The SYRZIA party in Athens has vowed to maintain its election pledges and search for some forbearance on its debt load. The IMF keeps pushing for its money and Greek Prime Minister Tsipras keeps maintaining that he will keep his promise to the Greek people for less stringent loan terms. Director Lagarde stepped deep into the politics of Europe by advancing the money to Greece and as the previous Finance Minister of France she had to be well aware of the financial morass in which Greece and the peripherals were trapped. The IMF had no business getting involved in the Greek problems when the entire EU system was very solvent.
If Greece is part of the EU then it is the problem of the ECB and the European Commission. But in typical IMF fashion, Lagarde is playing hardball and demanding the scheduled loan payment. In a Financial Times article over the weekend–“Eurozone tells Greece No Deal Without IMF”–it seems that the IMF is being used as the one to make or break the entire Greek bail out. It said in the article:
“The IMF has clashed with the European Commission over how tough a line to take, with the commission going so far as to moot cutting the IMF out of a deal. But German officials have bristled at the commission’s interventions and have made clear all three bailout monitors–the IMF, the commission and the ECB–must approve any deal.”
This is politics laid bare. Everyone is pointing their fingers at the IMF as being the final arbiter but it is the U.S. who ultimately controls the FUND through its weighted veto power and the U.S. has stated many times that it seeks a positive outcome to the Greek debt situation. Director Lagrade has to wear the FOOL‘s crown for entering where angels fear to tread.
The weekend FT also noted another IMF faux pas.The FUND has inserted itself in the global currency wars and called on the Bank of Japan to increase its QE program in an “… all-out effort to push inflation to 2 per cent.” The Japanese government has taken a wait-and-see approach to further stimulus with recent economic data being more positive. Prime Minister Abe has been concerned that the sharp fall in the YEN has harmed the middle class by pushing up the cost of imported goods. Last week the BOJ made its decision to keep monetary policy unchanged yet the IMF feels the need to criticize a sovereign government about its domestic policy.
The FT article said, “The IMF took Japan’s government to task for using overly optimistic assumptions in its fiscal plans and called for a ‘concrete and credible plan’ to tackle Japan’s huge public debt and deficit.” The IMF is an institution in search of a reason to exist. Maybe it is time to dismantle the IMF and redistribute its holdings to its members. Otherwise, the IMF staff should seek out ways to enhance its lending power by creating a GOLD-SECURITIZED IMF BOND. Now there is a worthwhile project.
***In another effort to be relevant, today the IMF announced that the Chinese YUAN was at fair and full value. This pronouncement will surely raise the ire of many in Brussels and Washington. The Chinese currency has been a negotiating point for many nations in their efforts to create a more balanced trade environment with the Chinese. This will not sit well with Senator Schumer and others as President Obama looks to enhance his trade agenda. The IMF needs to find some other areas to make itself seem relevant.