International Monetary Fund (IMF) and World Bank, known popularly as the Brettonwoods twins and the last resort of economies in distress held their annual meetings in Washington on Sunday Sept 25, amidst expectations that a plan of action would be unveiled to avert a default by Greece and the threat of a new financial meltdown and global depression. Stock markets have been plummeting, mounting debts have been prompting downgrades for western banks and western governments, and GDP growth across the world has either hit the pause button or downslide with financial system fragility, deep faultlines in economy, and high unemployment.
In short, as the “Consolidated Multilateral Surveillance Report” of the International Monetary Fund (IMF) said, “the global economy has entered a dangerous phase in which negative developments could quickly run beyond the control of policy makers.” It has voiced reservations on the euro zone avoiding a series of sovereign and bank defaults. Even if such a danger is averted, the world would see “an anaemic recovery in major advanced economies and a cyclical slowdown in emerging economies,” in which “many economies will continue to struggle with very high unemployment.”
IMF report’s prescription is urgent policy response to ‘decisively reduce rising uncertainty and fear.” The current lending capacity of the IMF would have to be increased to address the risks which have “increased sharply”, but it pales in “comparison with the potential financing needs of vulnerable countries and crisis bystanders,” IMF Managing Director Christine Lagarde told the Sunday gathering. He warned that debt burdens and capital-weak banks "could actually suffocate the recovery" in the world economy and spark more crises in the poorest countries
World Bank President Robert Zoellick pressed all the advanced economies for action, saying “Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world.Not to do so is irresponsible.”
US Treasury Secretary Timothy Geithner said the threat of cascading default, bank runs and catastrophic risk must be taken off the table.
Yet, when it came to administering the medicine, the good doctors appeared clueless in reading the prescription. No specific measures were unveiled to avert a default by Greece and global depression. Only a promise was held out that bailouts to salvage the euro would be announced at G20 summit to be held in Cannes, France on November 4. “Today we agreed to act decisively to tackle the dangers confronting the global economy,” the statement said and added “We will therefore act collectively to restore confidence and financial stability, and rekindle global growth.”
One reason for this bland statement is discord and tensions between the US and the European Union, between countries within the EU, and between policy makers and the banks.
The US and the IMF are pushing for the European Union to dramatically expand the financial reach of the 440 billion euro European Financial Stability Facility (EFSF), upon which agreement was reached last July 31. They are proposing that the rescue fund be leveraged by allowing it to coordinate with the European Central Bank—which has the ability to print Euros. Plainly it is a call for injection of capital by ECB into troubled European banks and guarantees by the EFSF guarantee against any losses. This was the route adopted by the Bush and Obama administrations to bailout troubles US banks after the housing bubble burst to the chagrin of the Federal Reserve.
Germany, which is the White Knight of sorts in Europe and ECB officials themselves are not impressed by the trans-Atlantic message. German Finance Minister Wolfgang Schäuble said “There are other possibilities than going to the ECB.” ECB Governing Council member Ewald Nowotny added: “It is not helpful that we have an avalanche of new proposals every week.” Germany favours the restructuring plan which was agreed in last July as part of a second bailout fund. The plan, inter alia stipulates that private holders of Greek government bonds would have to accept a 50 percent discount on the face value of their investments, up from the 21 percent discount agreed to earlier. It may look like a steep loss in bond yield but will only be five percent loss in the end while enabling Greece to avoid defaulting on its debts, according to economists at Barclay’s Capital.
Seconding Wolfgang Schäuble argument is a leading German banker, who has large holdings of Greek debt. Josef Ackermann, CEO of Deutsche Bank, categorically ruled out re-opening the July agreement. “It is not feasible to reopen the agreement,” said Ackermann, who also heads the Institute for International Finance.
Notwithstanding all this posturing, there is agreement that Greece must be saved. And that Portugal, Ireland, Italy and Spain which are on the debt default border land must be saved from a similar fate, even while shielding the better off- euphemism for German banks- from the impact of restructuring of Greece debt.
On the eve of the IMF-WB annuals, Greek’s social democratic government announced a slew of austerity measures that steps ranged from 50,000 job cuts in the public sector to new taxes aimed at curbing consumption and steep reduction in wages and pensions, and new consumption taxes. Critics consider these measures as a signal to the IMF, European Commission and European Central Bank (ECB) that Athens would be willing to go the extra mile to please the lenders. It is also an appeal to them not to hold back the eight billion euro instalment of the rescue fund (that was set up in 2010) since Greece will run out of money to pay wages and pensions by mid-October if the funds are not approved by October 8.
While in Washington for the IMF- World Bank meetings, Greek Finance Minister Evangelos Venizelos pledged that his government would take the necessary steps to satisfy the banks and financial organizations “at any political cost.” Yes, the key to turn around the Athens scrip is willingness to bear the costs. As the EU’s big brother, Germany also will have to bear the cost.
-malladi rama rao
