How the US Has Perfected the Use of Economic Imperialism Through the European Union!

Reggie Middleton's picture

The IMF, like many other international institutions, asserts that it
has a “preferred
creditor status”
, and this has been a practiced convention in the
past. Thus, IMF has de facto seniority rights over private creditors
despite the fact that there is no legal or treaty-based foundation to
support this claim and this seniority of rights for IMF will continue
under the recent EU rescue plan announced as well as it has not been
noted otherwise implicitly nor explicitly. This is the reason why
Sarkozy said it is a said day when the EU has to accept a bailout from
the IMF (aka, the US). The EU now, and truly, contains a significant
parcel of debtor nations.

To add fuel to this global macro tabloidal fire, the Euro members’
loan will be pari passu with existing sovereign debt i.e. it will not be
considered senior. Although there is no written, hard evidence to
support this claim, it is our view that otherwise there will be no
incentive for investors to hold the debt of troubled countries like
Greece, which will ultimately defeat the whole purpose of the rescue
package. Moreover, there are indications that support this idea. As per
Dutch Finance Minister Jan Kees de Jager, “We are not talking about a
special preference for the eurogroup loans, that’s not possible because
then you would have the situation that already-existing rights of
creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html).
Of course, if more investors did their homework and ran the numbers,
that same disincentive can be said to exist with the IMF’s super senior
preference given the event of a default and recoverable collateral after
the IMF has fed at the trough.

The ramifications:

IMF’s preferred creditor status coupled
with the expensive Euro members’ loans which are part of the rescue
package can create a public debt snowball effect that could push the
troubled countries towards insolvency when the IMF debt becomes
repayable in three years time. This could be seen particularly in case
of Greece (subscribers, please reference Greece
Public Finances Projections
). Even if
all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak
to 149.1% of the GDP in 2013. Please keep in mind that these numbers are
based on what we perceived (as does simple math) to be pie in the sky
optimism. I urge all readers to reference Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
Collapse!.

image005.png

Notice how dramatically off the
market the IMF has been, skewered HEAVILY to the optimistic side.
Now,
notice how aggressively the IMF has downwardly revsied their
forecasts to still end up widlly optimistic. image018.png

Ever since the beginning of this crisis,
IMF estimates of government balance have been just as bad…

image013.png

Many of my readers have inquired as to why the IMF has been so
inaccurate in their estimates throughout the crisis. I doubt very
seriously that it is a case of ineptitude. If one were to be a skeptic,
and realize that the IMF charges stringent rates and can (and does)
usurp the hierarchy of the claims upon assets upon its entrance, then
one can clearly see a motivation in undershooting certain estimates. I
am not saying that this is the case, but I would be remiss in failing to
broach the topic. Remember, this is not your typical mainstream media
publication. Nothing is off limits.

IMF Economic Forecasts (%) 2010 2011 2012 2013 2014
Economic Growth 04 -2.6 1.1 2.1 2.1
Debt as % of GDP 133.3 145.1 148.6 149.1 144.3
Budget Deficit 8.1 7.6 6.5 4.9 3

 

The year 2013, with a IMF-proclaimed debt ratio of a tad under
150%, is the time when Greece will have to refinance the debt to pay the
IMF (remember the charts above that show how optimistic the IMF has
been historically). However, since the current debt raised by Greece is
at fairly high rates, new debt will only be available at much higher
rates (as markets should price-in the risk of high debt rollover) unless
there is some saving grace of a drastic plunge in world wide interest
rates and a concomitant plunge in the risk profile of Greece. At a 150%
debt ratio, historically low artificially suppressed global interest
rates that have nowhere to go but higher and prospective junk ratings
from the US rating agencies, we don’ t see this happening. Thus, the
cost of borrowing for in 2013 is likely to be much higher in the market
than the nearly five percent for the existing debt. Greece will either
be unable to fund itself in the markets at all, and will have to
convince the Euro Members and the IMF to extend the three-year lending
facility just announced (reference What
We Know About the Pan European Bailout Thus Far
) or, it will get
the debt refinanced at very high rates. In both cases the total debt as a
percentage of GDP will continue to rise, and this is not a sustainable
scenario over the longer-term. In addition, if it accept the EU/IMF
package and there is an event of default or restructuring, the IMF will
force a haircut upon the private and public debtors beyond what would
have normally been the case. This essentially devalues the debt upon the
involvement of the IMF, a scenario that we believe many sovereign
bondholders (particularly Greek, Spanish and Irish) may not have taken
into consideration. This also leaves the possibility of a significant
need for many banks to revalue their sovereign debt – particularly Greek
sovereign debt – holdings.

