‘International Monetary Fund chief Christine Lagarde will be grilled Thursday by prosecutors investigating a huge state payout to a disgraced tycoon during her time as French finance minister.
Lagarde will appear before the Court of Justice of the Republic (CJR), which probes cases of ministerial misconduct, to explain her 2007 handling of a row that resulted in 400 million euros being paid to Bernard Tapie.
Tapie is a former politician and controversial business figure who went to prison for match-fixing during his time as president of France’s biggest football club, Olympique Marseille.
Prosecutors working for the CJR suspect he received favourable treatment in return for supporting Nicolas Sarkozy in the 2007 and 2012 presidential elections.
They have suggested Lagarde — who at the time was finance minister — was partly responsible for “numerous anomalies and irregularities” which could lead to charges for complicity in fraud and misappropriation of public funds.
Lagarde would not automatically be forced to resign her job as head of the International Monetary Fund if a French court decides to prosecute her in the Bernard Tapie case.
But such a ruling could weaken her as managing director of the Fund, after having led it through four difficult eurozone rescues in her 22 months in the job.
And it would mean the second IMF managing director in a row – both French – beset by legal problems, after the sex scandal that forced the resignation of her predecessor, Dominique Strauss-Kahn.’
‘The IMF has approved a three-year, $1.3 billion loan to jump start recovery in Cyprus and restore financial credibility to its indebted banking industry.
The funds will be distributed to stabilize the banking industry, tame the debt deficit, and to restore economic growth on the island.
The IMF announced on Wednesday it had approved the first $111 million (86 million euro) installment of the loan, which was made immediately available to the Cypriot government. The next installment of $1.3 (1 billion euro) will be wired before June 30th, 2013 and fostered by the Luxembourg-based European Stability Mechanism.
The bailout is part of a $13 billion (10 billion euro) monetary package funded by Troika lenders over the next three years.The financial assistance is intended to prevent a further crisis and to revive the economic pulse of the debt-stricken nation.’
‘IMF chief Christine Lagarde said Thursday she saw little alternative to the agenda of austerity being pushed across Europe, after massive demonstrations in several countries demanded an end to the policies.
Asked by journalists from Swiss public broadcaster RTS if there existed any alternatives to austerity programmes, Lagarde answered: “What is the alternative?”
Returning to out-of-control deficits was not an option, Lagarde said, adding that stimulus programmes were impossible as these could only be financed by more debt.’
IMF chief Christine Lagarde has been summoned by a French court to answer questions over alleged abuse of office during her time as France’s finance minister, her lawyer has said.
Ms Lagarde is to be questioned before a magistrate in May over her role in the awarding of financial compensation to businessman Bernard Tapie in 2008.
Ms Lagarde, who took over as IMF chief in 2011, denies any wrongdoing.
Her apartment was searched last month as part of the ongoing investigation.
As finance minister, Ms Lagarde referred Mr Tapie’s long-running dispute with bank Credit Lyonnais to an arbitration panel, which awarded him 400m euros (£340m) damages.
Mr Tapie was a supporter of ex-President Nicolas Sarkozy.
Critics say she abused her authority but Ms Lagarde denies any wrongdoing.
by Larry Elliott
George Osborne has been told by the International Monetary Fund to rethink the pace of his deficit reduction plan after the Washington based institution cut its forecast for UK growth in both 2013 and 2014.
The IMF’s flagship publication – the half-yearly World Economic Outlook – provided fresh ammunition for the chancellor’s Labour critics when it said the Treasury should contemplate being flexible about its austerity strategy.
In its latest forecasts, the Fund said gross domestic product in the UK would rise by 0.7% this year and by 1.5% in 2014 – in both cases a cut of 0.3 points from its last set of predictions in January.
Eagerly awaited growth figures for the UK are due out next week but regardless of whether they show Britain in an unprecedented triple-dip recession, the IMF said recovery was progressing slowly, held back by the weakness of trade and attempts to reduce the government’s budget deficit.
Egypt is stalling on the terms of a $4.8 billion International Monetary Fund loan to help it fight a deepening economic crisis, and no deal is likely while an IMF team is in Cairo, diplomats said on Sunday.
The IMF mission is set to leave on Tuesday after nearly two weeks of talks, and negotiations may continue on the sidelines of this week’s IMF ministerial meetings in Washington, they said.
