Posts Tagged ‘IMF’

Greece just moved from a “developed” to a “developing” nation

July 1, 2015

It has never happened before – certainly not since the 2nd World War –  that a developed economy defaults on payments to creditors and slides back to be a developing nation. But now Greece joins Argentina, the Ivory Coast, the Dominican Republic, Russia, Ukraine and Ecuador, among other developing countries, as countries which have defaulted on loan repayments to international creditors.

Greece has however defaulted many times before; in 1826, 1843, 1860, 1893, 1932 and now in 2015.

Reuters:

The International Monetary Fund on Tuesday confirmed Greece had not made its 1.5 billion euro ($1.7 billion) loan repayment to the Fund, making it the first advanced economy to ever be in arrears to the Fund.

The missed payment, the largest in the Fund’s history, is equivalent to a default, in that both imply a breach of Athens’ obligations. IMF spokesman Gerry Rice said Greece can now only receive further IMF funding once the arrears are cleared.

The Greek default is not only an indictment of the past profligacy and mismanagement in Greece but also of the EU’s (and the Eurozone’s) recklessly expansionist policies.

It is time, I think, for Greece to return to the Drachma. And then an orderly Grexit – as orderly as may be possible. The Euro is too far ahead of its time. As of now it is a failed experiment and the Eurozone needs to shrink sharply, if not to be entirely dismantled.

If the Deutschmark is not to return then at least a N.Euro and a S.Euro are called for?

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Greek deal will be done: Bread rather than Guernica

June 22, 2015

I was listening to Swedish, UK and German radio this morning and one could be forgiven for being utterly depressed. But surprisingly, the blackness went over the top. It was too much. The picture being painted by all the pundits and commentators seemed a little surreal. The picture left in my mind is of  Salvador Dali’s “Basket of Bread” rather than Picasso’s “Guernica”.

bread rather than destruction

bread rather than destruction

So instead, I am feeling remarkably upbeat. Maybe I am just an optimist and would rather see bread than destruction. But I am sufficiently “moved” that I shall make a forecast for the next few weeks.

Tsipras will make statements which seem like that he will do something about curtailing pensions. These will be worded sufficiently loosely such that the Eurozone Finance Ministers can accept the assurances and still have their posteriors covered. Tsipras will have sufficient face-saving text so that he can argue domestically that pensions will not actually be cut when the turnaround occurs and that the turnaround is just around the next corner (or maybe the one after that).

The ECB will make further emergency arrangements so that the current run on Greek banks will not be unmanageable. (By some accounts Greek banks have seen some €20 billion withdrawn).

The payment due to the IMF will be paid.

A short-term (6 month?) deal will be done and the whole problem of a non-homogeneous and splintered Eurozone will be patched up for the short term

Which is good for the short term but which, in the long term and if the Eurozone does not become homogeneous, will give a very big bang when it implodes.

There is a little more brinkmanship to go through until the Greek payment actually falls due at then end of the month.  But I expect a real jump in European markets – and followed by the Asian markets – when Greece makes the payment due and a “deal” is announced. Probably by the end of June.

Maybe it is time to pick up some equity bargains.

US is not amused at the rise of AIIB as rival to World Bank

March 20, 2015

The US is not amused.

The list of countries signing up to the Chinese-led initiative which would rival the World Bank is growing as Japan and Australia have now indicated that they too will join. In the last week the UK, Germany, Italy, France and Luxembourg indicated that they too would sign up to the Asian Infrastructure Investment Bank (AIIB) in spite of dire warnings from across the Atlantic. South Korea is also expected to sign up now that the UK and Japan have.

(Reuters)Japan signaled cautious approval of the China-led Asian Infrastructure Investment Bank (AIIB) on Friday and said for the first time that, if conditions were met, it could join the institution that the United States has warned against.

Australian Treasurer Joe Hockey said there was “a lot of merit” in the bank and the Sydney Morning Herald newspaper reported that Canberra could formally decide to sign up when the full cabinet meets on Monday.

