International Monetary Fund

Claire Jones

France’s tendency to hog the IMF managing directorship is well known. But (as this post by Chris Giles shows) the extent to which it has done so is staggering.

If Christine Lagarde was to complete her five-year term, then French nationals will have served as the Fund’s managing director for 41 years. By 2016, the Fund will be celebrating its 70th birthday, meaning that one out of a total of 187 members would have held the managing directorship for a whopping 59 per cent of the time. Read more

Christine Lagarde, France’s finance minister, launched her campaign to become the next managing director of the International Monetary Fund on Wednesday. Read more

Chris Giles

British politics is in a bit of a tizz this morning about whether David Cameron will block Gordon Brown, his predecessor as PM, as the next managing director of the International Monetary Fund. Mr Cameron had a good line about it on the radio this morning:

“It does seem to me that, if you have someone who didn’t think we had a debt problem in the UK, when we self-evidently do, they might not be the best person to work out whether other countries around the world have a debt and deficit problem”

The thing is, apart from British journalists, no one else was talking about Mr Brown as the next MD of the Fund at all. Read more

Chris Giles

Although the IMF is super-orthodox and Anglo Saxon, when it comes to advanced economy monetary policy, even with a French managing director and chief economist, there are some signs of a softer IMF this spring.

Capital controls
Most attention has focused on capital controls, on which the Fund has issued its first ever guidelines on their use. This is seen as the IMF giving ground to countries, such as China, seeking to build foreign exchange reserves for currency management rather than expose itself to volatile capital inflows. This is a misreading of the IMF’s intentions.

The Fund could not have been clearer that capital controls are only a valid part of the macroeconomic toolkit if a country’s currency is not undervalued, it has sufficient foreign exchange reserves and it is unable to use monetary or fiscal policy. Only one  - foreign exchange reserves – of these three criteria apply to China.

In contrast, in the World Economic Outlook, the Fund complains repeatedly about China’s exchange rate Read more

Chris Giles

If the International Monetary Fund is very hawkish about emerging economy monetary policy, it is super-dovish about the same policies in developed economies. This will please the Fed, many in the Bank of England, but make difficult reading for the European Central Bank.

Fed
The Fund is very relaxed about the recent upturn in inflation and thinks the Fed and its advanced economy counterparts can “accommodate hikes in food and energy prices mainly because the weight of food and energy in the consumer basket is relatively small, people have learned from experience that such hikes do not set off a cycle of inflation, and excess capacity will exert downward pressure on wages”. The Fed will be pleased with its assessment from the Fund.

“With output still significantly below potential, inflation persistently low, and the unemployment rate stubbornly high, continued monetary accommodation is warranted.”

ECB
Jean-Claude Trichet is likely to be irritated by the IMF’s typically Anglo Saxon view that its rise in interest rates when the European economy is still weak was wrong. But the IMF did not try to hide its view Read more

The International Monetary Fund has proposed its first ever guidelines for using controls on flows of speculative capital, legitimising a controversial tool that it once campaigned against.

The guidelines – which are not yet official Fund policy – say that countries can control capital inflows when their currency is not undervalued, when they already have enough foreign exchange reserves, and when they are unable to use monetary or fiscal policy instead. Read more

Chris Giles

Last week Mervyn King, Bank of England governor, and Dominique Strauss Kahn, managing director of the International Monetary Fund spoke about international policy co-ordination. Both speeches are worth reading. Though this is not their intention, both speeches also highlight how difficult it will be to get an agreement on a co-ordinated solution to global imbalances.

Remember, global trade imbalances were an important contributor to the financial and economic crisis because huge amounts of money, which flowed to the US searching for yield, ultimately found its way to borrowers who were wholly unsuitable via lots of dodgy dealing in the financial sector.

In the depth of the crisis, world leaders came together to co-ordinate economic policy to ensure that recession did not become depression. Protectionism was largely avoided; monetary policy moved to unorthodox territory, and fiscal policy moved into super-stimulus mode. As Mr Strauss Kahn said:

“In sum—during the heat of the crisis, the benefits from co-operation were evident, and the costs of cooperation were small.”

