Archive for the ‘IMF’ Category

The EU’s financiers responsible for the Greek rescue scheme in 2008 have reacted strongly to accusations from the IMF that serious errors were made in the initial bail-out of Greece. Maybe it is time that these deniers started being a little more honest with themselves and us.

Haircuts can be good things. Sampson may not have agreed with such a sentiment, but, on the other hand, we tend to feel better afterwards. It can be like that with sovereign debt too, but in 2010, the so-called TROIKA – that’s the organisation made up of the IMF, EU commission and ECB – thought the very idea of a haircut of Greek debt was about as sensible as turning the Acropolis into a new apartment block.

Plenty of people warned that it was dangerous, and over and over again we were told that the harsh terms imposed on Greece were not necessary. Now the IMF is saying it was all a terrible mistake.

In a report published yesterday the IMF said: “Not tackling the public debt problem decisively at the outset or early in the programme created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output.”

Of course this is the IMF. It is not going to wear a hair shirt, or be too vocal in slating its partners for that matter.

It said that after the initial bail-out Greek public debt “remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.”

And, it continued: “There are…political economy lessons to be learned. Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program. The obstacles encountered in implementing reforms also illustrate the critical importance of ownership of a program, a lesson that is common to the findings of many previous EPEs. To read the report, go to Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement 

A spokesman for the EU commission said: “We fundamentally disagree… With hindsight we can go back and say in an ideal world what should have been done differently. The circumstances were what they were. I think the commission did its best in an unprecedented situation.”

ECB President Mario Draghi has entered the debate too, saying: “We tend to judge things that happened yesterday with today’s eyes. We tend to forget that when the discussions were taking place the situation was much, much worse.”

Hindsight bias is indeed a real phenomenon, and maybe we are all too keen to claim wisdom after an event. Psychologists can even cite studies to show that we have a distorted view of our own history, claiming, or even believing we predicted certain events when in fact we did no such thing.

But on this occasion citing hindsight bias as an excuse is not good enough.

Plenty of media, including, but not only, this publication warned at the time that the TROIKA was failing to see reality, that it was punishing Greece unnecessarily and that debt has to be cut via write-downs.

The TROIKA ignored what was obvious to outsiders. To now claim it had no way of knowing; that we are applying hindsight bias shows it has not learned anything. It is, frankly, arrogantly ignoring what is happening around it, stuck as it is in an ivory tower, or wherever it is that these financiers live.

There is a lesson today. Still the TROIKA, EU Commission and grandees of the Eurozone claim that the worst is over; that the troubled economies of indebted Europe are on the road to recovery, and by doing so they continue to make fatal mistakes.

What will happen in two years’ time, when the IMF says that too much austerity in 2013 led to unnecessary human hardship? Will the TROIKA accuse the IMF of hindsight bias, and say it had no way of knowing this at the time?

Rather than denying errors, perhaps the TROIKA et al, should tuck into some humble pie, and then, just maybe they will notice they are repeating this mistake.

© Investment & Business News 2013

The IMF has now released its latest outlook for the global economy. So who are the latest winners and losers?

Well, let’s start with the world’s biggest economies.

It won’t surprise you to learn that China is still top of the pecking order. The IMF forecasts growth of 8.0 per cent this year followed by 8.2 per cent next.

India is expected to stage something of a recovery, from 4.0 per cent growth in 2012, to 5.7 per cent next year and then 6.2 per cent.

In South America, Brazil too is expected to enjoy a recovery, with growth increasing from 0.9 per cent in 2012 to 3.0 per cent this year. Mexico is expected to outperform Brazil this year, and next, however.

Russia is predicted to chug along with growth between 3 and 4 per cent, as was the case last year.

As for the world’s largest developed economies, it’s kind of going with size. The fastest growth rate is expected to apply to the US, expanding by 1.9 per cent this year and by 3.0 per cent next. Then we have Japan (1.6, then 1.4 per cent) and then Germany (0.6 followed by 1.5 per cent.)

The UK is expected to see a marginally better performance than Germany – 0.7 then 1.5 per cent, while France is expected to contract this year by 0.1 per cent before growing by 0.9 per cent next year.

Incidentally, the IMF is still sticking to the line that next year will be better. It always does seem to say that these days. It said it in 2008, 2009, 2010, 2011 and 2012. No doubt, this time next year, after revising its forecasts for 2014 downwards, it will predict an improvement in 2014.

Drill down and Europe’s star performer in the growth league in 2013 is expected to be Latvia, followed by Turkey, then Estonia and Lithuania. The worst performer is expected to be Greece, then Portugal, followed by Slovenia, Spain and then Italy.

Ireland is expected to grow by 1.1 per cent this year and by 2.2 per cent next. Iceland is expected to do slightly better this year and slightly worse than Ireland next year.

In Asia, Indonesia is expected be in second place behind China, followed by the Philippines, and then Thailand, India, and Vietnam.