An IMF program could help stabilize Egypt’s economy in the rocky transition to democracy since the 2011 overthrow of former President Hosni Mubarak, unlocking up to $15 billion in aid and investment to improve a dismal business climate.
But diplomats and politicians say Islamist President Mohamed Mursi had yet to endorse required tax increases and subsidy cuts that prompted him to halt implementation of an earlier IMF deal in December, two weeks after it was agreed in principle.
[...] One Western diplomat said that after securing $5 billion in stopgap finance from Qatar and Libya last week, Egypt no longer felt the same sense of urgency to conclude the IMF negotiations.
[...] Egypt’s economy has deteriorated significantly since the November IMF agreement stalled. Tourism and investment have dwindled due to political turmoil in the Arab world’s most populous country, where 40 percent of the 84 million citizens live on less than $2 a day.
[...] Diplomats said the ruling Muslim Brotherhood was reluctant to impose unpopular tax and fuel price increases before parliamentary elections provisionally due to start in October.
Nevertheless the Brotherhood’s Freedom and Justice Party is pushing through parliament new tax laws apparently linked to the IMF deal. Opposition politicians accuse the government of trying to impose its will without dialogue.
Planning Minister Ashraf El Araby warned last week that Egyptians would face worse austerity without an IMF deal. Ministers fear a long, hot summer of power cuts and possible fuel and food shortages that could spark unrest.
by Philip Aldrick
Speaking in New York ahead of next week’s IMF Spring meeting, Ms Lagarde launched a broadside against the financial services industry for resisting urgent reform.
“In too many cases – from the United States in 2008 to Cyprus today – we have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a business model that ultimately destabilizes the economy. We simply cannot have pre-crisis banking in a post-crisis world.
“We need reform, even in the face of intense pushback from an industry sometimes reluctant to abandon lucrative lines of business.”
Almost five years since Lehman Brothers collapsed, she claimed: “The ‘oversize banking’ model of too-big-to-fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation.”
Regulators have forced banks to increase significantly their loss-absorbing capital buffers since the crisis, but are still working on “resolution” mechanisms that will allow giant lenders to fail without hitting the taxpayer and threatening financial stability.
The International Monetary Fund officially recognized the Somali government on Friday, ending a 22-year hiatus and allowing the Fund to provide economic policy advice to Somalia.
The move opens the way for donors and other development banks to resume relations with Somalia, whose economy is in tatters after more than two decades of conflict.
Donors are expected to meet officials from the World Bank and International Monetary Fund during meetings of world finance leaders in Washington next week.
Christine Lagarde, managing director of the International Monetary Fund, said that the €10bn rescue hammered out between Cyprus and the so-called troika of the European Commission, ECB and IMF would help to “restore the health of the economy”.
The IMF has agreed to contribute €1bn towards the country’s bail-out via a three year loan, of which Britain is liable for 4.51pc.
Ms Lagarde said that the deal would also help the country to restructure its bloated banking sector. She added that protecting customers with deposits of less than €100,000 in the country’s stricken banks was an “important” part of the deal. “Insured depositors (representing over 95 percent of the total number of account-holders in the two affected banks) have been fully protected,” she said.
The Treasury has already flown more than £10m in cash to Cyprus to ensure that British troops and their families stationed in the country have had access to funds amid the financial chaos.
Britain’s new banking watchdog, the Prudential Regulation Authority, brokered a deal this week to rescue 15,000 savers’ deposits held by ailing Cypriot lender Laiki by transferring them to Britain.
Britain and France are the joint fourth biggest financial contributors to the IMF’s rescue fund. However, both countries’ contributions are dwarfed by the United States, which will pay €177m towards Cyprus’s rescue.
Japan, the fund’s second largest contributor, will pay €65.6m, while Germany’s €61.2m share will come in addition to its loans via the EU. The funds are expected to be approved by the IMF’s board in early May.
Cypriot president Nicos Anastasiades warned on Wednesday of “difficult days ahead” as he swore in new finance minister Haris Georgiades.
Cyprus Parliament President Says “No Future” Under Troika, Calls For “Iceland” Solution ~ Zero Hedge
by Tyler Durden
Just last week Yiannakis Omirou, Cypriot House of Representatives President, was calling for the nation to accept it is “time for responsibility” as they progressed towards a final solution; and yet today, as Cyprus’ Famagusta reports, he believes the ‘Troika-imposed’ responsibility will, “turn Cyprus into a colony of the worst possible type.” His ‘Icelandic’ solution is to “leave the Troika and EMS behind,” to ensure “national independence, national sovereignty, moral integrity, and economic independence.” He may have a point; judging from the chart below of the Troika’s poster-child Greece, relative to Iceland, things are not going so well. As Omirou ominously concludes, “if we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future.”
