Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘IMF

Is there a rift between the democratic party and the Obama administration?

leave a comment »

Obama-democrats

I have written about Goldman Sachs and how the investment firm contributed to the worst financial crisis since the Great Depression. Matt Taibbi alluded to GS as The Great American Bubble Machine contributing substantially to all major investment bubbles since the 1930s. GS has always been a talent hotbed where privileged alumni leave the firm through what Stieglitz calls a revolving door to end up in critical positions of government. The list of those exiting Goldman and entering the government is long, but it is clear that they are all associated with the Democratic party.

Next to this one there could be another list, one of detrimental political decisions that contributed to the current crisis. On top of it is the repeal of the Glass-Steagall-Act under former GS employee and Bill Clinton’s Treasury secretary Robert Rubin, which allowed bank holding companies to own other financial institutions and eventually become too big to fail and a systemic risk. This of course was never intended but as we painfully recognize one of those far-reaching wrong judgments made by a democratic administration. In light of this anything but impeccable track record we have to ask if democrats are truly forthcoming in their desire for real change or are they about to make another big mistake?

In November of 2008 a new spirit of political leadership in the US was finally entering into the halls of congress and the White House. President Obama has promised to bring change to Washington and the democratic party vowed to stand beside him and his ambitious agenda. In the meantime democrats together with two independents have a sound filibuster majority of 60 in the senate. They are now calling the shots in the government and the legislature. It is therefore even more disturbing to see how the House of Representatives overwhelmingly rejected a signing statement from their president.

In June a $106 billion war supplemental bill passed legislation in the House and Senate which included conditions on World Bank and IMF funding. The bill would extend a credit line of $108 billion for international financial institutions (IFI) to aid struggling developing economies crippled by the current financial and economic crisis. Major recipients of IFI funds could be nations in Eastern Europe under immense pressure to devalue their currencies in an attempt to avoid a default scenario. This would have a ripple effect and threaten the stability of the global financial system similar to events during the Asian crisis in the late 90s.

Despite severe and eventually devastating consequences to an already ailing global financial system of such a devaluation scenario, resistance is mounting among lawmakers who view IFI funding as an unnecessary ‘global bailout’ . To reach a compromise and find the votes to pass the bill House and Senate leaders included restrictions resulting in an amendment requiring the Treasury department to report on World Bank and International Monetary Fund (IMF) activities. Late Thursday the amendment passed with strong bipartisan support and an overwhelming majority of 492-2 votes against the Obama administration.

The president in a statement during signing of the original bill rejected this restrictions and vowed to ignore the amendment’s conditions. They would "interfere with my constitutional authority to conduct foreign relations (with international organizations and foreign governments)… by requiring consultation with the Congress prior to such negotiations or discussions," Obama said in the signing statement. With the passage of the amendment lawmakers including Barney Frank, a democrat and head of the powerful House Financial Services Committee (HFSC), are now threatening to withhold funds in a stand-off with the Obama administration.

492 to 2 speaks a clear language and it remains to be seen if the administration can afford to ignore congress under these conditions. Though it certainly would mean a severe blow to the authority of the president if he will be forced to revoke his signing statement. His foray into environmental politics (see also here), for the first time opening up the United States to international commitments to substantially reducing carbon emissions, could be called into question. So could his commitments he made during his Moscow speech (see also here), to the establishment of an international body together with and under the leadership of the U.S.

Much needed reform in Washington away from neoliberalism towards true and sustainable world leadership hangs on a thread. While first signs emerge of a search for an effective international body that more truthfully represents interests of all nations in a global economy, the coverage of the G-8 summit in Italy by mainstream media in the U.S. suggests otherwise.

The media are either ignoring or mocking efforts of the G-8 to increase the scope of their discussion round tables by opening it up to other powerful nations like China, Brazil, India, Mexico, South Africa and others. The NYT writes: “Eventually, the so-called Group of 8 started what might be considered auxiliary clubs. And that was how they ended up with a meeting on Thursday that was actually dubbed the G-8 + 5 + 1 + 5. Seriously.”