Japan, Australia and the South Korea, all major U.S. allies, are the notable regional absentees from the AIIB. The United States, worried about China’s growing diplomatic clout, has questioned whether the AIIB will have sufficient standards of governance and environmental and social safeguards.

The US  (US Treasury department and the US Congress) was not amused in October last year when “India along with 20 other countries today signed an agreement to become founding members of the China-backed Asian Infrastructure Investment Bank (AIIB) to aid the infrastructure development in the Asian region and reduce the dependence on Western-dominated World Bank and IMF.”  The authorised capital of AIIB is to be USD 100 billion and the initial subscribed capital is expected to be around USD 50 billion. The paid-in ratio will be 20 per cent. The AIIB is to be headquartered in Beijing and it is hoped that it will be operational by the end of 2015.

It was the US opposition to allowing any reform of voting rights at the International Monetary Fund which had irritated and annoyed China and other Asian countries which had led to the Chinese initiative. The proposed – relatively mild – reforms for the IMF were agreed at a G20 meeting in 2010 and have been ratified by all European countries. But the US has not yet ratified these changes. It has not been prepared to permit any weakening of its dominance in the World Bank and the IMF.  The founding members of the AIIB members in October 2014 were China, India, Vietnam, Uzbekistan, Thailand, Sri Lanka, Singapore, Qatar, Oman, the Philippines, Pakistan, Nepal, Bangladesh, Brunei, Cambodia, Kazakhstan, Kuwait, Lao PDR, Malaysia, Mongolia and Myanmar.

The US has followed a strategy of criticising the possible environmental and social irresponsibility of the new institution which is intended to focus on transport, energy and telecommunications infrastructure. The US has also raised doubts about the transparency and governance of the proposed new institution and warning other countries not to join. But what was a relatively minor and mainly regional matter has been blown-up by the US opposition. The US strategy of “bad-mouthing” the AIIB seems to have back-fired. Some of the support now coming from countries traditionally seen as US followers can be considered a direct reaction to the bad-willed US opposition. 

From all accounts, the Obama administration has expended serious energy trying to dissuade its allies from joining ……. With the defection of the UK, however, it appears likely that Washington’s carefully constructed coalition will gradually unravel—both Australia and South Korea are apparently reconsidering their earlier reluctance to join the bank and could well use the UK’s decision as political cover for deciding to join the bank.

The European countries (and Japan and South Korea) have realised that their companies must have the chance of bidding for future AIIB infrastructure projects. For at least the next two decades – and maybe longer – there has to be a massive infrastructure investment in Asia. The US will eventually have to join the AIIB or to step aside and to let it proceed. US companies hoping to bid for Asian infrastructure projects would prefer that the US join. But now the US administration has the additional task to do some “face-saving” while it backs away from its ill-considered strategy of opposition.

 

Bad forecasts and grovelling apologies have become standard for the IMF

June 9, 2014

It’s not what you say but what you do that counts.

Economics is clearly not a science though many would like us to think it is. But with the IMF it is just apology followed by apology for wrong forecasts and bad advice. It smacks of forecasts made to suit a political agenda or just plain incompetence. Based on their track record nothing that is said by Christine Lagarde or the International Monetary Fund that she heads can be taken very seriously. She spends more time apologising than would seem to be healthy.

The latest apology by Christine Lagarde has been called “grovelling”:

‘Do I have to go on my knees?’: grovelling apology from IMF head for incorrect warnings on UK economy

Head of the International Monetary Fund, Christine Lagarde, accepts her organisation’s low growth forecasts for the UK economy were wrong.

Christine Lagarde has asked whether she needs to grovel on her knees before George Osborne over the IMF’s incorrect warnings on the UK economy, as she warned against raising taxes.

“Do I have to go on my knees?” Ms Lagarde, the head of the International Monetary Fund said, when asked whether she has apologised to George Osborne over the fund’s low growth forecasts and calls to adopt a ‘Plan B’ of less austerity – calls the body now accept it got wrong.

