For some time, International Monetary Fund supremo Christine Lagarde has argued that a stronger “global firewall” is needed, to contain “any future financial crises”. Well, at this weekend’s IMF-World Bank meetings in Washington, she announced there are now “firm commitments” from member states to boost the IMF’s lending power.
The extra resources, Lagarde’s officials dutifully claimed, will be “available for the whole IMF membership, not earmarked for any particular region”. Everyone knows this is nonsense. This higher IMF firewall has been created, the money being reluctantly made available by member states, because governments around the world are petrified the eurozone could implode, sparking another “Lehman moment”.
Since the start of the global economic crisis in 2007, the IMF has extended over $300bn in loans. With another $430bn of finance now available, in theory at least, these latest “pledges” have almost doubled its existing lending capacity.
“We made a call to action, and our members delivered,” proclaimed Lagarde. Behind the rhetoric, though, donor countries are seething – not least those who aren’t even in the euro. Switzerland, the UK, South Korea and Sweden have respectively stumped-up $26bn, $15bn, $15bn and $10bn. Norway has weighed-in with $9bn, Australia and Singapore pledging $7bn and $4bn each
The US is refusing to contribute to the IMF new lending facility, for the unspoken reason that Obama would be eviscerated if he even thought about asking Congress, this close to the November Presidential election, for “money for the olde world”. Based on its jealously-guarded voting quotas, America’s “fair share” of the financing would be $70bn.
The large emerging markets, in contrast, have said that, between them, they’ll chip-in over $100bn. Before making specific commitments, though, China, Russia and Brazil in particular want more evidence of “eurozone governance”.
So a communist country, a formerly communist country and a country not so long ago rightly described as “an economic basket-case” now need proof that Western Europe is capable of facing-up to its problems and doing something about them. Can you blame them?
Right across the emerging markets, in fact, where incomes per head remain way below Western levels, there is deep concern about ponying-up for a region rich enough to look after itself – if only that region’s elite could agree on sustainable monetary and regulatory arrangements. This on-going eurozone debacle shows they can’t. And now the eurozone is going “cap-in-hand” to the rest of the world, albeit under the face-saving auspices of the IMF.
In March, the eurozone enlarged its own firewall by 40pc. Double-counting, definitional changes and other book-keeping wheezes mean combined pledges and cash in the eurozone’s arsenal now total $930bn – an amount which may never be delivered or even be deliverable. The very size of the “bazooka” is supposed to reassure global markets any eurozone “contagion” will be contained.
That’s the theory behind financial firewalls – that they’ll never actually be needed. Such reasoning is defendable but only if the breathing space the firewall provides is used to press ahead with genuine structural solutions to the issues which necessitated the firewall in the first place. Publicly-funded firewalls are justified if they are used to facilitate genuine action. It’s almost inevitable this eurozone firewall will be used instead to facilitate further denial.
Is it possible, with the best will in the world, to draw any other conclusion? Europe’s almost entirely un-restructured banking sector remains bombed-out, sitting on trillions of euros of undeclared losses. Member states continue to bail-out their busted banks using “virtually printed money”, the banks in turn using such bail-outs to buy members states’ sovereign debts. This is unsustainable – so, by definition, will not be sustained. These IMF and eurozone firewalls may allow the party to continue a while longer. But the ultimate hangover will be even worse.
What the eurozone desperately needs, as this column has argued ad nauseum, is for its banks to be forced, under threat to executives of custodial sentence, to “fess-up” the massive losses on their balance sheets. The worst of those losses must be written-off, resulting in bank restructurings, with salvageable loans placed in a state-sponsored “bad bank” in the hope some value can ultimately be recovered. Doing this will cause a lot of pain and yet more debt will hit some nations’ balance sheets. But there really is no alternative.
We’re well, well beyond the point where any eurozone solution will be palatable. The harsh medicine of write-downs and debt restructurings should be implemented behind the various firewalls, while such firewalls can still be erected.
None of this will happen, of course. The most likely outcome is that the European Central Bank once again starts buying bucket-loads of eurozone sovereign bonds. The Spanish 10-year yield, having jumped above 6pc momentarily in recent weeks, is now 5.8pc. If it goes decisively over 6pc, and starts heading for 7pc, expect German objections to be shunted aside as the ECB goes on another spending spree courtesy of “continental QE”
Already last week, covert secondary market ECB bond-buying was suppressing Spanish sovereign yields. Meanwhile, ECB net lending to Spanish banks soared to €228bn in March, 49pc up on the month before. Spain now accounts for two-thirds of the ECB’s net lending to Eurozone banks.
Socialist French Presidential candidate Francois Hollande has just upped the stakes, calling for the ECB to hoover-up sovereign paper directly, without even using commercial banks as intermediaries. This is a wildly irresponsible proposal, the gateway to unashamed debt-monetization. It wouldn’t surprise me, though, if such brain-dead populism was now adopted by Nicolas Sarkozy, Hollande’s struggling rival. What price French bonds if, after this weekend’s first-round poll, Sarkozy and Hollande engage in an escalating Berlin-baiting contest, insisting that the ECB adopts Zimbabwe-style economics?
Eurozone leaders need to decide, fast, if the solution to their problems is “more Europe” or “less Europe”. Is the single currency going to be slimmed down, or will it press ahead, in its current form towards full fiscal union? There is no middle way. The current reliance on printed money, cover-up and denial can’t last, however high the firewall.
How much longer will Germany’s hard-working, inflation-averse population tolerate paying for other countries’ excesses? There is considerable anger across the eurozone’s largest economy, even though most voters don’t know the half of it. Obscure data shows that under so-called “Target 2” operations, the ECB’s intra-eurozone payments system, the Bundesbank is owed a mighty €620bn by other member states. This on-going “stealth bail-out” dwarfs German’s covert contributions to previous eurozone rescues, contributions which themselves provoked bitter public criticism.
The firewalls and bail-outs have so far served only to consolidate and deepen the nepotistic, self-serving relationships between many of the eurozone’s banks and governments. This has allowed the banks to go on another credit-fueled binge, this time based not on dot-com stocks or real estate, but on their own governments’ debt.
Chancellor George Osborne defended the UK’s financial commitment to the maintenance of this self-destructive charade. “Britain is not turning up in Washington seeking a loan from the IMF, but offering a contribution,” he said.
Yet, on this issue at least, I find myself agreeing with Ed Balls. “The IMF’s job is to support individual countries with solvency crises, not to support a whole monetary union which cannot agree the necessary steps to maintain itself,” the Shadow Chancellor rightly observed.
The IMF cannot and should not become the eurozone’s de facto central bank. Yet under Lagarde – a eurocrat to her well-manicured finger-tips and future French Presidential candidate, no doubt – that was always gong to be the case.