8/7/2013: IMF on Euro Area: Repetition in the Endless Unlearning of Reality

IMF released its statement on 2013 Article IV Consultation with the Euro Area

The Statement reads (emphasis mine):
"Policy actions over the past year have addressed important tail risks and stabilized financial markets. But growth remains weak and unemployment is at a record high."

So what needs to be done, you might ask? Oh, nothing new, really. Euro area needs:
-- To take "concerted policy actions to restore financial sector health and complete the banking union". Wait… err… this was not planned to-date? Really?
-- "continued demand support in the near term and deeper structural reforms throughout the euro area remain instrumental to raise growth and create jobs". In other words: find some dish to spend on stuff and hope this will do the trick on short-term growth. Reform thereafter.

Not exactly encouraging? How about this: "…the centrifugal forces across the euro area remain serious and are pulling down growth everywhere. Financial markets are still fragmented along national borders and the cost of borrowing for the private sector is high in the periphery, particularly for smaller enterprises. Ailing banks continue to hold back the flow of credit." So the solution is - more credit? Now, what did we call credit in old days? Right… debt, so: "In the face of high private debt and continued uncertainty, households and firms are postponing spending—previously, this was mainly a problem of the periphery but uncertainty over the adequacy and timing of the policy response is now making itself felt in falling demand in the core as well." Wait a second, now: more credit… err… debt will solve the problem, but the problem is too much debt… err… credit from the past…

Ok, from IMF own publication earlier this year, what happens when credit - debt - is let loose:

Source: http://blog-imfdirect.imf.org/2013/03/05/a-missing-piece-in-europes-growth-puzzle/


Just in case you need more of this absurdity: "…reviving growth and employment is imperative. This requires actions on multiple fronts—repairing banks’ balance sheets, making further progress on banking union, supporting demand, and advancing structural reforms. These actions would be mutually reinforcing: measures to improve credit conditions in the periphery would boost investment and job creation in new productive sectors, which in turn would help restore competitiveness and raise growth in these economies. A piecemeal approach, on the other hand, could further undermine confidence and leave the euro area vulnerable to renewed stress." Oh, well, 5 years ago we needed

1. 'actions on repairing banks balance sheets' - five years later, we still need them;
2. actions on 'supporting demand' - aka, no tax increases and some investment stimulus - five years on, we still need them;
3. actions on 'advancing structural reforms' and five years on, we still need them too;
4. "measures to improve credit conditions in the periphery would boost investment and job creation in new productive sectors" - wait a second ten years ago we had easy credit conditions in the periphery and they failed comprehensively to 'boost investment and job creation in new productive sectors', having gone instead to fuel property and public spending bubbles… five years since the start of the crisis, we now should expect a sudden change in the economies response to easier credit supply?

IMF is more sound on banks: "bank losses need to be fully recognized, frail but viable banks recapitalized, and non-viable banks closed or restructured". But, five years, bank losses needed to be fully recognised too and we are still waiting. And when it comes to closing or restructuring non-viable banks, pardon me, but where was the IMF in the case of Ireland when the country was forced by the ECB to underwrite non-viable banks with taxpayers funds?

"A credible assessment of bank balance sheets is necessary to lift confidence in the euro area financial system." Ok, we had three assessments of euro area banks - none credible and all highly questionable in outcomes. Five years in, we are still waiting for an honest, open, transparent assessment.

Cutting past the complete waffle on the banking union and ESM, "The ECB could build on existing instruments—such as a new LTRO of longer tenor coupled with a review of current collateral policies, particularly on loans to small and medium-sized enterprises (SME)—or undertake a targeted LTRO specifically linked to new SME lending." Ooops, I have been saying for years now that the ECB should create a long-term funding pool for most distressed banks, stretching 10-15 years. Five years into the crisis - still waiting.


On structural reforms, IMF is going now broader and further than before and I like their migration:

"For the euro area, …a targeted implementation of the Services Directive would remove barriers to protected professions, promote cross-border competition, and, ultimately, raise productivity and incomes. A new round of free trade agreements could provide a much-needed push to improve services productivity. In addition, further support for credit and investment could be achieved through EIB facilities. The securitization schemes proposed by the European Commission and the European Investment Bank could also underpin SME lending and capital market development." Do note that the last two proposals are still about debt generation (see above).

"At the national level, labor market rigidities [same-old] should be tackled to raise participation, address duality—which disproportionally hurts younger workers—and, where necessary, promote more flexible bargaining arrangements. At the same time, lowering regulatory barriers to entry and exit of firms and tackling vested interests in the product markets throughout the euro area would support competitiveness, as it would deliver a shift of resources to export sectors [ok, awkwardly put, but pretty much on the money. Except, greatest protectionism in the EU is accorded to banks and famers, and these require first and foremost restructuring]."

In short - little new imagination, loads of old statements replays and little irony in recognising that much of this has been said before… five years before, four years before, three years before, two years before, a year before… you get my point.

21/6/2012: IMF Article IV on euro Area: a massive miss, but loads of passion

So having penned the G20 response to the euro area crisis (see post here) last night, tonight, IMF decided to issue another missive on the topic (here). Which makes you wonder if the IMF has become so frustrated with the euro area's lack of real leadership, it has now resorted to the tactic known as blanket bombing the EU with gloomy assessments.

Here are some interesting extracts [comments and emphasis are mine]:

"Downward spirals between sovereigns, banks, and the real economy are stronger than ever. 

