The IMF has been spewing forth on the possible horrors to come in the UK housing market this week and fretting that financial turmoil and trade imbalances could put paid to the global economy’s strongest run of growth since the 1970s.
But not so fast. Does the world’s watchdog on all matters economic ever turn its critical gaze inwards?
John Chambers, chairman of S&P’s sovereign rating committee, has what he dubs a “modest proposal” for the IMF, which posted a loss in its last fiscal year, and in the first quarter of this one. A modest proposal of the sort that Jonathan Swift had for Ireland.
His report concludes with:
the observation that it is unwise for an institution charged by its 185 member countries to promote exchange rate stability (among other objectives) to delay putting in place a credible remedial plan to redress its finances.
His graph shows how the outstanding credit of the IMF has plummeted in recent years. That is on the one hand a mark of success, says Chambers – emerging markets are stronger and countries are keen not to be seen to be beholden to the IMF. Lex also noted last year that the bull market in risky debt had meant that the IMF’s subsidised loans were no longer so competitive.
But this process has removed the organisation’s source of funding. It meets its rising operating costs from the spread between the interest rate it charges borrowing countries and the risk-free interest rate it pays to wealthy lending states. The fund has a large stash of gold but is restricted from using that to generate income.
An independent committee in January advised that the IMF should sell gold worth up to $6.6bn and invest the proceeds as part of a remedy to its ailing finances.
Not enough, argues Chambers. His nuclear solution would see a recapitalisation of the fund, requiring an amendment to its articles of association.
IMF members should pay into the fund their reserve tranche, the amount proscribed to be drawn down on by the IMF in its lending. That could raise about $81bn, giving the IMF an equity base and a balance sheet structure resembling a financial institution. In short, says Chambers, it would have “sufficient capital and earnings capacity consistent with its policy objectives.” The sweetener, from the point of view of the contributing members or shareholders, is that they should get their gold back, the market value of which is around 85 per cent (and rising) of the reserve tranche.
The finances of the IMF must be placed on a sound footing, argues Chambers, so that it can play its role in assuring international monetary cooperation.
In any event, no one is served by letting this issue fester.
We wonder if that’s a line Swift used.