In the Americas, Paraguay is expected to lead the way – in fact it is expected to have the fastest growth rate in the world (11.0 per cent). Chile, Bolivia and Ecuador are in second, third and fourth spots respectively; all are expected to grow at between 4 and 5 per cent. Venezuela is expected in last place.

In the Middle East and North Africa, Iraq is expected to be the fastest growing economy this year followed by Maghreb, then Qatar. Iran is expected to see contraction.

In Asia, Turkmenistan is expected to top the list followed by Kyrgyz Republic and then both Uzbekistan and Tajikistan.

In Sub-Saharan Africa the order from the top is expected to be Sierra Leone, Swaziland, the Gambia, Mozambique and the Ivory Coast. Both Sierra Leone and Swaziland have been subjected to massive swings with huge contractions last year, and anticipated huge growth this year.

©2013 Investment and Business News.

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It was told elsewhere how the single most important piece of academic research underpinning austerity has come under attack. See: Austerity economics in disarray. Now the IMF has put the boot into the Austerians.

At the press conference held by the IMF as it revealed its latest economic outlook report, its chief economist Oliver Blanchard said of the UK: “In the face of very weak private demand, it may be time to consider adjusting the original fiscal consolidation plan.”

The IMF report itself when looking at the UK said: “Domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions, and economic uncertainty, while declining productivity growth and high unit labour costs are holding back much needed external rebalancing.”

Let’s just remind ourselves of the arguments on both sides.

Against austerity: GDP is made of consumption, investment, exports minus imports and government spending. Across the global economy exports must equal imports. For the world, only consumption, investment and government spending make up GDP. If consumption and investment fall, government spending must rise in order to achieve growth.

For austerity: The economy is like a fixed cake. If the government spends more, investment and consumption must fall. In short, a rise in government spending causes consumption and investment to fall. Households see government debt rise, and immediately assume taxes will rise, and save more and spend less to save for higher taxes. Companies follow much the same logic.

Against austerity: But countries such as Spain had modest government debt just at the point when the economy crashed. Poor economic growth causes government debt to rise.

For austerity: Government debt is immoral. It means we are passing on debts to our children and generations to come.

Against austerity: But austerity can cause unemployment amongst the young, and may permanently result in the deterioration of the career prospects for those who should be entering the workforce for the first time.

For austerity: Creative destruction frees up space into which new companies can grow.

For austerity: Debts have to be reined in.

Against austerity: Implement creative destruction when the economy is growing. Because austerity leads to lower growth, it can cause debt to GDP to rise. For austerity: Carmen Reinhart and Ken Rogoff’s book: ‘This time it is different’ makes it clear. When government debt rises over 90 per cent of GDP, growth falls.

Against austerity: A new paper has thrown a huge question mark over the validity of Reinhart and Rogoff’s findings. See: Austerity economics in disarray.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

The IMF and the French government disagree. The IMF has downgraded its previously estimated forecast for the French economy to grow by 0.3 per cent in 2013, to a 0.1 per cent contraction. The French government predicts a growth rate of 0.1 per cent in 2013. The difference between the two sets of projections is not great, but psychologically speaking there is a huge gulf between modest growth and a slight contraction. Alas, the IMF may be understating the reality.

It really boils down to culture. There is the Anglo Saxon way and the French way. In the UK, the favourite pastime of many Brits is called “let’s knock our country.” Let’s find reasons why we are… how can one put it nicely?… crap. So that’s our cars, our factories, our, well… our everything. The French have one thing in common with the Brits, and that is that they too find it easy to think of things wrong with Britain. Rarely, however, do you hear the French talking down France.

This is not meant to be a criticism of either set of cultural attitudes. It is just the way it is.

When it comes to economics, however, it is not like that. Anglo Saxon economists look at the restrictive labour laws in France, the wall of protectionism it erects – it is a kind of latter-day Maginot line of business – at its inefficient and highly protected auto makers, at French taxes, at the low retirement age at a time of an ageing population, and scratch their heads. It is a miracle, say these economists, that France didn’t fall into recession years ago, and then stay there.

French economists, on the other hand, look at the UK, at its nonsensically low minimum wage at a time when wages are falling, at the lack of maximum working hours and the high level of our retirement age at a time when unemployment is high, at the way in which Brits sit back and allow foreign companies to buy out our famous brands and businesses, at our lack of manufacturing, and scratch their heads. They say the only reason why the UK didn’t fall into recession years ago, and stay there, was because of that hugely damaging and destructive place we call the City of London.

Last year the US Conference Board put out forecasts for the 58 most important countries across the global economy for the next ten years and predicted that the French economy would be the worst performer. It forecast an average growth rate of 0.2 per cent for France over the next five years, and 0.3 per cent over the next ten years. If these forecasts are right, that may support the Anglo Saxon view. On the other hand, its forecasts for the UK weren’t much better.

Last year the ‘Economist’ ran a controversial article claiming that France was the time-bomb at the heart of Europe.

It went down in France about as well as the idea of New Zealand wine.

But looking forward, well actually, we might as look backward. The difference in French and Anglo Saxon ideology goes back centuries. And neither side has yet won the argument.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here