There is no other alternative but to free Cyprus from the bonds of the troika and the memorandum, House of Representatives President Yiannakis Omirou has said.
Omirou also expressed his conviction that no Attorney General would dream of not following through with the results of an investigation led by an independent committee to apportion blame on those responsible for bringing the country’s economy and banking sector near collapse.
Omirou talked about the troika demands, which according to him will multiply and will turn Cyprus to a colony of the worst possible type and warned “I would like to send a message to the Cyprus people that there is no other way, there is no alternative apart from freeing (the country) from the troika’s and the memorandum’s bonds”.
He noted that certainly, “this road will demand sacrifices”, adding that “by leaving the troika and the EMS behind us, we will ensure our national independence, our national sovereignty, our moral integrity and our economic independence”.
“If we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future”, he pointed out.
The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.
The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa – are set to approve the establishment of a new development bank during an annual summit that began today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.
“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”
The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe.
You’ve heard that the tiny European country Cyprus is threatening to grab between 3 and 13% of bank depositors’ funds in return for a bailout of the country by the European Union.
Zero Hedge reports that Germany’s Finance Minister and the IMF originally demanded that 40% of bank deposits be looted.
Sajiyat Das notes:
Irrespective of the fate of Cyprus, the solution adopted will exacerbate the European debt crisis.
Many commentators note that the deposit grab may cause panic among bank depositors in Spain and other vulnerable countries as well. Indeed, many are asking whether this could be a modern Creditanstalt situation. Another common analogy is that this could be “worse than Lehman” failing.
On the other hand – given that the entire economy of Cyprus is smaller than that of Shreveport, Louisiana, and that Cyprus is mainly a parking spot for hot money from Russian oligarchs and mafia – some say that the whole crisis will quickly blow over.
What’s the bigger picture? Bank deposit grabs may spread to other vulnerable European countries. The New York Times reports:
Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus.
And the chief economist of the German Commerzbank has called for private savings accounts in Italy to be similarly plundered:
A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product.
Indeed, Zero Hedge has been warning about this kind of scenario for years.
Why are they doing it?
The Financial Times notes:
Cyprus’s new president Nicos Anastasiades did not like the idea of forcing any losses on ordinary account holders….But after receiving what Cypriot officials said were reassurances from Angela Merkel…Mr Anastasiades agreed to a deal that he thought would include relatively modest “haircuts” – a 7 per cent levy on deposits above €100,000 and a 3.5 per cent hit on those below.
With the principle of haircuts agreed, Mr Anastasiades decided to stay for the finance ministers meeting, which was just getting under way. All he asked was that the rates be tweaked: raise the levy on the bigger deposits in order to lower the hit taken by the less well off. Both sides believed a deal was at hand….
However, Mr Anastasiades was left reeling by the response to his request for modest adjustments, according to Cypriot officials. Wolfgang Schäuble, the German finance minister, said Nicosia would immediately have to raise as much as €7bn from depositor haircuts. A stunned Mr Anastasiades decided to walk out…
But Mr Anastasiades soon learnt storming out was not an option. The European Central Bank had another shock for him: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance – the cheap central bank loans that teetering eurozone banks need to run their day-to-day operations.
The message, delivered by the ECB’s chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island’s largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.
Mr Schäuble was not alone. Several officials involved in the talks said he not only had backing from the Finns, Slovaks and to a lesser extent the Dutch. The International Monetary Fund, which had been urging depositor haircuts for months, had won the argument over the skittish European Commission, which had long worried that seizing depositor assets could spark a bank run in Cyprus and, potentially, elsewhere in the eurozone.
Yves Smith explains that the real reason for the EU’s grab for deposits from Cyprus bank accounts is that it is easier to screw the little guy than to screw sophisticated investors:
Why are depositors, the folks most senior in the creditor hierarchy, being whacked? Shareholders and bondholders should be wiped out before they lose a penny. Yes, but this is a case where expediency, unwisely, has been allowed to carry the day.
In an excellent and important post, “A stupid idea whose time had come,” Joseph Cotterill of FT Alphaville explains why the axe fell on the depositors.
