Minggu, 15 April 2012

The fork in the rod leads to an exit from the eurozone ? Japan plays the good soldier and will piss away 50 billion to the IMF - better use for that money at home ?


The pressure has been on the 17-member eurozone to build its own bazooka, but Lagarde has quietly been canvassing for an increase in the IMF’s own resources. Behind her thinking has been the fact that the eurozone simply does not have the resources to bail out Italy, its third-largest economy, without help. Furthermore, a crisis in Italy, or indeed Spain, would threaten the global economy all over again. A “safety net” would allay such fears.
It has been a baptism of fire for Lagarde, France’s former finance minister who was appointed after the disgraced Dominique Strauss-Kahn stepped down in the wake of rape allegations. Just nine months into the job, she has the unenviable task of trying to build a co-ordinated global strategy on the shifting tectonic plates of domestic politics.
At the IMF’s key spring meetings in Washington this week, she faces her first real test. If Lagarde can strike a big deal on resources, she will be garlanded with praise. If she can’t, the jury will remain out. Either way, the pressure is now on.
Until recently, talk of IMF funding has been hampered by the eurozone members’ failure to show the “colour of their money”, as George Osborne demanded in Davos. Last month, though, a eurozone bazooka was agreed in principle – to increase the size of the rescue fund by about €300bn (£247bn) to €800bn.
Coming on the back of the ECB’s €1 trillion emergency funding line for the banks, Europe could finally argue that it had played its card.
Limping to the podium at Brookings last week, after surgery on her knee, Lagarde said the time had come “to increase our resources” at the IMF, following the eurozone’s efforts.
“I am hopeful that, during the spring meetings, we will make progress on this issue,” she added, a statement that some believe has left her something of a hostage to fortune.
Osborne, who is close to Lagarde, having been one of the first to push for her IMF nomination, is thought to be prepared to commit the UK to another funding round of about £10bn. China and Japan have also hinted at their support, but there are big obstacles – not least the US.
Timothy Geithner, the US Treasury Secretary, is not convinced that the Euro Group has added enough boom to its own bazooka, and independent analysis suggests he has a point. As the Centre for European Policy Studies (CEPS) has noted, the eurozone’s new bazooka leaves a “safety buffer” of just €300bn after taking into consideration the existing programmes for Greece, Ireland and Portugal.
That hardly looks like the “mother of all firewalls” called for by the respected Paris-based think tank the Organisation for Economic Co-operation and Development.
CEPS added: “It seems clear that [the firewall] would not be able to provide substantial support for Spain and Italy.”
Tellingly, all the US Treasury could muster in response to the eurozone agreement was the weak recognition that it “reinforces a trajectory of positive efforts to strengthen confidence in the euro area”. UK sources said that, privately, the US was bitterly disappointed, and adamant that no further US taxpayer money would be put at risk of more euro bail-outs.
Normally, US opposition would be enough to kill any plan to increase resources. But Lagarde has other ideas. She hopes to corral the rest of the major non-eurozone players – the UK, Canada, Japan, Australia, China and India – into a joint agreement. But she has already begun managing down expectations.
Having previously indicated that she wanted as much as $600bn more, she said at Brookings: “The needs now may not be quite as large as we had estimated earlier this year.”
UK sources said she would be lucky to secure $400bn. Of that, the eurozone members have committed to contributing €150bn – on top of their own bazooka – leaving just $250bn to be gathered from other members.
Even at $400bn, the extra resources would be a retreat from earlier ambitions. Lagarde wanted to increase the IMF’s available resources from the current $400bn to $1 trillion, while global policymakers had hoped for a total bazooka of €2 trillion to allay concerns about Europe. The IMF and the eurozone’s combined funds will fall well short of that.
Making this week’s talks even more awkward has been the fresh fear of a crisis in Spain, sparked initially by the new prime minister’s decision to cut the deficit more slowly than originally agreed.
As markets have lost faith in Spain, questions have resurfaced about whether the eurozone firewall is big enough. According to CEPS, “even if the [firewall] only had to cover half of the financial needs of Spain and Italy”, it would need another €400bn.
The renewed crisis is making Lagarde’s argument harder to sell. Canada, in particular, has sympathy with Geithner’s stance that the eurozone should be doing much more before extending the begging bowl to the rest of the world. If any one of the major non-eurozone countries refuses to play ball, a deal will be temporarily abandoned – to be taken up again at the G20 summit in Mexico in June.
Even securing €250bn from non-eurozone members excluding the US could prove difficult.
The UK, which speaks for 4.5pc of the IMF, has the authority to commit another £10bn without recourse to Parliament under the “new arrangements to borrow” established at the 2009 G20 summit in London.
Politically, it would be a tough call, though. Britain has already pledged £29.5bn to the IMF, £5.5bn of which has been ploughed into rescuing Greece, Portugal, Ireland and other bailed-out nations. Topping that up would leave the Government open to accusations that it was chucking good money after bad. With the US refusing to join in, the argument would be even more difficult to make to an already sceptical electorate.
Given the difficulties faced by one of Lagarde’s main backers, filling her handbag will be as tricky as ever.



