IMF Rapidly Expanding Its Balance Sheet

Just following up on PO’Neill’s post (here) on the IMF loan to Serbia, where he says:

Finally, since this request would seem to shave another $2 billion of whatever headroom the IMF thought it had for such programs, getting them more space to lend might soon be a priority agenda item at the London Summit.

This is absolutely the point. The Financial Times today quotes Simon Johnson, a former IMF chief economist now at the Massachusetts Institute of Technology, to the effect that : “We are seeing the consequences of the lack of IMF resources. Programmes are probably undersized because the IMF is worried about running out of money.” and Ken Rogoff, another former chief economist, who said: “The IMF doesn’t have nearly the resources to backstop all of eastern Europe.”

Mr Rogoff echoed calls from Robert Zoellick, World Bank president, for the EU to take a leading role in rescuing eastern Europe. But the European Commission has already spent nearly €10bn ($12.6bn, £8.8bn) of its €25bn rescue fund on Hungary and Latvia, and EU governments have yet to provide more resources.

According to the FT the IMF, which has $142bn in quickly available resources and $50bn it can raise rapidly, recently finalised an agreement to borrow an extra $100bn from Japan and is seeking a further $150bn from other member governments. The question no one seems to be thinking about is the “what if” one of possible defaults. If the IMF borrow $100 billion from Japan, and the loans are defaulted on, then who covers the debt, or do we just turn the IMF into another “bad bank”? I don’t think people are being at all responsible here.

Ukraine, Belarus and Serbia all have shrinking and rapidly ageing populations, the possibility of defaults here are high, in each case, and it is quite possible we will see continually shrinking GDPs which will effectively turn these countries into IMF economic protectorates (in the absence of some other multilateral agency being created in the mid term to handle the problem).

Hungary and Latvia both look like being dangerously close to default come 2012 if emergency measures are not taken soon (the IMF programmes as currently structured simply cannot work, in either case), and they could quickly be followed down the same road by Bulgaria and Romania. Basically we need some sort of order putting back into this whole situation before things simply get out of hand, simply talking about reform of the IMF quota system is absurd at this point. Europe needs to act, and act decisively. Above all we need something which is sorely lacking from our leaders at the moment, a feeling that they are able to rise to the scale of the problem and start to act, rather than simply react. If you think what we have so far is bad, you just wait till you get to see what comes next.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

4 thoughts on “IMF Rapidly Expanding Its Balance Sheet

  1. The IMF has experience in forcing countries to do things they loathe. Isn’t it better to bundle all measures in an experienced institution? Which would also avoid problems with countries having to vote in their own torture in the EU.

    Furthermore how big a default can the rest of the EU or the IMF prevent?

  2. All of this is taking a very interesting twist. Let’s say you are China and you want to sell more cars into Europe. What is the best way to influence people and win friends? Should you buy Eurobonds with proviso trailers? Should you lend money to the IMF with proviso trailers?

    How best can Boeing park Airbus at the fringes of the economic rebound? I wonder about all these newly nationalized banks. Who will ensure they have a “fair” share of the global banking business.

    Which taxpayer will be deemed the “bad taxpayer”? It looks like we are playing global “musical chairs”.

    I think Europe needs to pick up the ball, rather than looking down at it. If they don’t, they will have many new “friends” providing guidance and advice on key economic areas…

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