Geo-Graphics

In our March 5 post, we argued that the Obama administration linking Ukraine aid to IMF reform was disingenuous and counterproductive.  We were right: the legislation failed, congressional Republicans were angered, foreign governments were annoyed, and aid was delayed.  All for what?  Without IMF reform, Ukraine will still get every penny it would have gotten with IMF reform.  Today’s Geo-Graphic shows this.  And more... The far left two bars (1 and 2) in the figure show that IMF “Rapid Financing Instrument” (RFI) aid was precluded by the American political wrangling, which held up the $1 billion in U.S. loan guarantees the IMF expected to accompany RFI aid.  Bars 3 and 4 show the level of IMF aid Ukraine is entitled to over two years under “normal” access criteria with its current quota and what it would have been entitled to with a revised quota, post-IMF reform.  The difference between these two numbers is meaningless – even if IMF reform were enacted, Ukraine would still need to qualify for “exceptional” access to receive the level of aid the IMF has agreed to provide over two years (bar 5). Brazilian IMF executive director Paulo Nogueira Batista told the FT that he had wanted the Fund to approve a small bridging loan to Ukraine quickly, with negotiation of the bigger package coming later under less stress.  “The experience we had in some other programmes – notably Greece – is that rushed decisions taken under economic and political pressure can lead to questionable results.” But, he explained, Ukraine’s short-term financing needs were greater than the IMF could have covered with a bridging loan.  The U.S. loan guarantees could have covered the difference, but the Obama administration unwisely made them hostage to IMF reform. The scorecard?  No IMF reform; an unnecessarily rushed IMF aid package for Ukraine, but with slower aid dispersal; and ruffled feathers all around.  This is an object lesson in how not to conduct economic diplomacy. Financial Times: IMF Rushes Through $15 Billion Ukraine Bailout IMF: Agreement with Ukraine on US$14-18 Billion Stand-By Arrangement Wall Street Journal: IMF Reaches Deal to Provide Up to $18 Billion to Ukraine The Hill: Reid Drops Ukraine Demands   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.”

Fed officials have been tripping over themselves and each other trying to explain to the world what the right measure of unemployment is and how it should affect what the Fed does. Using the headline unemployment rate (“U-3”) in official communications hasn’t worked out so well.  Last June, then-Chairman Ben Bernanke suggested that the taper would end with U-3 around 7%; in fact, taper only started with U-3 below that level, at 6.6%.  The FOMC’s December 2012 forward guidance specified a 6.5% threshold for potential rate rises; yet now, with unemployment barely above this, we have NY Fed President Bill Dudley arguing that the guidance should be discarded entirely, as the number is “not providing a lot of value right now in terms of our communications.” No kidding.  And that’s because, as we argued in this post, it’s actually not about unemployment right now – whether the “right” measure is U-3, U-4 (adding discouraged workers), U-5 (adding all marginally attached workers), or U-6 (adding all marginally attached and employed-part-time-for-economic-reasons workers).  As the graphic above shows, unemployment today is not much above where it was when the Fed started hiking in ’94.  And the evidence is strong that unemployment is on a downward trend.  (The main debate is over how rapid the decline will be.)  Inflation, however, is way below the Fed’s official long-term target of 2%.  It is also substantially below where it was at the beginning of the Fed’s past four rate hike episodes - ’94, ’97, ’99, and ’04. This suggests not just that Dudley is right about the Fed dropping the U-3 guidance, but that the Fed should replace it with clarification on inflation.  At what point does the Fed worry about inflation going, or staying, too low?  Is the December 2012 inflation guidance, which said that the Fed would tolerate projected inflation 0.5% above its long-term target of 2% in order to bring unemployment down, still operative?  Or are we back to the plain-old 2% target?  Something else? It’s on inflation that the Fed appears disconcertingly rudderless at the moment. New York Fed: Eight Different Faces of the Labor Market Real Time Economics: The Evolution of the Bank of England’s Rate Guidance Davies: The Fed’s Next Focus Is on Wages Free Exchange: The Market Does Not Expect Overshooting   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.”

The new provisional government in Ukraine is seeking $15 billion in assistance from the International Monetary Fund.  This would represent 700% of the country’s quota with the Fund, added on top of the loans it has already outstanding, amounting to 214% of its quota. The Fund allows members to borrow up to 200% of their quota annually and 600% cumulatively through stand-by and extended arrangements, so Ukraine is clearly seeking well in excess of this.  U.S. Treasury Secretary Jack Lew has called on Congress to back IMF quota reform, “which would support the IMF’s capacity to lend additional resources to Ukraine.” We wholeheartedly back the IMF reform the administration seeks, but it is neither necessary nor desirable for Lew to ratchet up this fight with Congress now. The IMF already has criteria for allowing member countries to borrow beyond the normal access limits.  And indeed, as shown in the graphic above, Greece, Portugal, and Ireland are already doing so. Lew knows this.  Since Ukraine should also meet the criteria for above-quota borrowing, it is imprudent of him openly to question the IMF’s “capacity” to aid Ukraine as a pretext for shunting Republicans into action on broader IMF reform. CFR Expert Roundup: The Case for IMF Quota Reform Congressional Research Service: IMF Reforms Macro and Markets: Make or Break for IMF Reform Geo-Graphics: A GDP-Based IMF Would Boost China’s Voice . . . and America’s   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.”