There is pretty much squat in the way of equity and senior debt. The “other liabilities” may be secured. So then we get to liabilities to central and other banks. The liabilities to central banks are not going to be haircut; that is part of the “private sector participation” premise. Remember, banks in periphery countries have been pledging any asset the ECB will take to it, and any stuff the ECB won’t take to their own central bank. In the case of the Cypriot banks, the exposure is almost entirely that of the local central bank. Again from Cotterill:
As of January, the Cypriot central bank was extending around €9bn of secret liquidity in return for collateral no longer accepted at normal ECB liquidity ops. Much of it (it’s naturally difficult to determine how much) was probably going to Laiki.
… That’s €9 billion of Cyprus loans to the banks, mainly Laiki, which is junior to deposits, versus the €5.8 billion to be seized from depositors. So why aren’t the loans from the Cyprus central bank being written down and the Cyprus sovereign debt investors taking losses? Well, it turns out it is easier to screw retail customers than it is professional investors:
As it is, there were lots of good reasons why a sovereign debt restructuring did not happen. I don’t want to downplay them. Notably, the fact that the bonds that were best to restructure were governed under English law, and were likely held by the kind of investor who’s willing to litigate. I listed the problems here. Around it all was the inability to get write-downs out of Cypriot domestic-law sovereign debt, because that was held by the banks which already bore big black holes in their balance sheets. Again we come up to something that could be raised in the defence of the deposit levy — local exposure was so great everywhere, that any distribution of losses would have been painful. For the widow depositor, substitute the pension fund holding local-law bonds….
No wonder this cartoon – showing the EU forcing the Cypriot bankers to rob their depositors – is going viral in Cyprus (the caption just says “bank robbery of the Cypriot people):
Indeed, it’s not the “great recession” … it’s the great bank robbery. (Too bad Cyprus didn’t choose theright fork in the road.)
As Tyler Durden notes, the Cypriot deposit grab is just one of a wide variety of forms of financial repression that central banks, big private banks and governments are using to grab money from the people. For example, negative interest rates are an ongoing theft.
Sajiyat Das writes:
A debt crisis, especially on the current scale, cannot be dealt without other than by financial repression. To date, it has taken the form of higher taxes, interest rates below the rate of inflation, directed investment and increased government intervention in the economy. Cyprus marks a new phase of financial repression, shifting the burden increasingly onto savers directly by confiscating savings.
As we’ve previously noted, we’ll have a never-ending depression unless bondholders are forced to take a haircut. The world economic and political “leaders” have demonstrated once again that forcing the big boys to take a haircut is inconceivable. Instead, they will escalate their campaign of repression against savers and taxpayers.
It’s funny how quickly perceptions can change on the global stage. Just a few years ago, Argentina was being hailed as a remarkable tale of success snatched from the jaws of defeat. After suffering an economic crisis in 1999-2002 that saw widespread unemployment and riots, the fall of the government, and a national default on foreign debt, analysts in recent years have been pontificating on the re-stabilization of the Argentinian economy. But it appears they spoke too soon. Find out more about the Argentinian inflation crisis and the country’s latest struggle with the IMF in this week’s edition of The Eyeopener report.
“There will be an impact on global growth,” IMF spokesman Bill Murray said. “We’ll have to reevaluate our growth forecast for the United States and also our other forecasts.”
Murray emphasized that the $85 billion in US spending cuts, known as sequestration, would be phased in over seven months. The sequestration also includes $109 billion in cuts over the following eight years.
The drastic cuts were mandated after Democrats and Republicans failed to reach an agreement on budget deficit reduction.
“It’s really going to affect US growth,” Murray said. “We have to see how deeply the spending cuts are implemented.”
The IMF’s current US growth forecast for 2013 is 2.0 percent and economists expect that full implementation of the sequestration will subtract at least 0.5 percentage points from growth.
IMF’s revised growth forecasts will be reported in April in its twice-yearly World Economic Outlook report.
As for the sequester’s impact on global growth, Murray said, “The countries most affected will be countries that have active trade relations with the United States.”
In Ecuador President Rafael Correa is reelected with 61% of the vote, he faces 4 critical years for Ecuador, the main challenge now is to keep the country on the path of growth while shifting the model from a raw material based economy to a new, more sustainable and inclusive one.
The International Monetary Fund (IMF) has warned again of a weakening global economic recovery despite government efforts to stimulate growth.
