The latest partial solution to many problems besetting – well, all kinds of sectors and areas of the world – seems to be to pump money into the IMF (ie, to massively expand the so-called “New Arrangements to Borrow”, a system by which the fund can borrow from its richer members – or, under the EU’s new proposal, reserves-rich members) and no doubt get it to bail out Eastern Europe.
At least, that’s if the US, Germany and other key G20 member countries have anything to do with it. As the FT reports Thursday, US Treasury secretary Tim Geithner ahead of the G20 finance ministers’ gathering in London this weekend called for the tripling of IMF funds – from about $250bn in readily available funds to about $750bn – and urged governments around the world to undertake bigger fiscal stimulus measures.
Ideally, in the eyes of some of the G20, the IMF – borrowing from countries such as Japan, which pledged some months back to make $100bn available if required – could then take the heat.
As Morgan Stanley’s emerging markets strategist Stephen Jen remarks in a Wednesday note: what the G20 can deliver in the way of fiscal stimulus measures is very limited:Risks are rising that the market will, again, be disappointed by what will likely be a non-event… the US will likely propose concerted Keynesian stimulus — larger fiscal and monetary stimulus — by all countries, while Europe will likely prefer to focus on co-ordinated, or even centralised, regulatory reforms.
As Jen correctly observes, probably the single-most important commitment that could be made by the G20, either at the FinMin’s and Sherpas’ gathering outside London this weekend or at the actual G20 leaders meeting on April 2, would be a commitment to at least doubling the IMF’s financial resources to about $500bn.
But where to get the extra money? You can assume that Japan – which only committed the extra funds for the IMF on a “pay-as-needed” basis – is not overly thrilled at the prospect of stumping up the funds, now its economy is falling off a cliff. And as Jen notes, it’s “difficult to imagine other countries stepping up to make an equally large contribution without a commensurate rise in their quota/voting right”.
So, suggests Jen, the IMF should consider selling its gold holdings:Gold prices are high and, with 100.3 million ounces of gold, the IMF could secure close to $100 billion on its own, using its own resources. The EU’s latest suggestion, to be formally proposed this weekend … is for the reserves-rich nations in the world to contribute to the doubling of the IMF’s resources. This will not be straightforward as the EU is (i) refusing to put up most of the financing needs to bail out Eastern Europe and (ii) asking emerging economies to put up the IMF financing without a commensurate increase in their voting rights on the IMF’s Board. In any case, if the G20 manage to reach an agreement to double the funding of the IMF, the trends in Eastern Europe currencies — while still downward sloping I suspect — will show more volatility and be more hesitant. Overall, the Eastern European shorts will be somewhat frustrated by an IMF with $500 billion to lend.
Either way, it seems almost certain the IMF will get a doubling of funds. The EU's proposal - to be put to the G20 finance ministers this weekend - is to ask reserves-rich G20 countries to contribute $150bn or so of the IMF funding needs. As Jen notes:The 'hat-in-hand' approach to ask for funds from the reserves of rich nations (who are among the G20) such as China (with US$1.95 trillion in foreign reserves), Russia (US$384 billion), India (US$249 billion), Korea (US$202 billion), Brazil (US$201 billion) and Saudi Arabia seems to be the more expedient option under the circumstances. There are obstacles to this proposal, however. First, so far, it has been the developed countries (UK, and the EU) proposing that the reserves-rich EM economies foot the bill. We have not yet heard from the latter whether they think they are able or willing to provide such financing, when their own economies are under stress.
Nevertheless, it's "always a good idea to spend other people's money to solve one's own problem", notes Jen. For Germany, with pressures mounting for it to solve the problems of Eastern Europe, it's "brilliant".
By deflecting the financing burden to the IMF, and asking for other EM economies to foot the bill, Germany stands to gain by preserving its fiscal resources. Further, by shifting the focus to the IMF, the EMU may avoid confronting the difficult structural issues such as how best to establish a disciplined federal fiscal framework, and how to avoid diluting the intrinsic quality of the EMU. The US Treasury will, I suspect, not be too impressed with this proposal; neither will China or Saudi Arabia. In any case, this new EU proposal is, in theory, brilliant for Germany. Even the EUR should be helped by this IMF program, if it succeeds in deflecting the financing burdens from the EMU.
As for the (very) short-term impact of all this manoeuvring on currency trading, Jen advises a temporary reduction in all emerging markets currency shorts - and the likelihood of pressure easing on EUR/USD trades.
With regard to Eastern Europe's woes: unlike many other issues arising directly from the credit bubble in the US, Eastern Europe's problems have arguably been made in Europe, and "this means that Western European governments should feel accountable for Eastern Europe", says Jen.
He cites Liaquiat Ahamed, author of "Lords of Finance", who pointed out in an article called "Subprime Europe" in Wednesday's New York Times:For while the losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the continent's problems are politically harder to solve, and their consequences may prove to be much worse... The debts of many Eastern European countries and some banks will have to be written off. Ultimately, as in the case of the American subprime debts, taxpayers will have to foot the bill. But which taxpayers?
As Jen concludes, "we are just starting to explore the political and structural tug-of-war that will take place in Europe".
And the show begins this weekend.
Related links:
US calls for tripling of IMF funds - FT
Liaquat Ahamed: Subprime Europe - NYT