Yesterday’s events give us an opportunity to look again at one of the longest-running themes of my writing on here. This is the role of the IMF and to do so I would like to take you back to the 8th of June 2010 when I pointed out this.
1. It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.
This was my response back then to the way that the Dominique Strauss-Khan who was Managing Director of the IMF at the time allowed it to get involved in the Euro area crisis. There was an obvious issue in a French politician doing this and of course the IMF has continued with French political heads. It worried me at the time on various grounds one of which was that poor third world countries were in essence financing a bailout of a much wealthier area overall which could afford to collectively pay for it. In my opinion the reason for this was that whilst Euro area political leaders ( including the French Finance Minister at the time one Christine Lagarde) were proclaiming “shock and awe” in fact the Euro area response was a mess. The so-called rescue vehicle the European Financial Stability Facility (EFSF) was anything but which my updates from back then show. Over time they have proved this as it was later replaced with the European Stability Mechanism or ESM.
But the fundamental point here was that a modus operandi which involved balance of payments problems was replaced by a fiscal one. This line could be covered up to some extent in Greece as it also had a balance of payments problem but not for example in Ireland which has surpluses pretty much as often as the UK has deficits!
This of course has been a debacle for the IMF where whatever reputation it had for economic competence has come a cropper as Greece was plunged even further into recession and in fact has yet to emerge from the economic depression created. This contrasts with the official view which I pointed out on March 30th of this year.
but from 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms, are expected to lead to a rebound in growth.
There was supposed to be economic growth starting in 2012 and then running at around 2.1% for two years and then pick-up to 2.7% in 2015.. Then once that obviously did not happen we got the “Grecovery” theme which did not happen either. Along the way we got a “mea culpa” from the IMF as well as something of a hand brake turn as the advocate of austerity became a fan of fiscal deficits.
However something was wrong and at least some in the IMF knew it’ Let me take you back again to the 8th of June 2010.
Mr.Boutros-Ghali (Egypt’s Finance Minister) went on to give us some idea of one of the areas he feels that trouble and hence further demands for funds might come from. He told the Reuters news agency that Greece’s problems were not over yet and there were doubts about its ability to implement the reforms demanded by the IMF and European Union in return for a 110 billion euro aid package.
“We are not out of the woods,” he said in the interview. “The measures they have been required to implement are fairly tough. And there are in some areas doubts whether they are able to continue implementing such tough measures.”
He was of course correct and it is a sad indictment of these times that official sources are still claiming progress on reforms when reality has been very different. After all Greece would not be in the state it is in if they had worked or even been applied. In my opinion there is something worse than the mistakes which is the way that there has been deliberate dissembling and misrepresentation of not only what is going to happen but what is happening at the time.
The implication that the IMF is free
Another feature of IMF aid is the way that it is presented as a type of SPV and sadly not the Spectrum Pursuit Vehicle driven mostly by Captain Blue in my and many other’s childhoods. These official SPVs ( such as the EFSF) are off-balance sheet vehicles which allow politicians to obfuscate about the state of play. Back to June 8th 2010 again.
Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong. Just to quote the IMF itself there are “doubts” over Greece. Any proper accounting system allows for the possibility of things going wrong. After the experience of the last two years we should know the implication of sticking your head in the sand like an ostrich and assuming there are no problems around…
In other words it is presented as “free” until it isn’t at which point phrases such as “this could not have been reasonably expected” and words such as “counterfactual” are deployed as weapons. Missing from the conversation is how people who were are regularly told are so intelligent and thus need to be paid highly have been wrong again! This of course brings us to the concept of responsibility.
I have been critical of the IMF’s Managing Director quite a few times on the grounds that she has been intimately involved with the disastrous bailout of Greece via her roles as French Finance Minister and Managing Director of the IMF. Not everyone has spotted this as the Financial Time has proved this morning as it reviews her.
a blow to her previously unblemished reputation for managerial competence
But even the FT which appears ever keen to stand firmly behind any establishment vehicle has to admit this.
A conviction for negligence is somewhat at odds with a commitment to “the highest standards of efficiency and technical competence”.
Mind you perhaps something in the past has influenced this.
The Financial Times therefore argued earlier this year that she deserved reappointment for a second term on merit.
Is negligence the new definition of merit? I will have to update my financial lexicon for these times. This next bit is full on internal contradictions and effectively self-critiques.
It found her guilty of negligence because she did not appeal against the eventual decision — but it has not imposed any sentence, and the verdict will not result in a criminal record. Short of full exoneration, this is the mildest possible verdict.
This is an unusual verdict from an unusual court. Politicians who sit on the special tribunal may well have wished to avoid a tougher ruling that would have deterred ministers from making delicate decisions in future.
There are a litany of issues here. We see yet again that the more important you are the less you are apparently responsible for anything. Someone lower down the scale would have received punishment if they had been found guilty of negligence yet the leader of the world’s major financial organisation apparently can shrug it off. Punishment is for the little people only it would seem.
This leaves the IMF as a whole in an even bigger hole. As the economic world shifts east towards places like India and China it looks ever more like a western and to some extent French fiefdom. At the same time more of its bailouts have gone rogue of which Greece is the most extreme example. The worst part is the way that this is all covered-up and the truth is bent and miss shaped.
The only hope we have is that this statement from the IMF turns out to be like one about a manager from a football club’s board of directors.
In this context, the Executive Board reaffirms its full confidence in the Managing Director’s ability to continue to effectively carry out her duties.
Oh and “outstanding leadership” also needs to go into my financial lexicon for these times. Although we do need perhaps to go through the Looking Glass of Lewis Carroll.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”