An odd development today was that Christine Lagarde, the head of the IMF, put forward the idea of having members pony up $500 billion for rescue loans, since the agency said it foresees demand of $1 trillion over the next two years and it has only $387 billion uncommitted. It goes without saying that the most of the anticipated need is in Europe.
There are two puzzling aspects of this story. One is that the IMF got a serious and predictable smackdown from the US, since any funding would be a fiscal outlay, which requires Congressional approval, which is just not happening with Washington embracing the new religion of deficit reduction. Even though Eurobanks are really big lenders in the US (they are the providers of cheap corporate loans) and they did get really sick from eating toxic US mortgage instruments, the message from the Administration was tart. Per the Financial Times:
“The IMF cannot substitute for a robust euro area firewall,” the US Treasury said in a statement. “We have told our international partners that we have no intention to seek additional resources for the IMF.”
The UK wasn’t too keen either.
Since the objective was presumably to get some funds into Europe, that means the logical suspects are emerging economies. India and Brazil made positive noises, but advanced economies are cool on getting funding from China and the feeling is likely mutual. While some observers have suggested that China could simply recycle the annual amount it uses to maintain its currency-weighted peg (last estimate I saw was 70 billion euros, but growth and exchange rates have changed since then), the big stumbling block is that China wants concessions in return for its largesse. In addition, the Chinese want politically desirable but unrealistic assurances that its foreign currency holdings won’t depreciate. Since China has said it plans to liberalize its peg, it is guaranteed losses on the currencies it is buying to manipulate its currency level.
And that’s even assuming the Chinese would play ball. They turned down a direct appeal by Sarkozy to invest in the EFSF. Why would China go through an international organization where it is chafing at its level of votes it has when it has the option of dealing directly?
All of the elements of this equation were known in advance. None of these reactions is a surprise. So why did Lagarde announce a measure that was likely to land like a lead balloon?
Let’s consider the second puzzling part: Mr. Market is currently in a good mood because the ECB has been pretty aggressively lending to banks via its three year LTRO, and the banks can use the proceeds to buy government debt. So while the ECB can’t lend to eurozone states directly, it can launder the loans through banks. And at least some readers of this blog have taken to arguing (effectively) that the ECB will act just as the Fed did in the 2007-2008 crisis, it will do what it takes to save the system, in particular, monetize debt.
But if this were true, the IMF would NOT need to fund bailouts in the eurozone. The ECB has the capacity on its own. So Lagarde’s move would seem to say that the IMF does not think the ECB will go the distance, and the IMF will need to step up in a meaningful way. This is consistent with the take of some of my German-press-reading correspondents. Their interpretation of various official remarks is that while the ECB is clearly willing to do more than in the past, it is not willing to balloon its balance sheet to the degree the Fed did.
So Lagarde’s request may indeed be a tacit admission that the IMF knows that the ECB won’t go the distance, as well a precaution, not just on a practical level (to try to have as much firepower as possible) but on the political (to say she did what she could when the IMF is the target of blame-mongering, which is what will happen if/when a crisis breaks loose).
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Good points.
The LTRO beneficiaries are NOT lending to governments but are parking cash in reserve accounts at the ECB.
The big problem in EU is capital more than liquidity with no way for banks to earn it. Add ongoing bank run(s).
It may be that Lagarde is signaling the Germans are going to ‘take steps’, either rein in the ECB or tell the euro to get lost …
OK. I should have been more clear. At least in the case of Italy, the banks did use some of the dough to buy Italian gov’t debt which they then used as collateral with the ECB. So it’s a carry trade.
The IMF cannot cover their defined benefit costs as their economists can retire at 6 figures after 50. China and Russia and Brazil and So. Africa are going to create their own currency that is pegged to black gold and maybe diamonds and cobalt and yellow cake. Good luck Legacy Euro, OoSA and The City.
To pay off the hedge funds who are going to sue greece for going BK.
http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html
Ba Dat Bing!
What a world, no one to big, can lose to much, or boom!
Skippy… that made my day and it was a stinker, from clients to the climate. Ta bob.
Human rights court?
As long as no party to the claim is a real, living, breathing human.
It’s the only civilized way….
http://youtu.be/d98WEUNDXk4
I bet if I dig far back enough, I could find the legal separation of human and person thingy.
Skippy… as usual, its probably some priest, eco ommm ignarus… amen!
Hedge funds suing in a human rights court when austerity is leading to suicides, an inability to import medicine, garbage piling up in the street, and a breakdown in services (like public transport and electricity).
I’d LOVE a really clever lawyer to turn the tables on these jerks and file a counterclaim.
To add to your list (thing that really got me):
http://www.bbc.co.uk/news/magazine-16472310
Yeah, those were my first thoughts when via a type of freudian slip I misread the initial headline that Greece was planning to sue the hedge funds for human rights violations for not playing along with the negotiations.
Seriously!
>> …that while the ECB is clearly willing to do more than in the past, it is not willing to balloon its balance sheet to the degree the Fed did.
But hasn’t the ECB balance sheet already passed that of the FED? And in five weeks the banks can get a second helping from the ECB if they like which means that the ECB has alreday announced to go some additional way if the banks ask for it.
Not during the peak of the crisis.
Ah, OK. And there was I fearing that the peak of the crisis is still ahead of us. ;-)
Markets *want* to believe a solution will be found — Lagarde’s statement is yet another play into that sentiment. One might think that after a series of failed summits and bold statements lacking in critical details, and after Sarkozy’s failed play for Chinese cash last year, cynicism would prevail; it doesn’t yet. But the danger with this happy talk is that a smaller and smaller bit of unexpected bad news–either financial or political–is all it will take to bring things to a screetching halt.