The Times also calls into question the relevance of the G-8 if they seemingly cannot take landmark action without enlisting others, and misses the point completely: It is not about relevance of the G-8 but rather about sustainable credibility within the G-15, G-20 or even G-194. It is not about America but rather about sustainable relations between all nations in a political and economic environment more and more intertwined by globalization. If we have learned nothing else from the current financial and economic crisis this should be it.

Leaving other nations out makes the G-8 nothing but an elite club of snobbish leaders who in a reactionary move desperately seek to conserve neoliberal, neoconservative mindset. Barak Obama, Angela Merkel, Nicolas Sarkozy and other powerful leaders understand that and therefore support this search for a new international world order. Reactionary dinosaur politicians will eventually face the same destiny. In the meantime there are still too many of them and they are still very powerful. President Obama’s stand-off with the congress on the issue of the signing statement serves as a litmus test about the determination towards change in a modernized America.

Advertisements

Austria – is there an emergency plan for Eastern Europe?

leave a comment »

Back in January this year experts from the EZB, IMF, EBRD and Austrian government together with representatives from the largest banks in the country met almost secretly to what has been called ‘Gedankenaustausch’. Officials denied it was a crisis meeting but rather a swapping of ideas about how best to meet the challenges threatening the stability of the country coming form Eastern Europe.

Noble laureate and US economist Krugman even claimed that the country is at severe risk of default because of its off the charts exposure to Eastern Europe. Krugman: “So what I said …..— that after those two (Iceland and Ireland), it’s (Austria) probably the advanced country at most risk from the financial crisis — shouldn’t even be controversial.”

image

The professor does not even deem it controversial and yet Austrian officials both from politics and financial industry maintain the crisis is manageable and not as bad as some might fear.  Walter Rothensteiner CEO of Raiffeisen Zentralbank (RZB), one of Austrian’s biggest banks, does not agree with international organizations like the IMF that his bank will need more government funds in 2010. Of course those funds are expensive. So far RZB has requested 2.5 billion euro from the government (that’s almost 30 percent of core capital!). Rothensteiner refuses to make any projections about the magnitude of possible NPLs in his firm.

Recently economist Paul Hilbers, head of IMF’s monetary and financial systems department, downplayed the threat coming form Eastern Europe. “We don’t see a threatening default scenario. Austrian banks are facing a difficult time in Eastern Europe, but I wouldn’t call them threatened," Hilbers said.

Today the OECD again warned of more risks to the financial stability of the country through its heavy Eastern European exposure. They recommend to the Austrian government to prepare emergency plans in case the financial and economic crisis should get worse. In addition OECD experts suggest further cross-boarder initiatives to handle the crisis.

There are no official emergency plans known. Maybe they do exist though. Even the OECD admits so far Austria has weathered the storm better than others, but I sincerely hope that politicians and experts do not turn off electricity entirely when they all go on vacation in the coming months. Better yet hopefully there will be no emergency at all, at least not in the months of July and August.

Written by Alfred

2. July 2009 at 1:15 pm

Update on deepest global recession in over 60 years

leave a comment »

Yesterday US president Obama for the first time offered a passionate defense of Ben Bernanke, chairman of the Federal Reserve. Bernanke did a fine job and performed well during the crisis. This support is supposed to strengthen Obama’s position on reform and oversight of the financial-services industry. He plans to vest almost unlimited power with Bernanke and the Federal Reserve and this has drawn some criticism. Many blame the Fed for the current financial and economic crisis and despite drastic actions by the Fed and other central banks around the world, global growth has continued to contract. Here is an update on the most recent forecast for global growth and despite some improvement it ain’t looking good.

Weltbank Kahlschlag bei Euro-Zone-Prognose:

World Bank lowers Euro-zone GDP growth forecast dramatically from minus 2.7 to minus 4.5 percent GDP growth for 2009. US GDP will also contract by 3 percent, worse than the previous 2.4, and Japan by 6.8 percent versus 4.3 percent contraction of GDP in 2009. According to WB the recovery in 2010 will also be more tepid than previously thought. A modest better growth uptick is expected for China, Russia and India.

