* The IMF program has already deteriorated from strict support with firm strings attached, to anything goes - you´ll get your money anyway
One has to ask oneself; What is the IMF doing? Trying to fund fixed currency regimes? I thought the purpose was to stabilise countries and help them over a bumpy transitionperiod when under financial distress. Well, to get some kind of bang for the buck the IMF would be wise to start by demanding a floating currency. This fundamental piece has been ignored so far.
*Ukraine
Ukraine remains a case in point. The government signed strict terms in order to get their 16 Bn Usd IMF "loan". Once it was signed they did not cut spending as agreed, their banks were in worse shape than initially declared and the probability of the agreed fiscal program being launched was very low. So what does the IMF do? They just pay out the 16 Bn Usd anyway. Those 16 Bn Usd have now been used to bail out the 7 biggest local banks. Nothing left. More local banks in line and, of course, the country´s economy is still in shambles. Oh, Ukraine have not floated their currency either, which IMF recommended.
*Latvia sinking
Next case is Latvia and the rest of the Baltics. They are all sinking like stones in the Baltic sea and still havent reached bottom. The obvious and no brainer first step is to let go of their fixed currency regimes. However, local prestige mixed with a Swedish bank lobbied Swedish finance minister and government has blocked this first step so far. Instead IMF is burning global taxpayer cash to fund the fixed currency regimes. Swedish taxpayers are doing the same and they havent catched on as of yet.
* The IMF ATM machine
IMF negotiated an agreement with Latvia under which the Latvian government agreed to set a budget which limited the Latvian budget deficit to 5% of GDP. Once an attempt was made to get this through the local parliament, the Primeminister was relieved of his duties by the Latvian president due to protests from the population.
The new Government then promptly declared that they would not honour the agreement and that Latvia would be bankrupt by June without the June IMF payment.
It was added that the Latvian budget deficit would amount to 7.7% of the GDP.
So far this year , the Latvian government has spend twice as much as they should in order to meet the IMF criteria. They will now have to make budget cuts of up to 40 % in an environment of swiftly dwindling tax revenues as the private sector implodes.
What is the probability of that working in a kryptonite deflation environment which grows exponentially due to a fixed currency regime? Low, lower, zilch?
Latvia havent recieved the March 200 Mln Eur payment so far, but it now seems they will receive a 1.6 Bn Eur payment for June from the IMF, despite Latvia not fulfilling the most important IMF criteria of all. With Russia around the corner soon looking for IMF money it might be wise to slow down on the burnrate somewhat, or at least link the payouts with a float of their currencies. This bearmarket is by no means over and Europe and the CEE is next in turn to get hit hard.This time should be wisely spend to prepare and plan for what has a high risk of happening - not to mindlessly throw money around. Its time to limit the IMF ATM.
As usual, good luck
The tragic part of it is that the local populations of all these countries with fixed currency regimes will pay a very hefty price for politicians prestige and foreign banks unwillingness to take their losses. The fixed currency regimes will be let go - the question is how much the local populations will have to suffer before there is a float. Risks of social unrest have risen dramatically and will continue to do so over the next few months.
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2 comments:
Hi Macrotrader, thanks for continued illuminating posts.
I think the reason the IMF is allowing Latvia so much latitude is because they are aware of the potential contagian effects of a deval of the LVL - I'd be surprised if they are in favour the exchange rate regime itself. Devaluation would set off a chain of similar moves elsewhere.
More generally, personally I view weaker IMF conditionality (relative to history) as a positive. It's unrealistic to expect many of these countries to tighten fiscal policy very significantly when they are already suffering horribly and when the source of this crisis is external (though I appreciate the fixed exchange rates are accentuating the effects). Too strong a tightening of policy could lead to an undesirable swing to leftist policies in these countries - I dont think anyone wants that. And, after years out i n the wilderness, the IMF knows that too tough conditionality will lead to countries refusing their help... again that doesnt help any parties involved.
Hi J72!
I definitely agree with you on the contagion risk. However,that in itself does not justify letting a country implode though, with massive human suffering as a consequence. Especially when it can so easily be avoided.
Besides, from an overall perspective it is wasting precious capital in order to maintain a fixed currencyregime - in a deflationary environment - where cash is king.
Without the fixed currency regime, the IMF money might actually do some good. Currently it is instead being channeled mainly into the public sector and to compensate for lost taxrevenue.
The private sector is currently withering away as the Latvian government is dithering. Without a private sector, Latvia will have to depend on IMF money going forward.
Not really a viable set up, is it? I simply suggest the IMF provide Latvia with limited funds, conditioned on letting the fixed currency regime go. This in order for Latvia to be able to navigate the very difficult process ahead.
Thank you very much for your feedback and your views. Appreciate.
Best of luck
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