The global economy is likely to grow at a slower rate than previously forecast over the next two years, the organisation said in its latest report.
It said it now expected the eurozone to remain in recession in 2013, having previously predicted growth.
The UK’s growth forecasts have also been revised down.
The IMF said continued problems in the eurozone were weighing on the global economy.
“The euro area continues to pose a large downside risk to the global outlook,” the IMF report said.
“In particular, risks of prolonged stagnation in the euro area as a whole will rise if the momentum for reform is not maintained.”
by Howard Schneider
Consider it a mea culpa submerged in a deep pool of calculus and regression analysis: The International Monetary Fund’s top economist today acknowledged that the fund blew its forecasts for Greece and other European economies because it did not fully understand how government austerity efforts would undermine economic growth.
The new and highly technical paper looks again at the issue of fiscal multipliers – the impact that a rise or fall in government spending or tax collection has on a country’s economic output.
That it comes under the byline of fund economic counselor and research director Olivier Blanchard is significant. Fund research is always published with the caveat that it represents the views of the researcher, not the institution itself. But this paper comes from the top, and attempts to put to rest an issue that has been at the center of debate about how fast countries should move in their efforts to tame large debts and deficits.
If fiscal multipliers are small, countries can cut spending faster or raise more in taxes without much short-term damage. If they are large, then the process can become self-defeating, at least in the short run, with each dollar of government spending cuts, for example, costing the economy more than a dollar in lost output and thus actually increasing debt-to-GDP ratios.
That is what has been happening with a vengeance in Greece, where fund forecasters, as part of the country’s first bailout program in 2010, predicted that the nation could cut deeply into government spending and pretty quickly bounce back to economic growth and rising employment.
Two years later, the Greek economy is still shrinking and unemployment is at 25 percent.
[...] “Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation,” Blanchard and co-author Daniel Leigh, a fund economist, wrote in the paper.
That somewhat dry conclusion sums up what amounts to a tempest in econometric circles. The fund has been accused of intentionally underestimating the effects of austerity in Greece to make its programs palatable, at least on paper; fund officials have argued that it was its European partners, particularly Germany, who insisted on deeper, faster cuts. The evolving research on multipliers may have helped shift the tone of the debate in countries like Spain and Portugal, where a slower pace of deficit control has been advocated.
But the paper includes some subtle and potentially troubling insights into how the fund works. Blanchard – effectively the top dog when it comes to economic science at the fund – writes in the paper that he could not actually determine what multipliers economists at the country level were using in their forecasts. The number was implicit in their forecasting models – a background assumption rather than a variable that needed to be fine-tuned based on national circumstances or peculiarities.
Heading into a crisis that nearly tore the euro zone apart, in other words, neither Blanchard or any one of the fund’s vast army of technicians thought to reexamine whether important assumptions about the region would still hold true in times of crisis.
by Ambrose Evans-Pritchard
President Anibal Cavaco Silva called for urgent action to halt the “recessionary spiral”, warning Europe’s leaders that the current course had become “socially unsustainable”.
In a speech to the nation, he said Portugal would “honour its international obligations”, but in the same breath called for a tough line with the European Union-International Monetary Fund Troika over the pace of fiscal tightening under Portugal’s €78bn (£63bn) loan package. “We have arguments, and we should use them firmly,” he said.
“Fiscal austerity is leading to declining output and lower tax revenue. We must stop this vicious circle,” he said, cautioning the Troika that there would be no way out of the crisis until policy was set in the interests of the “Portuguese people” as well as foreign creditors.
IMF chief Christine Lagarde said Friday the looming “fiscal cliff” in the United States threatens the country’s international supremacy and the fragile global recovery.
In an interview with BBC World News, Lagarde noted the US fiscal cliff, a combination of severe tax increases and spending cuts due in January, would probably wipe out growth in the world’s largest economy.
“The real issues are, in a way, the supremacy of the United States and its leadership role in the world,” said the managing director of the International Monetary Fund.
“To make sure that that leadership endures, the uncertainty has to be removed because uncertainty fuels doubt as to that leadership.”
[...] The preliminary agreement reached on Tuesday for a $4.8 billion, low-interest loan from the IMF is a signal to global investors that Egypt, which had been trying for months to attract international capital, is serious about economic recovery.
The deal, a hotly debated issue in Egypt for months, is meant to alleviate the country’s liquidity crunch, ease currency-depreciation risks, and boost investor confidence following 20 months of economic strain since the January 2011 uprising that toppled President Hosni Mubarak and brought Morsi to power.