Weltwirtschaft erholt sich laut IWF schneller:

According to the International Monetary Fund (IMF) the recovery from the global recession will be stronger than previously thought but deleveraging of private and public households, slow credit growth, unemployment and shrinking private wealth will slow down recovery. For 2009 global growth will contract by 1.3 percent according to the IMF.

World Bank cuts 2009 global growth forecast:

Global trade is expected to plunge by 9.7 percent this year, while total gross domestic product for high-income countries contracts by 4.2 percent, the bank said. Economic growth in developing countries should slow to 1.2 percent — but excluding relatively strong China and India, developing economies will contract by 1.6 percent. The WB sees a projected recovery beginning at the end of 2009 but expects it to be much less vigorous than normal.

Global recession nearing bottom, OECD says:

The deepest global recession in over 60 years is close to bottoming out, but recovery will be weak unless governments do more to remove uncertainty over banks’ balance sheets, the Organization for Economic Cooperation and Development (OECD) said Wednesday. The economy of OECD countries will shrink by 4.1 percent in 2009, slightly better than a 4.3 percent from the previous forecast. But the recovery "is likely to be both weak and fragile for some time” . The OECD forecasts return to an average of 0.7 percent growth across its member countries in 2010. In the US recovery "could be uncharacteristically weak and insufficient" .

 WachstumsprognosenJun2009

Written by Alfred

24. June 2009 at 10:11 pm

This crisis is far from over

leave a comment »

This weekend finance minister of the G-8 nations gather in the south of Italy hopefully not only to take a sunbath. While leading economists are still warning of high uncertainty regarding growth and systemic risk for financial contagion still lingers the G-8 finance ministers are already discussing a possible exit from fiscal and monetary stimulus programs.

This seems premature. The subprime fiasco seems largely over but other problems prop up in particular in Eastern Europe. This region of the former communistic Soviet Union is a going concern. While some of the worst fears are probably exaggerated systemic risk and possible contagion for some Central European banks still lingers.  Banks in Austria, Germany and Sweden have 1.6 trillion US dollar loan exposure in the region.

Of particular interest is the Baltic mini-state of Latvia. GDP of Latvia was 36 billion US dollar in 2008 but problems might spread to neighboring countries yet and get out of control. Just recently foreign exchange markets got upset by failure of Latvia’s bond auction.

Sweden is Latvia’s biggest creditor and its banks have heavy exposure to the Baltic state. Recently Sweden’s Riksbank borrowed 3 billion euros from the ECB. That shows how serious the situation is. The bank is drawing down on a 10 billion euro swap agreement.

Latvia is now in negotiations with the IMF to secure another round of funding, but first it has to implement spending cuts and restrictive fiscal measures, which could further dampen the outlook for growth and lead to even higher unemployment.

But Latvia is not the only problem. About a third of fund managers polled expect more Eastern European countries to default and about 11 percent expect a full-blown systemic meltdown. This has prompted the ECB to issue a warning for 2010 rather than 2009 if the recession lingers.

According to the European Commission 27 EU states have so far pumped 3.7 trillion Euro into rescuing the banks, that’s almost a third of European GDP. Out of that pool 311 billion have been in the form of direct capital injections, that is more than US banks received.

In the meantime the German government has agreed to implement a ‘bad-bank-model’ where large regional banks, like the German Landesbanken, will be able to transfer their bad investments worth about 600 billion euros until 2010. A similar drastic measure might be necessary for Austrian banks too. It seems to be a weird coincidence that this dumping institution for bad assets has been named after a beautiful Italian opera, AIDA.

Complicating the situation is a moldering conflict within the IMF, where funding in the US seems to be called into question. A proposal to send $108 billion is attached in a supplemental appropriations bill to fund the wars in Irak and Afghanistan. While funding for the wars is most likely to be approved the IMF has come under criticism, mainly because of lack of economic stimulus measures among European states.