But such co-operation diminished as recession became recovery and squabbling has replaced co-ordinated activity at the G20 level. Countries are now engaged in a tortuous discussion of how to measure global imbalances because this distracts them from having to disagree about what to do about them. Read more

Romania is set to obtain a new €5bn precautionary loan deal from the International Monetary Fund and European Union, its president has confirmed. Traian Basescu said in speech on Sunday that funds would serve as a backstop and would only be drawn if strictly necessary. The safety net will remain in place for two years.

The package is likely to reassure investors given the still lingering risk of a spillover from Europe’s sovereign debt crisis and the impetus the IMF may give to further structural reforms in Romania. Analysts also said a precautionary deal would help lower the government’s borrowing costs. Read more

The IMF has tried to rally the troops at a meeting in China, urging central bankers to maintain the international co-operation forged during the financial crisis, and looking to Asia to lead the way.

At an IMF-sponsored meeting of central bankers and regulatory luminaries in Shanghai, an “important consensus” was reached, according to PBoC deputy governor Yi Gang, on the need for international co-operation in ensuring strong macro-prudential policies, because systemic risks “are very likely to spread over borders.” In practice, this means central banks and national regulators taking on more international roles.

Central banks also need to take a broader view domestically, said IMF managing director Dominique Strauss Kahn, seeming to suggest that financial stability would be part of central banks’ remits going forward. “Clearly, conventional macroeconomic policies and macro-prudential tools are intrinsically linked, just as price stability and financial stability are intrinsically linked,” Strauss-Kahn said. “We need a holistic approach, which means a changing role for central banks in the years ahead.” Read more

Ralph Atkins

The International Monetary Fund is already the world economy’s fire fighting team (as well as police force). Does it need even more powerful tools to do its job?

Not according to Germany’s Bundesbank. It has today signalled strong opposition to the idea of a “global stabilisation mechanism” (GSM) that would allow the IMF to offer unlimited credit without conditions to several countries at once.

The idea of equipping the IMF to prevent an economic crisis on one country spreading to others, has been floated by South Korea, and has apparently been received sympathetically in France and the UK. But ahead of this weekend’s IMF meetings in Washington, the Bundesbank is warning that the plan could have the opposite of the desired effect.  Read more

Chris Giles

On Monday, the IMF cannot contain its enthusiasm the UK’s harsh austerity plans. On Thursday it releases research warning fiscal consolidation “will hurt” and “are likely to be more painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them”.

The IMF finds that, “fiscal consolidation equal to 1 percent of GDP typically reduces real GDP by about 0.5 percent after two years”. Does the IMF left hand talk to its right hand?

Sadly for journalists, the answer is “yes”. Both IMF documents hype-up their conclusions to give the appearance of deep contradiction. They are, in fact, consistent.

How so? Read more

Chris Giles

The IMF tends to be a bit sniffy about countries’ economic policies in its annual report on countries’ economies. That often helps finance ministries in domestic political battles to do the right thing.

But with the new government adopting Fund-friendly fiscal policy, the Bank of England insisting it is ready to act either way on monetary policy and a strengthening of financial policies on the way, the Fund has been reduced to a schoolkid’s crush in its latest assessment of the UK economy. I understand from the Treasury that the chancellor is pleased.

Here are some highlights. On the immediate economic outlook:

“This progressive strengthening of private and external demand should underpin a moderate-paced recovery, even as the public sector retrenches.”

Even though the IMF said Read more

Greece is set to receive its €9bn second tranche of its Europe-IMF bail-out, following payment of the first tranche in May. The first quarterly review mission visited Athens from 26 July – 5 August 2010, declaring itself impressed with fiscal and structural reforms. The staff-level agreement made in Greece requires formal approval to release the funds.

Access to capital markets remains a key challenge – Greece can only access short-term funding at the moment – and the review encourages continued policy implementation to regain access:

Our overall assessment is that the programme has made a strong start. The end-June quantitative performance criteria have all been met, led by a vigorous implementation of the fiscal programme, and important reforms are ahead of schedule…

The contraction in the economy is in line with May programme projections: GDP is expected to decline by 4 percent in 2010 and some 2½ percent in 2011. Inflation is higher than expected – we have revised our estimate for 2010 to 4¾ percent – pushed up by indirect tax increases. With no signs of second-round effects, inflation is expected to decline rapidly…

 Read more

Further losses expected from commercial real estate will continue to pressure the US banking system, the International Monetary Fund has said in its first detailed assessment of the US economy. Delinquent commercial real estate loans in the US are rising, and currently estimated at $60.45bn, or 7.87 per cent.

