The global financial crisis has had a continual capacity to surprise policymakers and the latest unpleasantness would appear to be the failure of the IMF-backed stabilization program in Ukraine barely a month after it was announced.  As we noted at the time, the program emphasized a flexible exchange rate, to avoid blowing reserves on a futile defence of a peg (something on which the Fund’s reputation took a hammering during past crises in Russia and Argentina).  But the effect seems to have been a worst of both worlds situation where the failure to establish a credible range for the hryvnia led to a severe loss of confidence in it, with the result that the IMF loan is essentially covering a dollarization of the economy.  Ukraine had the bad luck to have a dollar benchmark for the exchange rate just as the dollar was sharply appreciating.  If they had been coming into the stabilization plan with a history of pegging against the euro (or sterling!) things wouldn’t look so bad.  One lesson would appear to be that planting an economic stabilization plan into unresolved political instability doesn’t work so well.  The Fund may look at Romania with a more jaundiced eye as a result.

The IMF has released yesterday’s concluding statement of its mission to Italy.   It’s mixed reading.  On the one hand, Italy is looking at a full year recession for 2008, let alone 2009 (the latter being the benchmark prediction for most OECD countries).  And long-term problems, such as low employment rates, remain.  However Italy has dodged the most severe aspects of the global financial crisis, partly because it never rode the wave upwards in the first place.  Nonetheless, the Fund wants to be clear that while the G20 summit might have sounded like a call for many countries to engage in fiscal stimulus, Italy shouldn’t think of itself as one of those countries.  It doesn’t have the room and should concentrate instead on getting the budget under control.  Indeed, the Fund’s emphasis on expenditure cuts for Italy makes it sound like the kind of medicine that David Cameron will be prescribing for the UK when the Pre-Budget Report comes out next week — but he is not going to get the gift of an IMF report saying that the UK should join Italy as a country needing to get its fiscal house in order.  Incidentally, the final paragraph of the IMF statement for Italy seems to be an oblique warning to Silvio to avoid any more industrial policy initiatives as part of his “solution” to the crisis.