Geo-Graphics

IMF GDP growth “projections” accompanying emergency lending programs are nothing of the sort; they are targets the level of which is necessarily set high enough to enable the interventions. Take Greece.  After committing to lending of €30 billion over 3 years in 2010, the Fund projected that the crisis-mired nation would return to growth by 2012.  As shown in the left figure above, Greece’s economy actually plunged by 7% that year – the year it completed the world’s largest sovereign restructuring, covering €206 billion of bonds. Take Ukraine.  After committing to lending $17 billion over 2 years in April, the Fund projected that its civil/Russian war would magically end and its economy bloom – achieving 2% growth in 2015.  Instead, its “adverse scenario” looks to be playing out according to script, with the economy on pace for a 7% decline.  There is now a massive $15 billion gap between what has been pledged by the official sector (IMF, World Bank, European Union, and others) and what is actually needed to fund the government. The point is not that the IMF is particularly incompetent or unlucky; few in the organization’s talented professional staff could be in the least surprised with how Greece and Ukraine have played out.  The point is that the IMF’s growth projections for crisis-hit client countries are deliberately being pegged at levels high enough to overcome its own prohibition against lending to countries that lack sufficient funding to cover government spending over the coming 12 months. This is a sound rule, intended to keep the Fund from getting sucked into the vortex of politics.  Greece’s insolvency clearly required write-offs and gifts; more debt, which is all the Fund has to offer, was never going to resolve the problem.  Ukraine requires at a minimum a cessation of hostilities.  By all means, the EU, U.S., and other friendly nations should step in financially and otherwise to show solidarity, but such is not the proper role of the Fund.  If it manages to avoid major losses on these interventions, it will only do so by having provided political cover for those who will – governments, such as those of Germany and the United States, which should have been up-front with their people about the likely cost and political purpose of their aid. Financial Times: IMF Warns Ukraine Bailout at Risk of Collapse Wall Street Journal: Ukraine Will Need More Bailout Funding, IMF’s Lagarde Says IMF: Ukraine Request for a Stand-By Arrangement IMF: Ex Post Evaluation of Greece's Exceptional Access   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Low market valuations (i.e., price to book ratios) for euro area banks reflect market concerns over their capital cushions, opined the Bank of England just prior to last-year’s launch of the ECB stress tests—the long-awaited results of which were published on October 26.  The tests, “by improving transparency,” said the BoE, have “the potential to improve confidence in euro area banks.” So did they? We looked at market valuations just before and after publication of the test results.  As can be seen from the right-hand figure above, they rose sharply, both in absolute terms and relative to the broader market, in the week leading up to publication—a period in which there was considerable speculation that the results would be good.  They were indeed good, with only 25 out of 130 banks failing, but valuations plummeted over the three weeks following publication, in absolute terms and relative to the broader market.  28 of the 31 Euro Stoxx index banks tested now trade at lower valuations than they did before the results were released. Over that three-week period, independent analyses were steadily coming out—among them, ours—criticizing the tests for flaws such as inflated inflation assumptions and over-generous treatment of deferred tax assets as capital.  The ECB’s conclusion that the banks needed to raise a mere €9.5 billion in additional capital was thus not credible, and indeed fell way short of what independent analysts were suggesting. In sum, the ECB has indeed improved transparency, revealing through data publication just how weak the capital base of the euro area banking sector actually is.  But in its unwillingness to call a spade a spade and to do something about it, it has failed to “improve confidence in euro area banks,” as the BoE had hoped it would.  The reason may lie in the fact that public-sector funds are needed but may not necessarily be made available by those that have them—a problem we flagged back in March. The ECB’s failed stress tests thus enter into the euro area’s already crowded stress test Hall of Shame.   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Paul Krugman routinely mocks Germany for wanting “everyone to run enormous trade surpluses at the same time.” As Martin Wolf has put it, this is impossible, as “the world cannot trade with Mars.” What we find amazing is that Krugman does not see a similar problem with his latest call for the United States to run “a weak-dollar policy.” Against whom should the U.S. pursue a weak dollar? As today’s Geo-Graphic shows, major economies outside the U.S. are in no condition to support stronger currencies.  Of the G-7 economies, as the main figure above indicates, only the U.S. and Canada – which have the second- and third-highest growth rates – have inflation near the developed-market standard of 2%.  The others, save the UK, have much lower growth and inflation.  The U.S. pursuing a weak-dollar policy towards its G-7 partners, therefore, would appear deeply damaging and misguided. The G-7 represents nearly half the global economy.  As for emerging markets, the small inset graph shows stagnant growth rates after years of decline.  Against this background, it looks difficult to justify a generalized appreciation of EM currencies. In short, we suspect that Krugman’s call for a weak-dollar policy can only mean one thing: currency war with Mars. CNBC: Why Currency Wars Could Stave Off a Fed Rate Hike Wall Street Journal: Fed Minutes Show Wariness Over Global Growth Financial Times: U.S. Dollar Surges After Strong Data WSJ's Real Time Economics: The Return of the Currency Wars   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”