Back to the future as IMF shrugs off Greek debacle to focus on EMs

The IMF’s independent watchdog gave the fund a strongly worded rebuke over its handling of the eurozone crisis. But analysts doubt this will change the way it deals with the stream of emerging markets beating a path to its door for help

  • By Phil Thornton
  • 03 Oct 2016
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AP Photo/Mark Schiefelbein
The independent report into the International Monetary Fund’s handling of the eurozone financial crisis may have come out as the economic commentariat was heading off for their summer holidays but its critical conclusions certainly hit home.

The immediate reaction ranged from “lacerating” to “damning” while one analyst said it gave credence to the Fund’s harshest critics.

The report by the Independent Evaluation Office (IEO) criticised both the way the Fund’s officers failed to foresee the magnitude of the risks in the eurozone and the way that they handled the resolution of the crisis especially in Greece.

In particular it censured the Fund’s failure to push for restructuring of Greek debt, its over-optimistic forecasts for the outcome projections and how it became too close to eurozone policymakers to act as an independent assessor.

Overall it said: “The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped to create the perception that the IMF treated Europe differently.”

This final conclusion tapped into a deep well of resentment that has built up among both emerging and developing countries that has often surfaced at previous IMF annual meetings.

Countries in east Asia and Latin America in particular feel that the IMF, which has been run by a European since it was founded 70 years ago, treated the eurozone very differently from the way it responded to their regional crises in the 1990s and 1980s, respectively.

In particular, the idea that the IMF overcame its own preference for a restructuring of Greece’s debt — the medicine it applied to many emerging markets — but instead provided exceptional access financing to Greece will stick in their gullet.

IMF managing director Christine Lagarde, a former French finance minister, was quick to repudiate the criticisms saying that the overall conclusion she drew was that that the Fund’s involvement in the euro area crisis programmes had been a “qualified success”.

But for many observers, the Greek debacle has left a sour taste. Luiz Vieira, co-ordinator of the Bretton Woods Project (BWP), a civil society organisation that monitors the IMF, is not convinced that if a similar crisis were to break out again in another peripheral economy such as Portugal or in Italy that the IMF would act differently.

“I think the IMF would be similarly pressured into doing something that they may not want to do. They may feel it is not within the bounds of their mandate,” Vieira says.

Jan Toporowski, economics professor at the School of Oriental and African Studies at London University, doubts that emerging markets will benefit from IMF largesse.

“They won’t treat them as nicely because they don’t have the financial infrastructure that the ECB and the European institutions provide,” he says. “The IMF can’t act as a central bank and create credit but can only refinance existing debt.”

RED HERRING

However, the IMF has supporters in the private sector. Holger Schmieding, chief economist at Berenberg Bank, who held the same post at Bank of America Merrill Lynch, says debt restructuring is a “red herring”.

The IMF should have made clearer that it was not providing debt assistance from the outset. “Unlike all other countries outside the eurozone Greece has someone with a very deep pocket standing behind it,” he says.

“This has been a red herring from the beginning and the idea that IMF should have gone for debt relief early is misplaced. That is very different from other places where their major function is indeed the money and not just the advice.”

But this whole debate will move centre stage as the IMF is called in on an increasingly frequent basis for help by what was seen as its traditional clientele before the eurozone countries — emerging and developing economies with a current account and fiscal deficits.

The continued anaemic global economy combined with the slump in commodity prices has undermined the financial stability of countries across the globe.

The IMF has been particularly active in the Middle East where the collapse in the world price of oil combined with a surge in terrorism and a resultant collapse in tourist revenues has pushed many countries into severe current account deficits.

The largest of these interventions was a $12bn three year loan to Egypt in August in the wake of the two terrorist-suspected plane crashes whose impact has decimated its tourism industry.

Egypt is estimated to have a gross external financing requirement of around $25bn (7.5% of GDP) over the coming year alone to finance its current account deficit and to roll over maturing external debt.

Meanwhile on the other side of the Red Sea, Jordan secured a $723m Extended Fund Facility loan in August. In North Africa Morocco has secured a two year, $3.47bn liquidity line to provide insurance against external shocks in light of heightened uncertainty worldwide. In June Tunisia secured a $2.9bn loan. Iraq has received a $5.3bn loan.