The most logical explanation of the IMF posture is that it saw Europe as an extortion opportunity and tried to grab it. But now that the ECB has found a way to print money, who needs the IMF? Even Treasury knows the IMF austerity routine wouldn’t fly in Europe. No need to funnel more dough to those clowns.
“…while the ECB is clearly willing to do more than in the past, it is not willing to balloon its balance sheet to the degree the Fed did.”
I’m sure you all know this by now, but: ECB’s balance sheet ($3.2T) is not only far greater than the Fed ($2.9T), but at 30x leverage it has the same risk as Lehman. A major distinction is that the Fed has been forced transparent, while the ECB is fully opaque about asset quality.
The ballooning has happened and continues to happen. There was a period of net deflation triggered by mark-to-market events, whence asset liquidation (MTM losses) outran printing on a net basis. That occurred from early October up until XMas–full stride in December (around LTRO).
1. The peak figure as of 6/302009 for the Fed was $3.1 trillion, and perhaps more important, the amount COMMITTED was $6.8 trillion. To my knowledge, the ECB commitments are nowhere near that large.
2. In addition. other government lenders had made similar large commitments. For instance, SIGTARP put the amount committed by the Federal Home Loan Banks, FHA, GSEs, NCUA, and VA at $7.2 trillion. There are no bodies like that in the eurozone, so the ECB would have to step into that breach too.
3. The Treasury also made $4.4 trillion in non-TARP commitments. Again, nothing comparable in the eurozone.
The Fed is already subsidizing eurobanks through its dollar swaps program. Their cost for accessing dollars would be a lot higher without it.
If the $500 billion was raised according to IMF quotas the Treasury would have to cough up $88.5 billion. China’s IMF quota looks really low 4%. That would translate to $20 billion for this program.
I agree this is a squirrely request. Maybe it’s just CYA. Lagarde is asking for funds now so once they are denied she has a rationale for no action later. On its face, the IMF is a secondary player in the Euro action and its request for funds is out of place.
What’s up with Lagarde? Good question. I have different take:
Ms.Lagarde, who serves Mr. Market (or rather, those who own and drive Mr. Market), has been flapping her arms and gums pretty much constantly from the moment she took the chair from her hapless (and set up) predecessor. There is no doubt who still controls the IMF, and Geithner (who of course also serves Mr. Market) quashed any thought of a kinder, gentler IMF role from the get-go, or of any major Chinese participation via that (IMF) mechanism.
You could attempt to argue she is engaged in a last-ditch effort to find some path that doesn’t see French power/prestige subsumed to sheer German economic prowess, but I wouldn’t bite. And it is certainly possible that it’s a signal for another effort to bring China in, but I think she’s just primarily keeping the screws on (no complacency allowed, Draghi). And secondarily, in the context of a badly overdone rally, and with other “officially concerned” voices, tamping down current expectations just a tad. And why not re the latter, as it’s very, very difficult not to see a substantial pullback going into the next key decision points (next LTRO and Greece)even with continuing good US data.
For instance, rumors are flying re the size of the second round of LTRO – just to give an idea of how far, how fast the perceptions have changed, there’s a story on another site quoting sources at UBS to the effect that up to $10 trillion is being bandied about – an absurd amount absent a total meltdown, which just is not in the cards so long as Europe continues to tow the global CB technocratic line (i.e., the Fed line) they have for the past couple of months. But the point is that Mr. Market, and Ms. Lagarde, are making it clear they expect the ECB to do as instructed and jump higher on cue. A crowd pleaser, but not an appearance from Zeus.
I rather suspect China has been frozen out by the US for strategic, as opposed to purely financial, reasons. It seemed evident from the outset that for Greece and others much earlier on, indeed for Germany and France, a deal with China that allowed it to unload a sizable portion of its mountain of US paper would be of great mutual benefit. Seeking assurance that in any deal, they would not be the next one simply screwed over by the CB/banking cartel, is not exactly asking too much. The Chinese are neither stupid nor fiendish. They would go for something reasonable. Still would. But the banking cartel is US-based and neither has a the total lock on China it has elsewhere, nor is inclined to do the strictly reasonable thing anymore – not when so much wealth moves up the chain so fast – over, and over, and over again.
Thanks for sharing your perspective.
I am now of the belief that one of the results of this period (1-3 years) we are entering will be a rearrangement of the world monetary system…..any sort of breadbasket would be better than the gun to the head (support our profligacy) US dollar regime.
And thanks right back.
There’s certainly plenty of activity among/between numerous countries who want to deal sans $$. I would guess these deals continue and expand. Countries are now on full alert (well, at least most) as to the possibility of sudden twists in the plot, and any that can are building buffers and running contingencies.
I still love this one and I think it was unappreciated on the last few days. From http://noahpinionblog.blogspot.com/2012/01/seven-principles-for-arguing-with.html via Rithotlz.com
You have to isolate all variables first in order to get the big one Y to increase. The question is not the identity, it is whether or not Y is the end all and be all. Remove that constraint and you have an unmanaged economy and a definition and no functional finance.
Principle 4: Argument by accounting identity almost never works.
Example: “But your theory is wrong, because Y = C + I + G!”
Suggested Retort: “If my theory violates an accounting identity, wouldn’t people have noticed that before? Wouldn’t this fact be common knowledge?”
Reason You’re Right: Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case the accounting identity acts like a budget constraint. But that is a very rare situation indeed.