….and the Germans aren’t onside, the Asians don’t buy the plan, the IMF is underfunded, Geithner’s assuming the taxpayer will have to cough up again, and Jean-Claude Trichet remains ominously silent.
Slog’s 2010 charge against IMF vindicated
Asia blew the Gobbledygook20 something of a raspberry in overnight trading: Thai shares fell to their lowest level in a year, after Indonesian shares plunged 11% last week. The Thai currency was down 5.2%, Malaysia’s KLCI shed 2.7%, Philippine shares fell 4.2% and Indonesian shares dropped 4.2%. The Nikkei Stock Average lost 1.8% as the Tokyo market caught up (Friday was a bank holiday), and South Korea’s Kospi Composite fell 0.9%. Hong Kong’s Hang Seng Index fell 1.8% to a more than two year low, while China’s Shanghai Composite was down 0.5%.
I was a little surprised to discover that the Asian markets didn’t respond more positively to Internal Rescue overnight. But then after more mature thought, I remembered that generally speaking, the Far Eastern markets are rather more earthbound than ours. (Dow futures are up 10 points this morning). “Participants really don’t know where to look at the moment; the market is continuing to be thrown around by headlines and rumours, with few ever transpiring into actual action,” Bell Potter, market strategist at IG Markets in Sydney told the Wall Street Journal this morning BST.
Hard to fault that analysis really. And in the cold light of a late-Autumn dawn here in Europe, quite a few holes are already appearing in The Big Plan. Biggest hole by far is the one where Angela Merkel used to be. She’s gone back into the attic to worry, as well she might: the G20 Geithner strategy has not gone down well in the Bundesrepublik.
“It is a cliche I know,” opined The Slog’s ultra-reliable German banking source, “But the leveraging idea gaining traction at the IMF conference over the weekend is nothing less than giving a binge of alcohol to an alcoholic. You ask ‘where is the money?’ but anyone who is analysing the proposals can see quite clearly it is just more borrowing. The German people don’t want even more debt. Merkel will struggle to sell the plan we’ve got, let alone this one”.
Wolfgang Schäuble is out there and making this abundantly clear – just in case anyone had any doubts. He told the media yesterday (Sunday) that he was open to the idea of leveraging Europe’s rescue fund, but said that did not necessarily mean the ECB should provide the extra firepower. A split is obviously developing on the issue of ‘where’ this enormous firepower is coming from: other delegates at the Conference averred that only the ECB could ‘scare’ the markets enough. This left me wondering why the EU would want to scare anyone: aren’t we all wearing brown trousers as it is?
Either way, the issue segues neatly into the second problem: the IMF, Christine Lagarde has told the G-men, has nowhere near enough money to be one of the Big Lenders in the Big Plan. For once, she’s right.
Return with me now to July 2010, when The Slog posted a blog stressing that the IMF was woefully underfunded. No other journalist I’m aware of tumbled the numbers to be found at the IMF site; but more importantly, nobody in the sovereign lending and global banking sectors has done anything about the shortfall since then. The plain truth is that the IMF was starved of funds for years by bankers and governments because, rather like the the builders of the Titanic, having lifeboats seemed pointless on a ship that was unsinkable.
At the time, I wrote:
‘There is powerful evidence in the IMF accounts that the lender is not crying wolf, but genuinely pointing out that, in a serious crisis, it would be as much use as a pin thrown at a steamroller.
Think for a second about, say, bailing out little Portugal. It’s debt to gdp ratio at 9% comes to a little under $2 trillion. Let’s say the EU asked the IMF to take up 30% of the slack on getting that in order: say, halving the debt. At $300 billion, that’s the IMF’s 2010 bailout budget gone. (It is already estimated to have lent Greece some $30 billion).
The IMF’s total resource is $600 billion – which sources suggest it wants to up to $900 billion. Bailing out Spain (even if asked to pick up only 10% of the bust) would zip through the bigger figure. And bear in mind: this is just two probable examples employing very conservative scenarios.’
The scenarios we’re staring at now have become much worse. So neither the IMF nor the ECB have anywhere near enough money to get the show on the road. As I argued yesterday, the ‘magic trick’ of turning 440bn euros of EFSF funding into 2 trillion is a combo of emptying the ECB while borrowing money…..again.
And herein lies the third problem: I have yet to hear the ECB’s boss Jean-Claude Trichet give us the benefit of his wisdom in relation to this ‘let’s stick up the bank’ strategy. The old fox admits that the EU “is at the epicentre of the global crisis”, but as to his specific role in turning the European Central Bank into an overinflated political football, he remains silent. Obviously, he won’t be happy about it: he is a responsible monetary anal retentive who believes (probably rightly) that he is the incorruptible bulwark against insane politicians.
Last Friday, Tim Geithner told the IMF multitudes, “European governments should work alongside the ECB to demonstrate an unequivocal commitment to ensure sovereigns with sound fiscal policies have affordable financing, and to ensure that European banks have recourse to adequate capital and funding to win the full confidence of their depositors and creditors.” So it looks like the Fed Secretary is expecting a hefty chunk of this firepower to come from local Treasuries. If so, I would have to tell him that such an idea is unsaleable in Germany at the moment – and for the foreseeable future.