In other emerging market areas such as central and eastern Europe (Albania, Kyrgyz Republic, Moldova and Serbia), sub-Saharan Africa (Central African Republic, Madagascar, Malawi, Nigeria, Rwanda, Sierra Leone), central Asia (Afghanistan) and south Asia (Sri Lanka) as well as Latin America (Colombia, Ecuador) are among the countries to be under the IMF’s ambit this year alone to a greater or lesser extent.

REVISITING NEOLIBERALISM

The key issue for finance ministers in affected countries, officials at the Fund and outside commentators and watchdogs is whether the IMF has learned from Greece and its experience in other crises.

The Fund has been on a long journey since the 1980s and 1990s when it was accused of making the crises in Latin America and East Asia worse by imposing harsh conditions in exchange for financial assistance.

The package of measures became known as the “Washington consensus”, which included free trade, floating exchange rates, free markets and macroeconomic stability particularly in the form of a cut to government spending and subsidies and higher taxes.

While the Washington consensus has been consigned to the dustbin many long term observers are worried that the Fund is still imposing traditional harsh policies.

Schmieding at Berenberg says that the IMF underestimated the severity of the Greek economic shock from the start of the programme. “The way that Greece has developed has hurt to some extent the credibility of all the institutions involved,” he says.

“The conclusion that should be drawn from that is any fiscal adjustment should be spaced over time or that the IMF should put much more emphasis on the pro-growth structural reforms that are creating opportunities for new jobs rather than just slashing public expenditure or raising taxes.”

Away from the arguments over Greece there are signs that the IMF is having a change of heart. Earlier this year an article in IMF’s in-house journal, Finance & Development, by Jonathan Ostry, a deputy director at the research department, and IMF colleagues conceded that “some aspects” of neoliberalism had “not delivered”.

While Ostry and his colleagues at the Fund say there is “much to cheer” at what neoliberalism had achieved, it has been seen as a significant admission.

He says that the benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries while the costs in terms of increased inequality are “prominent”.

“Such costs epitomise the trade-off between the growth and equity effects of some aspects of the neoliberal agenda,” they write. “Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.”

They also find that “austerity policies… generate substantial welfare costs … [and] hurt demand”, thus undermining overall growth.

PRO-CYCLICAL MEASURES

The IMF has since rowed back from its calls on crisis-hit countries to remove capital controls in times of crisis and has also acknowledged the growth contribution that labour unions can play in developing countries.

Vieira at BWP says that the neoliberalism article is a sign that the IMF’s role has changed. “The historic role of the IMF to support the North American and European dominance of the world economy is shifting so that different things are required of the IMF,” he says.

“People are thinking about different approaches but it is not something independent to the IMF as they are reacting to the views of their membership to these events as it percolates up to staff and the board.”

He says he hopes that the IMF will react differently to future crises and give countries more “policy space”. “Rather than adopt counter-cyclical approaches they can adopt pro-cyclical ones as these austerity measures disproportionately hit the poor and particularly women.”

The announcement of the $723m loan to Jordan talks about “advancing fiscal consolidation to lower public debt” but then also includes measures to boost youth and female employment and “enhance the conditions for more inclusive growth”.

Similarly the much larger Egyptian programme includes conditions to bring down budget deficit and debt but also includes strengthening the social safety net to protect the poor and vulnerable groups. “Social protection is a cornerstone in the programme,” the Fund declared in its August announcement.

Vieira says the issue is whether the rhetoric translates into reality. Research by three universities in the UK and New Zealand indicates that there is still a mismatch.

They analysed more than 55,000 policy reform conditions included in all IMF programmes between 1985 and 2014 and found that the number of conditions that affected issues such as cutting budgets and reducing wages had risen between 2008, when it reached a historic low, and 2014.

“The return of structural adjustment brings these decades-old criticisms of IMF programmes back to the fore,” they concluded. “The scale and pace of reforms to the IMF’s practices do not match the organisation’s rhetoric.”

Schmieding at Berenberg admits he is doubtful whether the IMF will learn what he calls the “big lesson” from Greece. “The emphasis should be less on the fiscal numbers,” he says.

In particular he believes that the focus in a crisis resolution should be on freeing up the supply of the economy rather than on slashing demand, which he acknowledges is traditionally the easiest way if you have an external deficit and cannot borrow any more.

