Why do I hear echoes of "Europe is Doomed!" from an economist whom I often admire?
Is he right about the IMF, and could we have failed to see some of the pieces of the puzzle here? Capitalism searches out the darkest corners of human potential, and mainlines them.
"Going to the IMF" brings with it a great deal of stigma. European governments are unwilling to take such a step as it could well be their last. Greece and the other weak eurozone countries need euro loans, not any other currency. If the IMF lent euros, that would be distinctly awkward - as this is what the European Central Bank (ECB) is supposed to control.
Greece and the other weak eurozone countries need euro loans, not any other currency. If the IMF lent euros, that would be distinctly awkward - as this is what the European Central Bank (ECB) is supposed to control.
Or, to give the cynical view -- since the IMF operates as a loan shark to 'third world' countries, perhaps they feel the odds of Greece signing over its public infrastructure is low. Maybe we can eventually make language a complete impediment to understanding. -Hobbes
Iceland imploded because of its foreign currency exposure - that is not going to happen to the Eurozone countries in any event. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
The IMF is ill-equipped to help, full stop. Its track record over the last twenty years consists virtually exclusively of turning disasters into catastrophes.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
I'd need to get more info on the reasoning here, because I don't see anything [Europe.Is.DoomedTM Alert] about noting that the IMF is ill-equipped to help European countries.
Caution: this is a long post (about 3,000 words). The main points are in the first few hundred words and the remainder is supportive detail. This material was the basis of testimony to the Senate Budget Committee today by Simon Johnson.
A. Main Points ... But thinking in terms of these headline numbers masks a much more worrying dynamic. A major sovereign debt crisis is gathering steam in Europe, focused for now on the weaker countries in the eurozone, but with the potential to spillover also to the United Kingdom. These further financial market disruptions will not only slow the European economies - we estimate growth in the euro area will fall to around 0.5 percent Q4 on Q4 (the IMF puts this at 1.1 percent, but the January World Economic Outlook update was prepared before the Greek crisis broke in earnest) - it will also cause the euro to weaken and lower growth around the world. There are some European efforts underway to limit debt crisis to Greece and to prevent the further spread of damage. But these efforts are too little and too late. The IMF also cannot be expected to play any meaningful role in the near term. Portugal, Ireland, Italy, Greece, and Spain - a group known to the markets as PIIGS, will all come under severe pressure from speculative attacks on their credit. These attacks are motivated by fiscal weakness and made possible by the reluctance of relatively strong European countries to help out the PIIGS. (Section B below has more detail.) Financial market participants buy and sell insurance for sovereign and bank debt through the credit default swap market. None of the opaqueness of the credit default swap market has been addressed since the crisis of September 2008, so it is hard to know what happens as governments further lose their credit worthiness. Generalized counter-party risk - the fear that an insurer will fail and thus bring down all connected banks - is again on the table, as it was after the collapse of Lehman. Another Lehman/AIG-type situation lurks somewhere on the European continent, and again G7 (and G20) leaders are slow to see the risk. This time, given that they already used almost all their scope for fiscal stimulus, it will be considerably more difficult for governments to respond effectively if the crisis comes. In such a situation, we should expect that investors scramble for the safest assets available - "cash", which means short-term US government securities. It is not that the US has anything approaching a credible medium-term fiscal framework, but everyone else is in much worse shape. ...
...
It is not that the US has anything approaching a credible medium-term fiscal framework, but everyone else is in much worse shape.
This is silly. Germany is clearly not in a worse shape, for one. and Germany is the country that matters here. In the long run, we're all dead. John Maynard Keynes
In such a situation, we should expect that investors scramble for the safest assets available - "cash", which means short-term US government securities. It is not that the US has anything approaching a credible medium-term fiscal framework, but everyone else is in much worse shape.
After all, who cares about medium-term fiscal prospects when you're trading three-month bills? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
A major sovereign debt crisis is gathering steam in Europe, focused for now on the weaker countries in the eurozone, but with the potential to spillover also to the United Kingdom.
The risk of a triple crisis - a banking crisis, a currency crisis and a sovereign debt default crisis - is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity. ... How and to what degree is this relevant to the UK? Iceland is a tiny country (about 300,000 people - the size of the city of Coventry). The UK has a population of over 61 million. Nevertheless, the UK is a small open economy for economic purposes: it is a price taker in the markets for its imports and exports and in global financial markets. Its share of world GDP in 2007 was 3.3% (at PPP exchange rates - somewhat higher at market exchange rates). Its currency is no longer a serious world reserve currency. The UK banking sector's balance sheet is about half the size of the Icelandic banking sector as a share of annual GDP: just under 450% at the end of 2007 as compared to Iceland's almost 900%. Switzerland, another vulnerable country (small, no currency with global reserve currency status , large banking sector relative to GDP and limited central government fiscal capacity) has a banking sector balance sheet of just over 650% of annual GDP. With UK annual GDP around £1.5 trillion, that gives us a banking sector balance sheet of well over £ 6 trillion.
How and to what degree is this relevant to the UK? Iceland is a tiny country (about 300,000 people - the size of the city of Coventry). The UK has a population of over 61 million. Nevertheless, the UK is a small open economy for economic purposes: it is a price taker in the markets for its imports and exports and in global financial markets. Its share of world GDP in 2007 was 3.3% (at PPP exchange rates - somewhat higher at market exchange rates). Its currency is no longer a serious world reserve currency.
The UK banking sector's balance sheet is about half the size of the Icelandic banking sector as a share of annual GDP: just under 450% at the end of 2007 as compared to Iceland's almost 900%. Switzerland, another vulnerable country (small, no currency with global reserve currency status , large banking sector relative to GDP and limited central government fiscal capacity) has a banking sector balance sheet of just over 650% of annual GDP. With UK annual GDP around £1.5 trillion, that gives us a banking sector balance sheet of well over £ 6 trillion.
officials in London suggested the risk of financial contagion from the Greek crisis meant that it should not be regarded as a matter exclusively for the 16 eurozone countries
But, then again, the US has veto in the IMF and it is only natural that the US Congress would want to be informed of the US government's line at the IMF and possibly instruct the executive what they think the US should be advocating at the IMF.
So, the question becomes, why don't European parliaments have similar discussion in public view? When Spain was invited to the G20 meetings all you could read about in the Spanish press was whether or not Spain would go, and how pleased everyone was that Spain finally went, but not one line about what exactly Spain's position would be at the meetings, or even calls for this position to be made explicit. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