The single currency has arrived at a three-pronged fork in the road

There are three possible ways out of the eurozone crisis: austerity, investment or the route taken by Argentina in the 90s
Protest Bank of Greece
Greeks protest outside the headquarters of the Bank of Greece in Athens. Photograph: Simela Pantzartzi/EPA
The next 12 months will decide the fate of the eurozone. The problems of the single currency have not gone away and will again dominate this week's meeting of the International Monetary Fund in Washington. Every one of those in attendance knows that the crisis could erupt again at any moment; last week's sell-off in Spanish and Italian bonds was like the puff of smoke billowing out of a volcano getting ready to blow.
Here's a summary of how things stand. The euro was constructed on the false premise that monetary union would lead to a harmonisation of economic performance across member states. Greece would become like Germany; Portugal would be similar to Finland. Instead, the euro has led to a widening gulf between rich and poor, and this has been brutally exposed by the financial crisis and its aftermath.

It became clear that the countries on the periphery of the eurozone had a cocktail of problems. Their economies were much less productive than those at the core, so they were gradually becoming less competitive. They had shaky banking systems. And they had weak public finances.
Investors, unsurprisingly, came to believe that holding Greek, Italian or Spanish bonds was risky and demanded higher interest rates for doing so. This added to the pressure on both banks and governments, and by pushing up the cost of borrowing, affected growth prospects as well.
By late last year, the eurozone was on the brink of meltdown. At that point, the European Central Bank stepped in and announced long-term refinancing operations (LTROs). These pumped unlimited amounts of ultra-cheap money into the eurozone banking system to satisfy the funding needs of banks for three years.
The idea was to kill two birds with one stone. Banks would have more cash and could use it to buy government bonds in their own countries, thus driving down interest rates and so boosting growth.
This was a high-risk strategy that depended on the crisis-affected countries quickly returning to steady and robust growth. If they didn't, their banks would be loaded up with government bonds and vulnerable to a sell-off in the markets.
In the past couple of weeks, this possibility has dawned on markets. They have started to mull over a scenario in which a deepening recession in Spain leads to the government missing its deficit-reduction targets, prompting rising bond yields and eventually necessitating an international bailout.
There is much talk in European circles about how Greece was a one-off. Few in the markets believe that.
In the very worst case the euro breaks up entirely, leaving the ECB nursing big losses and ruing the day when it embarked on an expansion of the money supply. As George Soros noted last week, the Bundesbank perceives the risk, which is why it is campaigning hard against any further LTROs. The message from Germany, and from some of the other core countries, is that it is time for Spain, Italy, Greece and Portugal to start delivering on the structural reforms they have promised.
All that explains why Christine Lagarde, the managing director of the IMF, keeps insisting that Europe has bought itself a little time to sort out its problems but no more than that. Lagarde is absolutely right about that: the single currency has arrived at a three-pronged fork in the road.
Route number one is Austerity Avenue. The eurozone continues on its current road with the poorer countries on the fringe making themselves more competitive by what is known as internal devaluation. This involves driving down the costs of production through wage reductions, welfare cuts and the sell-off of state assets. Living standards take a big hit for a prolonged period, but eventually countries such as Greece bridge the gap between themselves and Germany.
There are both economic and political problems with this route. Austerity is killing growth, making it harder to reduce government borrowing, and it is inflaming populations unhappy at the prospect of year after year of falling living standards. This is a bumpy road; it may also prove to be a short one.
Next up is the High-Investment Highway. The premise for this route is that the single currency can survive but only if measures are taken to stimulate growth. Soros proposed a scheme last week in which all countries would be able to refinance their debts at the same rate – but, as he admitted, this would never get past the Bundesbank.
Another idea, put forward by the former Labour MP Stuart Holland, is for a bond-financed investment programme modelled on Roosevelt's New Deal. This would have two components: the creation of Union bonds, under which a country would be able to convert up to 60% of its national debt into non-traded Union bonds; and the launch of Eurobonds, which would be traded and actively marketed to the fast-growing countries of the emerging world that are looking for an alternative to holding reserves in dollars.