“What you really need in the long run to do is to work on supply. I’m not convinced that the IMF has taken that lesson on board enough. But the more you do on supply the fewer nasty things you have to do to contract demand,” he says.

The issue is unlikely to come up at this week’s annual meetings because few countries that are in the middle of negotiations or about to ask for a programme will want to rock the boat.

However, in a speech over the summer David Lipton, the IMF’s first deputy managing director, acknowledges that the global financial crisis had left people feeling the effects of income inequality, stagnating wages and a lack of job security; and they sense and fear market volatility.

He says that much of what needed to be done requires action at the individual country level.

He points to a three-pronged approach to boosting growth consisting of fiscal policy, monetary policy and structural reforms aimed at stimulating growth in both the short and long term.

“While this remains the right recipe, it is clear that individual governments see limits to their room for manoeuvre and so far have not made sufficient progress,” he said.

MACROECONOMIC IMBALANCE

But it is this issue of the balance between fiscal and monetary policy that will be more of an issue for debate at the meetings. Ahead of the summit of the G20 leaders in Hangzhou, China, in September IMF managing director Christine Lagarde said that monetary policy was “increasingly stretched” — or at close to 0% across the Western world in plain English.

“This means fiscal policy has a larger role to play,” she said. “Where there is fiscal space, record-low interest rates make for an excellent time to boost public investment and upgrade infrastructure.”

The idea that governments should increase spending — and therefore either take on debt or reduce their fiscal surpluses — is very different from the messages from the IMF in the past. However, Schmieding at Berenberg doubts that the IMF meetings will become a rallying point for advocates of another round of Keynesian economic stimulus.

Lagarde’s reference to surplus countries is a thinly veiled plea to Germany and China in particular to unlock their vast budget surpluses and spend money. Schmieding, whose bank is German, agrees that chancellor Angela Merkel will embark on a fiscal stimulus programme but only because Germany can afford it.

“Domestic political dynamics suggest that it will get one,” he says. “ The advice of the IMF is being heeded but it has nothing to do with the IMF: if you have money you will end up spending it, which is exactly what Germany is doing.”

Andrew Kenningham, a senior global economist at consultancy Capital Economics, says there has been a “significant shift” in the rhetoric surrounding fiscal policy over the past few months.

“The case for fiscal stimulus has become more compelling,” he says. “Partly as a result, we now expect advanced economies overall to benefit from a small fiscal boost in the next couple of years.”

Schmieding predicts that there will be individual fiscal stimuli in the US, thanks to pledges of infrastructure from both candidates Hillary Clinton and Donald Trump, in the UK in its post-Brexit autumn statement, in France and Spain and Italy with those countries missing their fiscal targets.

Japan can be added to the list for its decision to postpone its sales tax hike and unveil a large fiscal stimulus  in response to weak growth and inflation data.

But Schmieding doubts that the IMF is the cause of this Damascene conversion. “We will have a modest fiscal stimulus in many countries but none of that has to be with international co-ordination or with any advice from the IMF.”

The IMF may be seeking to gently mollify the way that its deals with emerging market countries and to pioneer a shift among rich countries’ macroeconomic policies but as chief economist Maurice Obstfeld said in an unusual public response to the neoliberalism article, the Fund is going through “evolution not revolution”.

  • By Phil Thornton
  • 03 Oct 2016

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 JPMorgan 94,925.33 384 8.39%
2 Citi 87,531.58 331 7.74%
3 Bank of America Merrill Lynch 84,341.49 288 7.46%
4 Barclays 75,288.19 241 6.66%
5 Goldman Sachs 68,504.71 208 6.06%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 Bank of America Merrill Lynch 10,650.87 23 11.13%
2 Deutsche Bank 8,169.49 17 8.53%
3 HSBC 6,243.46 23 6.52%
4 Citi 4,355.35 13 4.55%
5 SG Corporate & Investment Banking 4,273.37 17 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 JPMorgan 7,281.63 28 8.86%
2 Deutsche Bank 5,994.13 30 7.29%
3 UBS 5,678.69 26 6.91%
4 Citi 4,934.67 35 6.00%
5 Goldman Sachs 4,802.16 24 5.84%