“An IMF agreement for a loan to Egypt provides stability, confidence, and international support for fiscal consolidation and structural reform,” said Paul Gamble, a London-based anaylist with the ratings agency Fitch.
Prime Minister Hesham Qandil said the IMF agreement will help increase Egypt’s foreign-currency reserves to $19 billion by the end of the next fiscal year, according to a statement on the prime minister’s website.
The Egyptian central bank’s foreign currency-reserves have reached the critically low level of $15 billion, less than the value of three months of imports. Those reserves were at $36 billion in December 2010, but have been depleted since as foreign direct investment, exports, and tourism revenue declined following the popular uprising.
The agreement will also help release a total of $14.5 billion in funding commitments from other international bodies and partners, including the U.S., which were on hold pending the success of the IMF loan negotiations.
Throwing the guantlet at the feet of the Socialist president Francois Hollande, the IMF said rising tax rates are undermining France as a place “to work and invest” and leading to a “significant loss of competitiveness”.
“There is a risk it will get worse if France does not adapt at the same pace as its trading partners in Europe, notably Italy and Spain,” it said.
The IMF challenge had an added piquancy coming from a body headed by France’s Christine Lagarde, widely touted as the next Gaulliste leader and a future rival for the French presidency.
The warning came as French industrialist Louis Gallois delivered a long-awaited report to Mr Hollande calling for “shock therapy” to stop the national rot, with drastic cuts in business payroll taxes to claw back loss ground against Germany and other EMU states.
Mr Gallois, ex-head of the EADS aerospace group and a revered figure in France, said all parties need to unite in a patriotic push to save the nation.
One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.
The conjuring trick is to replace our system of private bank-created money — roughly 97pc of the money supply — with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.
Specifically, it means an assault on “fractional reserve banking”. If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.
The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.
Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world.
Entitled “The Chicago Plan Revisited“, it revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression.
Irving Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw it with his own eyes in the early 1930s as creditors foreclosed on destitute farmers, seizing their land or buying it for a pittance at the bottom of the cycle.
The farmers found a way of defending themselves in the end. They muscled together at “one dollar auctions”, buying each other’s property back for almost nothing. Any carpet-bagger who tried to bid higher was beaten to a pulp.
Benes and Kumhof argue that credit-cycle trauma – caused by private money creation – dates deep into history and lies at the root of debt jubilees in the ancient religions of Mesopotian and the Middle East.
Harvest cycles led to systemic defaults thousands of years ago, with forfeiture of collateral, and concentration of wealth in the hands of lenders. These episodes were not just caused by weather, as long thought. They were amplified by the effects of credit.
The Athenian leader Solon implemented the first known Chicago Plan/New Deal in 599 BC to relieve farmers in hock to oligarchs enjoying private coinage. He cancelled debts, restituted lands seized by creditors, set floor-prices for commodities (much like Franklin Roosevelt), and consciously flooded the money supply with state-issued “debt-free” coinage.
The Romans sent a delegation to study Solon’s reforms 150 years later and copied the ideas, setting up their own fiat money system under Lex Aternia in 454 BC.
It is a myth – innocently propagated by the great Adam Smith – that money developed as a commodity-based or gold-linked means of exchange. Gold was always highly valued, but that is another story. Metal-lovers often conflate the two issues.
Anthropological studies show that social fiat currencies began with the dawn of time. The Spartans banned gold coins, replacing them with iron disks of little intrinsic value. The early Romans used bronze tablets. Their worth was entirely determined by law – a doctrine made explicit by Aristotle in his Ethics – like the dollar, the euro, or sterling today.
Some argue that Rome began to lose its solidarity spirit when it allowed an oligarchy to develop a private silver-based coinage during the Punic Wars. Money slipped control of the Senate. You could call it Rome’s shadow banking system. Evidence suggests that it became a machine for elite wealth accumulation.
Unchallenged sovereign or Papal control over currencies persisted through the Middle Ages until England broke the mould in 1666. Benes and Kumhof say this was the start of the boom-bust era.
One might equally say that this opened the way to England’s agricultural revolution in the early 18th Century, the industrial revolution soon after, and the greatest economic and technological leap ever seen. But let us not quibble.