The idea, which has attracted the interest of the socialist candidate for the French presidency, Fran├žois Hollande, would be to use Union bonds to stabilise debt and Eurobonds to finance investment.
As with the Soros proposal, the Hollande plan would no doubt run into stiff opposition from Germany. It would also involve a much higher degree of fiscal integration. But if Austerity Avenue is a dead end and High-Investment Highway is a road to nowhere, that really leaves only one other exit: Buenos Aires Boulevard.
A paper published last week by Capital Economics described the similarities between the struggling countries of the eurozone today andArgentina in the late 1990s. The South American country had fixed the peso against the dollar irrevocably at the start of the 1990s but, after a few good years of strong growth and low inflation, by the end of the decade it had come under severe strain.
The solutions being tried now in Greece – austerity, debt rescheduling, IMF programmes – were tried in Argentina, to no avail. Indeed, output crashed, making the country's debt position even worse. Eventually the pressure became too much and Argentina devalued and defaulted.
Far from the sky falling in, which was what the IMF and the other proponents of orthodoxy predicted, Argentina's growth averaged 9% a year between 2003 and 2007.
As Andrew Kenningham of Capital Economics accepts, Greece would not be expected to do nearly as well as post-crisis Argentina, which benefited from rising commodity prices and did not have to cope with the inevitable contagion effects that would result from a country leaving the single currency. He argues, however, that Argentina's example offers a "painful but viable" route out of the crisis which the current deflationary policies do not. And unless policymakers in Europe can offer their citizens something more enticing than endless austerity, a stroll down Buenos Aires Boulevard will become increasingly enticing.


Japan to contribute $50 bil. to IMF
Japan is ready to contribute 50 billion dollars to the International Monetary Fund's efforts to contain the European debt crisis.

Japanese Finance Minister Jun Azumi conveyed this to IMF Managing Director Christine Lagarde by phone on Thursday.

The IMF is aiming to expand its lending sources to as much as 500 billion dollars in an attempt to prevent the crisis from spreading outside the eurozone countries.

The G20 finance ministers will begin meetings in Washington on Thursday of next week.
Attention is focused on whether the member countries can agree to provide the IMF with the amounts it is seeking from each.

Japan was one of the first countries to pledge funds after the Lehman shock of 2008, with a loan of 100 billion dollars to the IMF.
Sunday, April 15, 2012 01:43 +0900 (JST)

  • and next weekend's G-20 meeting gets set for the spotlight...

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