Republicans and Democrats in the House of Representatives oppose the fund because they fear that the money will mainly be used to bail out Central European banks. If the administration will fail to garner sufficient votes they can pull the funding bill out and support a war-only funding bill. That’s a smoking gun for Eastern Europe and Central Europe alike.

will it cause a snowball effect?

latvia_exchange_rate_1000_usd

Written by Alfred

12. June 2009 at 11:13 am

Eastern Europe showered with IMF funds

leave a comment »

The Raiffeisen Zentral Bank (RZB), a major Austrian bank with total assets of 156 billion euro, has issued results for the first quarter of 2009 today. While the bank is still making money profit after tax plunged to 29 million euro from 117 a year earlier, despite record revenues which increased 34 percent compared to last year.

Provisions for credit risk increased by a stunning 500 million euro to 596 million euro. RZB is one of the many European banks with heavy exposure to Eastern Europe. Devaluation of  local currencies led to a massive increase in troubled loans mainly in Ukraine, Russia, Hungary and Serbia, according to CEO Rothensteiner.

The dramatic development in Eastern Europe has caused the government of Austria, the EU and the International Monetary Fund (IMF) to intervene. Austria has already pledged 1.75 billion euro as participation capital for the RZB.

There is more concern in the region. The IMF has determined in a stress test that Romanian banks are also short of capital. They are in need of 1.7 billion euro. IMF experts think that output contraction in the region has not run its course yet.

Although due to large foreign currency reserves Russia does not need assistance from the IMF or the EU, Alexej Simanowski, head of bank supervision, urged banks to increase their capital by 12 billion euro. A necessary step to keep banks liquid if loan default would increase to 10 percent from about 4 percent today.

How precarious the situation is, becomes obvious from the plethora of assistance offered to Eastern European countries in the last 12 month. The IMF has granted Stand By Arrangements (SBA), pending SBA, Poverty Reduction and Growth Facilities (PRGF) and Flexible Credit Lines (FCL) to the tune of 80 billion US dollar. In the table below a loan of 2.1 billion USD to Iceland is also included.

Not included is Croatia. The outlook for long term credit rating has been lowered to negative from stable due to the deep recession . The country needs IMF assistance according to Fitch. 

IMF loan programs to eastern Europe:

image

Written by Alfred

27. May 2009 at 12:12 pm

Hochverschuldetes Europa!

leave a comment »

Geldausgeben scheint zu einer neuen Lieblingsbeschäftigung in Europa geworden zu sein. Da stehen wir Amerika jetzt nichts mehr nach. Man fragt was ist bloß aus dem Nulldefizit geworden?

Die Maastricht-Grenzen von drei Prozent werden in Österreich und allen anderen Europäischen Staaten (mit Ausnahme von Finnland?) 2008/09 mit Sicherheit nicht erreicht. In Österreich wird der Schuldenberg bis 2013 auf fast 80 Prozent des Bruttoinlandsproduktes anwachsen. Das bedeutet das man allein für die Zinsen in vier Jahren über 11 Milliarden Euro oder fast die Hälfte der heurigen Einnahmen aus Lohn- und Umsatzsteuer budgetieren muss. Na dann gute Nacht für die höchste Bonitätsstufe.

Die FT Deutschland berichtet über die Schuldenlast die Europas Staaten zu erdrücken droht. Die Tabelle als Erweiterung dieses Beitrags greift hauptsächlich auf Daten des Internationalen Währungsfonds (IMF) zu, die in der ‘World Economic Outlook Database, April 2009’ veröffentlicht sind. Für die Berechnung der nationalen Verschuldung der Ukraine in Prozent des GDP, wurde eine Publikation der National Bank of Ukraine verwendet, wobei die Staatsverschuldung in Milliarden US Dollar für 2008 und 2009 gleichbelassen wurde.

image

Written by Alfred

26. May 2009 at 4:14 pm