The original authors of the Chicago Plan were responding to the Great Depression. They believed it was possible to prevent the social havoc caused by wild swings from boom to bust, and to do so without crimping economic dynamism.
The benign side-effect of their proposals would be a switch from national debt to national surplus, as if by magic. “Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back liabilities, the government acquires a very large asset vis-à-vis banks. Our analysis finds that the government is left with a much lower, in fact negative, net debt burden.”
The IMF paper says total liabilities of the US financial system – including shadow banking – are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a “potentially a very large, buy-back of private debt”, perhaps 100pc of GDP.
While Washington would issue much more fiat money, this would not be redeemable. It would be an equity of the commonwealth, not debt.
The key of the Chicago Plan was to separate the “monetary and credit functions” of the banking system. “The quantity of money and the quantity of credit would become completely independent of each other.”
Private lenders would no longer be able to create new deposits “ex nihilo”. New bank credit would have to be financed by retained earnings.
“The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business,” says the IMF paper.
“Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend.”
The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.
The switch would engender a 10pc boost to long-arm economic output. “None of these benefits come at the expense of diminishing the core useful functions of a private financial system.”
Simons and Fisher were flying blind in the 1930s. They lacked the modern instruments needed to crunch the numbers, so the IMF team has now done it for them — using the `DSGE’ stochastic model now de rigueur in high economics, loved and hated in equal measure.
The finding is startling. Simons and Fisher understated their claims. It is perhaps possible to confront the banking plutocracy head without endangering the economy.
Benes and Kumhof make large claims. They leave me baffled, to be honest. Readers who want the technical details can make their own judgement by studying the text here.
The IMF duo have supporters. Professor Richard Werner from Southampton University – who coined the term quantitative easing (QE) in the 1990s — testified to Britain’s Vickers Commission that a switch to state-money would have major welfare gains. He was backed by the campaign group Positive Money and the New Economics Foundation.
The theory also has strong critics. Tim Congdon from International Monetary Research says banks are in a sense already being forced to increase reserves by EU rules, Basel III rules, and gold-plated variants in the UK. The effect has been to choke lending to the private sector.
He argues that is the chief reason why the world economy remains stuck in near-slump, and why central banks are having to cushion the shock with QE.
“If you enacted this plan, it would devastate bank profits and cause a massive deflationary disaster. There would have to do `QE squared’ to offset it,” he said.
The result would be a huge shift in bank balance sheets from private lending to government securities. This happened during World War Two, but that was the anomalous cost of defeating Fascism.
To do this on a permanent basis in peace-time would be to change in the nature of western capitalism. “People wouldn’t be able to get money from banks. There would be huge damage to the efficiency of the economy,” he said.
Arguably, it would smother freedom and enthrone a Leviathan state. It might be even more irksome in the long run than rule by bankers.
Personally, I am a long way from reaching an conclusion in this extraordinary debate. Let it run, and let us all fight until we flush out the arguments.
One thing is sure. The City of London will have great trouble earning its keep if any variant of the Chicago Plan ever gains wide support.
PROTESTERS calling for an end to the International Monetary Fund (IMF) have hit the streets of Tokyo as the last-resort lender held meetings in the Japanese capital.
About 200 demonstrators on Saturday marched through the city’s upscale Ginza shopping district near the Tokyo International Forum, which is playing host to the IMF and World Bank’s annual meetings which wrap up Sunday.
Some protesters also called on Japan to abandon nuclear power in the wake of last year’s Fukushima crisis, the worst atomic accident in a generation.
Inside the hall, finance chiefs from the IMF’s 188 member countries and representatives from non-governmental organisations gathered for meetings, with a heavy police presence on the streets outside.
“No more IMFs. Power to the people,” demonstrators yelled as they marched with anti-IMF banners.
The demonstration in conservative Japan was tiny compared with earlier anti-globalisation protests at meetings of the IMF, World Bank and organisations such as the World Trade Organisation.
Argentine President Cristina Fernandez de Kirchner used soccer terminology to lash out at International Monetary Fund chief Christine Lagarde for threatening the country with censure over disputed inflation data.
The IMF should focus on the global economic crisis and more countries should adopt Argentina’s policies to limit capital flight, Fernandez said today [Sept. 25th] at the United Nations General Assembly. The IMF on Sept. 17 threatened to censure Argentina if it doesn’t improve its inflation reports by December. It would be the first time a country faces that penalty, which can end with “compulsory withdrawal” from the IMF.