The Dodd-Frank Act was “an important step forward to address the weaknesses exposed by the global financial crisis,” said the report, issued under the Financial Sector Assessment Program. But stress tests carried out by the IMF noted that “the system would likely remain under pressure due to expected further losses in the commercial real estate sector. And in a scenario in which growth dropped and unemployment remained high, a significant number of U.S. bank holding companies—especially small and medium-sized and regional banks—would need additional capital.” Read more

It was hardly a surprise when Ukraine passed the bar for a $15.5bn IMF bailout. Desperate to plug a budget gap and stay financially afloat, Kiev caved in to unpopular but economically necessary austerity measures in recent weeks.

While painful for average cash-strapped Ukrainians, a nod from the IMF should reopen the door to international debt and capital markets. But in which currency?

Ukraine was expected in coming months to try (again) to raise some $2bn on international debt markets through a eurobond issue. Earlier this month, it cancelled a similar sized issue after balking at the prospect of paying more than 8 per cent on 10 year debt. Ukraine now hopes that with the IMF deal in place, it can secure cheaper money. But there’s a growing question for bankers, bond investors and fund managers eyeing the country: could Ukraine opt for rouble bonds instead? Read more

Creating a central fiscal agency for the eurozone is one of two solutions suggested in a new staff paper from the IMF. The current (decentralised) system doesn’t work properly, argues the paper, because buffers are not built up in good times; there is insufficient central risk management; and decentralised crisis response is inefficient, increasing the chance of ad hoc bail-outs.

“The case for binding fiscal constraints in a fiscally decentralized monetary union ultimately rests on the fact that all members’ solvency constraints need to be simultaneously satisfied, effectively exposing the credibility of the common currency to fiscal policy mistakes by the weakest performer,” reads the paper.

Centralising European functions has two proposed elements: a central fiscal agency, and the creation of a single European bond. Such moves would require changes to the Treaty on the Functioning of the European Union. Less radical suggestions, requiring minimal legislative changes, include broader sanctions such as financial penalties in good times, and reduced voting rights in bad times. Read more

Alan Beattie

For most of the last 20 years, central banking was increasingly a soloist affair: one instrument (interest rates), one target (inflation). Since that didn’t prevent a series of asset price bubbles and gigantic leverage nearly destroying the world economy, fashions have shifted to employing a veritable orchestra of instruments including a “macroprudential controls” section – capital requirements, collateral rules, dynamic loan loss provisioning and so forth. The IMF released a paper today which confirms the intellectual shift.

All very well, but putting this new approach into operation is going to be highly complex, not least because of the potential for normal monetary policy and the new macroprudential roles to get mixed up – one of the reasons that monetary policy and financial supervision were separated in the first place. Central banks are going to have to learn how to be independent of themselves.

South Korea is the latest Asian country to start raising rates. Following calls from the IMF, the central bank of South Korea has increased the base rate for the first time since late 2008. A cautious increase of 25bp leaves the rate at 2.25 per cent.

An expected rise in inflation was the main reason behind the move, even though current inflation is below the 3 per cent target. Economists at international banks said they expected a further 50bp increase by the end of the year. Korea’s move follows Malaysia’s increase of 25bp yesterday.

James Politi

The latest warning on the fate of the global economic recovery today came from the International Monetary Fund, which rather ominously stated that the risks of a slowdown have risen considerably in recent months.

In that context, I came across a fascinating – and worrying - note by John Makin, a visiting scholar at the American Enterprise Institute, a Washington think-tank, and former consultant to the Treasury department.

Mr Makin, who is also a partner at Caxton, the hedge fund, is firmly in the camp of economists who believe deflation is emerging as the biggest danger to the economic recovery, and he eloquently lays out his case.  Read more

Alan Beattie

The risk of a slowdown in the global economic recovery has risen sharply, but governments should continue planning to tighten fiscal policy, the International Monetary Fund has said.

Updates to the IMF’s regular world economic outlook and assessment of global financial conditions, released on Thursday, said jitters in financial markets in May and June threatened confidence and growth worldwide. Read more