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No honeymoon for Georgieva as recession fears intensify


Kristalina Georgieva takes over the reins at the International Monetary Fund with high praise from her boss at the World Bank. But she arrives as the financial watchdog faces an array of risks including a deep global recession

Not for the first time, the new head of the International Monetary Fund has taken up the reins of the global financial watchdog in the wake of the unexpected departure of their predecessor.

In fact, one must go back just over 40 years to find a managing director of the IMF who quietly stepped down as their term of office came to an end as Dutchman H. Johannes Witteveen did in 1978.

Jacques de Larosière, Michel Camdessus, Horst Köhler and Rodrigo de Rato all quit early either to take a new job or for personal reasons while Dominque Strauss Kahn was forced out in 2011 over allegations of sexual assault, paving the way for Christine Lagarde’s sudden appointment.

It was Lagarde’s nomination as president of the European Central Bank this year that created the vacancy which enabled Kristalina Georgieva to become the first managing director to be appointed from an emerging or developing economy.

Even before the 66-year-old Bulgarian’s appointment was confirmed earlier this month, the IMF took the unusual step of agreeing to amend the rule that had

previously prohibited the appointment of a candidate aged 65 or over as managing director, and had also prohibited them serving past their 70th birthday. If she serves two terms, she will retire aged 76.

Although she was unopposed — her appointment was subject to a vote by the IMF’s executive board, but she garnered overwhelming support early on — Georgieva will face no shortage of challenges over her five-year term.

Recession risk

She takes over the reins as the IMF faces a cocktail of challenges both immediate and further out on the horizon. The short-term risks lie in the IMF’s role as lender of last resort amid the current turbulence in the global economy, the threat of a trade war and the recent valuations on capital markets.

“The single most important thing facing the IMF in the next few years is going to be to help the leading economies of the world manage what is almost certainly going to be a slowdown — maybe even a recession,” says Masood Ahmed, a former director of the IMF’s Middle East and Central Asia Department who now heads up the Centre for Global Development (CGD) thinktank.

Many commentators fear any slowdown will be even worse than the 2008 global financial crisis that saw central banks cut rates, governments in both the West and Asia unleash extra spending and the IMF re-armed with $1tr of new capital.

But a decade on and none of those tools is available again. Central banks are either at, or close to the zero lower-bound for interest rates and those that are not, such as the US Federal Reserve, are cutting. Governments with large surpluses such as Germany seem reluctant to open their financial war chests.

Ted Truman, senior non-resident fellow at the Peterson Institute for International Economics (PIIE), and a former assistant secretary at the US Treasury, says there would probably be continued European resistance to using Keynesian expansionary fiscal policy. “The question is what will Kristalina do about that,” he says.

“She will have a challenge to demonstrate that she is managing director of the fund for the world as a whole and not just for Europe. She is smart politically so will look for opportunities to declare her independence.”

Ahmed says Georgieva will need to play the same role her predecessor Strauss-Kahn did ahead of the 2010 G20 summit (before his fall from grace) by holding the ring for the major economies to come up with a crisis-control strategy.

“There are going to be a whole range of ideas, some good, some bad, some crazy,” he says. “The IMF should be the place where these ideas are all brought together and discussed and from which national leaders can draw knowledge, experience and comfort about how they should deal with what is going to be a little bit of uncharted territory.”

On top of that are concerns over a trade war. Last month the fund published a new index of trade uncertainty developed with Stanford University and which showed tit-for-tat tariffs imposed by China and the US had sent uncertainty to levels 10-fold higher than in 2008 (see graph). IMF chief economist Gita Gopinath said last month that could potentially cut the level of global GDP by 0.8% in 2020.

Capital resources

Whether or when a major global economic slowdown comes to pass, Georgieva will have an even more immediate issue to oversee — the crisis in Argentina. “Even then once they’ve dealt with Argentina, this is not going to be the last emerging market crisis that she’s going to face in the next two to three years,” Ahmed says.

Georgieva will also have to develop her own strategy and reaction function in the case of a country bail-out. Lagarde was criticised for the way that the IMF joined with the European Commission and the eurozone’s central bank to formulate a rescue plan for Greece. Ten years after the start of the crisis and with Greece still owing about €9.4bn to the IMF, the fund is still assessing the lessons to be learned (see below).

If the fund wants to act as lender of last resort, it will need to have the resources at hand — it is already lending $56bn to Argentina or 13 times the Latin American economy’s quota with the fund.

Georgieva arrives as the long-running debate about replenishing the IMF’s capital resources comes to a head. Fund members are meant to strike a deal by the end of 2019 to ensure it has adequate financial resources for the next decade.

This should take place through a review of the quotas, which are the primary source of IMF financial resources and broadly reflect the size of members’ economies. In 2016 the board of governors said the current review should be completed no later than the 2019 annual meetings.

However, US Treasury Secretary Steven Mnuchin has indicated the US will instead seek to have the quota review wound up, probably to avoid giving China greater voting rights in the IMF. “I know that a number of emerging market countries are unhappy that there will be no overall quota increase and no redistribution of voting rights,” says Truman.

The likely outcome is a deal to replace some or all of the $357bn of members’ bilateral commitments to lend to the IMF and/or to augment the $247bn multilateral New Arrangements to Borrow (NABs). This will supply the fund with capital but leave quotas and voting rights frozen at 2010 levels.

These NABs are payments from 38 members to supplement the fund’s resources and that come up for a five-yearly renewal in 2022. The outcome of that depends on the United States’ agreement to renew and possibly extend its commitments. However, this decision is unlikely to be taken until after the 2020 election.

Nevertheless, Truman says even if recession hits before then, Georgieva will be able to draw on the existing NABs and bilateral promises. “In a crunch the fund is always able to pick up resources,” he says. “My guess is that this time the Chinas of this world in particular will step up and that will strengthen their case for increasing their quota down the road.”