Lagarde, speaking in Washington on Sept. 24, said the IMF’s decision amounted to giving South America’s second-biggest economy a “yellow card” for failing to improve inflation reports that economists say underestimate consumer price increases by almost one-third. A yellow card is typically given to a soccer player for committing a foul. A red card results in expulsion from the game.
“My country is not a soccer team, it is a sovereign country and as such is not going to accept a threat,” Fernandez said in her UN speech. “This is not a soccer game, this is the most serious economic crisis since the 1930s.”
Argentina and the IMF have squared off since the country’s 2001 default on $95 billion of bonds, which Fernandez’s late husband and predecessor, Nestor Kirchner, blamed on the Washington-based lender.
Argentina is the only member of the Group of 20 nations that has refused to allow the IMF to do its annual review of the country’s economy, a procedure known as an Article IV consultation.
The country’s inflation data has been under question since 2007, when Kirchner began replacing personnel at the national statistics agency in a bid to “improve operations.” Last year the government fined more than a dozen researchers as much as 500,000 pesos ($107,000) each for reporting inflation rates that were higher than official data.
To avoid fines, economists now share their research with opposition lawmakers, who release a monthly report based on the data. The September report said prices rose 24 percent in August from a year earlier. Two days later, the statistics agency said annual inflation was 10 percent.
The prime minister of Hungary and the International Monetary Fund are not friends any more, and that’s official.
Viktor Orban ‘defriended’ the IMF from his official facebook profile and posted a video criticising the agency’s terms for a loan it made to Hungary. He said that the IMF’s list of conditions “contains everything that is not in Hungary’s interests”.
The IMF is preparing to lend recession-hit Hungary up to 15 billion euros to help get its economy back on its own two feet. But in return it is asking for pension cuts, a reduction in the number of public sector employees and the eradication of a bank tax.
Just the day before Orban had announced that negotiations with the IMF had been going according to schedule and the two sides were headed for an agreement.
It just goes to show how quickly things turn sour when money comes between friends.
Egypt on Wednesday formally asked the International Monetary Fund for a $4.8 billion loan to boost the country’s sagging economy, and said it expects to reach a final agreement by the end of the year.
Egypt’s finances have been badly battered by the political turmoil that has roiled the country since last year’s popular uprising that ousted longtime leader Hosni Mubarak, and securing a loan would help shore up confidence in an economy that has seen tourism revenue and foreign investment dry up and foreign currency reserves plummet by more than half.
State TV said Egypt’s leaders requested the $4.8 billion loan during a meeting Wednesday with IMF chief Christine Lagarde in Cairo.
On July 16, a businessman and father of three hanged himself in his shop on the island of Crete. A 49-year-old man from Patras was found by his son. He had also hanged himself. On July 25, a 79-year-old man on the southern Peloponnese peninsula hanged himself with a cable tied to an olive tree. On August 3, a 31-year-old man shot himself to death at his home near Olympia. On August 5, a 15-year-old boy hanged himself in Pieria. And, on August 6, a 60-year-old former footballer self-immolated in Chalcis.
These are also reports from Greece, reports that, at first glance, seem to have nothing to do with the economy. They come together to form a grim statistic, raising questions of what is triggering the suicides and whether the high incidence is merely a coincidence.
Or do people see suicide as a way out of the crisis that has taken hold of their country and their lives? Are they bowing out before things get even worse? Germany and the International Monetary Fund (IMF) are opposed to a new bailout package for Athens. The country faces a shortfall of at least €40 billion ($49 billion). Greece could very well be officially bankrupt by the fall.
The outlook on Greece’s CCC rating, already eight levels below investment grade, was revised to negative from stable, S&P said in a statement yesterday. The change reflects the risk of a downgrade if Greece is unable to obtain its next disbursement of bailout loans from the EU and International Monetary Fund rescue package, the rating company said.
Representatives from the so-called troika of the European Commission, European Central Bank and IMF return to Athens early next month to review Greece’s economic program, which will determine whether the nation will receive further funds from rescue packages, amounting to 240 billion euros ($297 billion), needed to remain in the 17-nation euro area.
Prime Minister Antonis Samaras has held meetings with the leaders of the two parties supporting his coalition government since it was formed following elections on June 17 to hash out a 11.5 billion-euro package of budget cuts demanded by the creditors for the next two years. Finance Minister Yannis Stournaras said yesterday the government is still working on identifying almost a third of the cuts.