In a blow to Ed Miliband, who has called for higher rates of personal taxation and new levies on banks, Ms Lagarde said tax rises are “not recommendable”.

But this is not an isolated incident. Time after time the IMF announces that some country has got its economic policy wrong and warns of dire consequence if the country does not follow the advice of the IMF. Then – a few months later – they admit that the IMF got it wrong. And ususally by then they have caused much misery and wailing and gnashing of teeth.

12th January 2012: Does the EU-IMF Owe Ireland an Apology?

2nd June 2012: IMF apology to Greece after Lagarde remarks – YouTube

3rd January 2013: An amazing mea culpa from the IMF’s chief economist on austerity

6th June 2013: For hard-hit Greeks, IMF mea culpa comes too late

In any normal corporation Christine Lagarde and the IMF’s Chief Economist,  Olivier Blanchard would have been sacked a long time ago. And to think that some are suggesting Christine Lagarde for the top job in the EU only reduces my respect for the IMF and the EU.

 

Does the solar cycle impact the global economic cycle?

April 2, 2013

That weather and climate are affected by solar cycles is highly likely even if it is not part of the mainstream climate theories (though I think it is patently obvious). That climate and weather affect food production is clear and that this must impact the economic cycle is not so far fetched. Yet it has never been part of mainstream economic thinking that there will be a connection from the solar cycle to global economic cycles. Back in 1801 William Herschel observed the apparent connection between the sunspot cycles and the price of wheat. Since then many economists have returned at regular intervals to studying the link between the 11 year sunspot cycle and the behaviour of the global economic cycle. It is becoming increasingly clear that the economic cycle is not unconnected with solar cycles but the mechanisms are far from clear.

Mikhail Gorbanev an economist at the IMF has a fascinating new paper that became available last month at the University of Munich. He does add this Caution though!

Caution: This research is not in the “mainstream” of the economic thought. Read at your own risk!

Sunspots, unemployment, and recessions, or Can the solar activity cycle shape the business cycle?,” MPRA Paper 40271, University Library of Munich, Germany. (pdf Gorbanev Business Cycle and solar cycles MPRA_paper_40271)

Gorbanev shows some interesting correlations and  goes on to predict that “For other advanced economies, the upcoming solar maximum also suggests higher chances of recessions. The 3-year period when the recessions are most likely to occur in the G7 countries would run from early 2013 till end-2015”.

Whether there will be a sharp increase in US unemployment after the solar maximum remains to be seen. But it is not so unlikely that the world economy has another 2 – 3 tough years ahead!

 

Sunspot cycles and US unemployment (Gorbanev 2012)

Sunspot cycles and US unemployment (Gorbanev 2012)

Abstract 

 Over the last 77 years (from 1935), all 7 cyclical maximums of the solar activity overlapped closely with the US recessions, thus predicting (or triggering?) 8 out of 13 recessions officially identified by NBER (including one “double-deep” recession). Over the last 64 years (from 1948), all 6 maximums of the solar activity were preceded by minimums of the US unemployment rate, and the spikes in the unemployment rate followed with lags of 2-3 years. On the world scale, over the last 44 years (for which the data is available), all 4 maximums of the solar activity overlapped with minimums of the unemployment rate in the G7 countries, followed by its spikes within 2-3 years. From 1965, when consistent recession dating is available for all G7 countries, nearly 3/5 of the recessions started in the 3 years around and after the sunspot maximums. Was it a mere coincidence or a part of a broader pattern? This paper explores the correlation between the solar activity cycles (as measured by the number of sunspots on the sun surface) and the timing of recessions in the US and other economies. It finds out that the probability of recessions in G7 countries greatly increased around and after the solar maximums, suggesting that they can cause deterioration in business conditions and trigger recessions. This opens new approach for projecting recessions, which can be applied and tested with regard to the next solar maximum in 2013.


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