However, he points out that the continued failure to resolve the issue of power and voting rights within the fund is “troublesome” and will undermine the IMF’s legitimacy among emerging economies. “In the short run it doesn’t matter but in the long run it’s pretty serious.”

Climate for change

As well as dealing with short term crises and governance reform, observers at the annual meetings will want to know what imprint Georgieva wants to leave on the fund.

Both at the World Bank where she was CEO until August and as European Commissioner for international co-operation, humanitarian aid, and crisis response from 2010 to 2014, Georgieva focused on the need to protect poorer countries from the impacts of climate change and conflict.

In the statement she made to the fund’s executive board ahead of her interview she said she wanted to see whether tools such as credit lines could be deployed in a wider range of countries. “In my view we should explore if and under what conditions the fund could step up this type of financial support,” she said.

She also told the board the IMF needed to develop more “differentiated approaches” to both lending and capacity-building in lower income countries that fitted with their specific needs and circumstances.

The fund has been accused in the past of applying one-size-fits-all rescue

programmes that critics have said ignore the needs of less developed countries and Georgieva’s comment implies she will bring lessons from the World Bank.

Amar Battacharya, a former director of the Group of 24 countries that represents developing economies, says Georgieva needs to find a much stronger role for the fund on climate.

“While the climate crisis may not appear to be within the one-year horizon, it is the most macro significant crisis that the world faces,” he says. “The IMF needs to ensure that it is doing its part in ensuring that the financial system shifts, that the investment shifts in order to be able to respond more to the low carbon imperative, but also the climate resilience imperative.

“So, a much stronger, greater role for the fund on the climate agenda I think is called for. And I think you will see that from her.”

But Ahmed at CGD fears that the IMF is “behind the curve” in terms of trying to think about how climate will impact the work that the IMF does in macroeconomic management. “This is because it’s part of slightly blinkered thinking that climate is somebody else’s issue,” he says.

“She personally has a long history of commitment on this issue and I think, and I very much hope, that her presence in the IMF will help to shift the organisation towards doing more on this agenda.”

Georgieva has certainly indicated her commitment to the green agenda, telling the executive directors that as well as supporting sound monetary, fiscal and structural policies, her agenda will include issues such as inequalities, climate risks and rapid technological change.

Truman at PIIE says Georgieva earned a great deal of respect for her work at the World Bank and will cross 19th Street to the IMF having brought a level of stability to her former institution.

He adds that her move will help relations between the two institutions that are sometimes a “bit prickly”. “She will hit the ground running faster than Christine Lagarde did given that she came in after that embarrassing episode [with Strauss-Kahn].”

But the highest praise comes from her former boss, World Bank president David Malpass, who said on the eve of the confirmation of her appointment: “Kristalina is hardly my number two but has been my partner and friend. She has very strong economic and financial skills, so she is a loss to the World Bank but a gain to the world.”

IMF shy of starring role as 10th anniversary of Greek crisis looms

Staff at the IMF’s European department took part in a sweepstake for which actor would play their boss, Poul Thomsen, in the film version of the book Adults in the Room by former Greek finance minister Yanis Varoufakis.

“They were guessing who it would be, and they are all people who specialise in playing games,” Thomsen says. “I haven’t seen the film but people like me were written out of the script.”

As the 10th anniversary of the Greek financial crisis approaches, the IMF will be glad if its part as a member of the Troika that organised the €320bn bailout along with the European Commission and the European Central Bank becomes a footnote in the history books.

The IMF only joined in with its European partners after a heated debate within the fund and initially provided €30bn of the first €110bn bailout in 2010 that included €30bn in spending cuts and tax increases.

In 2012, after a change in government and rising fears of a default that would crash Greece out of the euro, the IMF joined with eurozone finance ministers in agreeing a second €130bn bailout that included a 53.5% write down of private creditors and a commitment to further austerity.

Thomsen, who was the IMF’s mission chief for Greece and now director of the European Department, acknowledges the pain Greeks suffered. “Greece had to go through a sharp internal devaluation that took a toll on growth,” he says. “We assumed that [in terms of] GDP per capita, it would take Greece 10 years to return to pre-crisis levels. That was a worst-case scenario, but the outcome has been much worse — 10 years after the crisis GDP per capita is 22% below pre-crisis levels.”

Despite that, Thomsen defends the decision to join the bailout. “We are an institution that deals with sovereign risk to ensure that these things don’t spread and destabilise the whole system,” he says.

“I know people objected but no one could seriously expect the IMF to sit on the side-lines when the mother of all sovereign crises popped up inside a currency union of advanced countries.”

He places the blame for the length of the crisis on the lack of domestic political support for the fiscal reforms that were needed to deal with a state pension scheme that was as generous as Germany’s, and with a system of exemptions from personal income tax that meant the burden fell on a narrow tax base.

The result was that austerity measures needed to cut the debt pile fell on the areas of the economy that were crucial for delivering future economic growth. He acknowledges the IMF underestimated the short-term effects of government spending cuts or tax hikes on economic activity but says: “That might have contributed to the deepening crisis by taking a toll on confidence, but the root cause of this crisis lies much deeper. Contrary to other countries hit by a crisis, there was a fundamental lack of political support for the programme from the outset.”

Although he defends the IMF’s decisions, he says that a repeat exercise will not be needed for the eurozone because of the financial firewalls that the Commission and ECB have put in place.

Looking ahead, Thomsen says Greece has achieved considerable economic stability, a modest recovery is on the way, unemployment has declined, real wages are beginning to recover, sovereign yields are lower and capital market access is being restored. “Greece has got the breathing space it needs to undertake some of these more fundamental structural reforms.” — Phil Thornton