As concerns about banks’ solvency have increased—because of large sovereign exposures and weak growth prospects in many parts of the euro area—the effectiveness of liquidity operations has diminished. [It is clear that the IMF is seeing the entire euro area response policy as a set of liquidity supply measures, rather than solvency and structural reforms set of measures.]

Sovereigns, in turn, are struggling to backstop weak banks on their own. Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. 

A more determined and forceful collective response is needed."

So far so good. In the nutshell, the IMF is saying that the euro crisis is now threatening the EU itself. In other words, were some nut eurosceptic to invent a tool for undermining the EU, he couldn't have done much better than inventing the current euro zone.

So what are the IMF proposals for the euro area more forceful collective response? Why, of course it is integrate more and grow.

"Completing EMU: Banking and Fiscal Union to Support Integration

A strong commitment toward a robust and complete monetary union would help restore faith in the viability of EMU. This should encompass a credible path to a banking union and greater fiscal integration, with better governance and more risk sharing. However, achieving this goal will take time and hence requires a clear timeline, with concrete intermediate actions to set the guide posts and anchor public expectations."

Err... Mr IMF, I have a question: suppose we have a banking union. Which means all banks will be regulated under singular umbrella. Note - this does not mean having a proper regime for shutting down currently insolvent banks, nor does it mean a unified system of banks assets workout. It means, however, joint deposits protection scheme. Good thing, deposits protection. Confidence improving. Alas, last time I checked, Greek banks are sick because of the sick sovereign, bonds of which they hold & of the sick economy. Spanish and Irish banks are sick because they made bad loans. In all cases so far, banks are sick not because they lack regulatory unification, and not because they lack deposits protection, but because they have bad assets. How can a banks union make these assets any better?

Good news, IMF says: "The proposed EU framework for harmonized national bank resolution processes is a necessary first step. But it needs to go further. ...A common bank resolution authority is also needed. It should be backed by a common resolution fund to ensure burden sharing and to limit fiscal costs. These efforts should be supported by a common supervisory and macro-prudential framework to forestall further financial fragmentation. While a banking union is desirable at the EU27 level, it is critical for the euro 17."

Bad news: there are absolutely no proposals even discussed yet to cover banks resolution mechanism. IMF is exceptionally silent on what should be done to achieve such 'resolution' and EU has shown no willingness to allow shutting down of a single bank. Thus, common resolution mechanism in the IMF parlance means preciously little, but in the EU vocabulary it means simply 'burden sharing'. In other words, 'banks resolution' mechanism is more about shafting bad banks debt onto all of the euro zone collectively. While this might help individual countries, e.g. Ireland, it does nothing to change the reality that euro area combined Government debt is going to be 90% of GDP this year alone. In other words, relabeling, for example, Irish banks debt an EA17 debt, instead of the Irish Government debt, will not achieve any net improvement in terms of breaking the links between banks and sovereigns (the sovereign here, thus becomes EA17 instead of national) and it will do absolutely nothing to restore functioning banking in EA17. 

My suggestion would be for IMF to be more forthright and tell exactly what this 'resolution mechanism' should look like.

IMF goes on with lofty dreamin: 

"More fiscal integration, with risk sharing supported by stronger governance, can reduce the tendency for economic shocks in one country to imperil the euro area as a whole. Ultimately, this could mean sufficiently large resources at the center, matched by proper democratic controls and oversight, to help insure budget shortfalls at the national level. Getting to this endpoint will take time. But the process can start with a commitment to a broad-based dialogue about what a fuller fiscal union would imply for the sovereignty of member states and the accountability of the center. This should deliver a schedule for discussion, decision, and implementation."

Wait, aside from the desirability of such a solution (which is open to a debate), the IMF says that the solution will take time. Lots of time. And yet, this is supposed to be a response to the ongoing acute crisis? Or does IMF honestly believe that 'a commitment to a broad-based dialogue' will do anything to compensate for the fact that euro area peripheral states are currently insolvent? How? By telling the markets that they are 'broadly-speaking talking to each other'?

I do note that the IMF is clearly stressing the need for democratic systems reforms in line with integration. I wonder, however, what they have in mind, exactly. Are they saying EU is currently not democratic enough? After all, if EU is democratic, then 'proper democratic controls and oversight' would exist already and would simply need to be deployed to a new structure...

The IMF also offers an interesting insight into its perception of the euro bonds ideas: 

"Introduction of a limited form of common debt, with appropriate governance safeguards, can provide an intermediate step towards fiscal integration and risk sharing. Such debt securities could, at first, be restricted to shorter maturities and small size and be conditional on more centralized control (e.g., limited to countries that deliver on policy commitments; veto powers over national deficits; pledging of national tax revenues). Common bonds/bills financing could, for example, be used to provide the backstops for the common frameworks within the banking union."

Interesting, isn't it? On one hand, IMF foresees limited common debt issuance. On the other it foresees this common debt being used to 'backstop ... banking union'. Now, wait - I thought banking union backstop would have to be enough to deal with current acute problems in Greece, Ireland, Portugal, Spain and Italy. That would be what? €300 billion? €500 billion? And that would have to be 'cheaper' and 'more stable' source of funding than ECB already provides. So it cannot be 'limited' and it cannot be 'short-term' (LTROs are already €1 trillion-large and 3-years long and they are not working).

In short, I see loads of frustration from the IMF side, but no real tangible solutions to the euro are crisis.