As illustrated above, there is a higher probability for a Greek
sovereign debt restructuring in 2013, which will definitely not hurt IMF
(since it has a preferred right) but the Euro Members and other
investors who will be holding the Greek debt.

image021

Members’ quotas and voting power, and Board of Governors

Major decisions require an 85% supermajority.[19]
The United States has
always been the only country able to block a supermajority on its own.[20]

Table showing the top 20 member countries in terms of voting power
(2,220,817 votes in total):[21]

IMF member country↓ Quota: millions of SDRs↓ Quota: percentage of total↓ Governor↓ Alternate Governor↓ Votes: number↓ Votes: percentage of total↓
United States United States 37149.3 17.09 Timothy F.
Geithner
Ben Bernanke 371743 16.74
Japan Japan 13312.8 6.12 Naoto
Kan
Masaaki Shirakawa 133378 6.01
Germany Germany 13008.2 5.98 Axel A. Weber Wolfgang
Schäuble
130332 5.87
United Kingdom United
Kingdom
10738.5 4.94 Alistair Darling Mervyn
King
107635 4.85
France France 10738.5 4.94 Christine Lagarde Christian Noyer 107635 4.85
People's Republic of China China 8090.1 3.72 Zhou Xiaochuan Hu Xiaolian 81151 3.66
Italy Italy 7055.5 3.24 Giulio Tremonti Mario Draghi 70805 3.19
Saudi Arabia Saudi Arabia 6985.5 3.21 Ibrahim
A. Al-Assaf
Hamad Al-Sayari 70105 3.16
Canada Canada 6369.2 2.93 Jim Flaherty Mark Carney 63942 2.88
Russia Russia 5945.4 2.73 Aleksei Kudrin Sergey
Ignatyev
59704 2.69
Netherlands Netherlands 5162.4 2.37 Nout
Wellink
L.B.J. van Geest 51874 2.34
Belgium Belgium 4605.2 2.12 Guy
Quaden
Jean-Pierre Arnoldi 46302 2.08
India India 4158.2 1.91 Pranab Mukherjee Duvvuri Subbarao 41832 1.88
Switzerland Switzerland 3458.5 1.59 Jean-Pierre
Roth
Hans-Rudolf Merz 34835 1.57
Australia Australia 3236.4 1.49 Wayne
Swan
Ken
Henry
32614 1.47
Mexico Mexico 3152.8 1.45 Agustín
Carstens
Guillermo
Ortiz
31778 1.43
Spain Spain 3048.9 1.40 Elena Salgado Miguel
Fernández Ordóñez
30739 1.38
Brazil Brazil 3036.1 1.40 Guido Mantega Henrique
Meirelles
30611 1.38
South Korea South Korea 2927.3 1.35 Okyu
Kwon
Seong Tae Lee 29523 1.33
Venezuela Venezuela 2659.1 1.22 Gastón
Parra Luzardo
Rodrigo Cabeza Morales 26841 1.21
remaining 166 countries 62593.8 28.79 respective respective 667438 30.05

source: Wikipedia

And the economic trench warfare continues on as nationalistic pride
gets in the way of practicality and progresss, politics as usual…

Britain must fend for
itself in event of crisis, French official warns
:Britain should not rely on EU help in the
event of a renewed financial crisis after refusing to sign up to the
bulk of a €500bn (£429bn) rescue package for the eurozone, the head
of the French financial markets watchdog said.

The UK is to be served up next. No
Need to fret, we have that covered:
UK
Public Finances March 2010
(subscriber edition).

The Pan-European Sovereign Debt Crisis

The Asset
Securitization Crisis
of 2007, 2008 and 2009 led to the demise of
several global banks and institutions. Central bank induced risky
asset bubbles gave rise to, what was popularly considered and reported
as through the popular media, a rapid recovery. The reality was that
the insolvencies that marked the crisis were passed on, in part, to the
sovereign nations that sponsored the Crisis, and as the chickens came
home to roost the Asset Securitization Crisis has now blown into a
full Sovereign debt crisis.

The Pan-European Sovereign Debt Crisis,
to date (free):

  1. The
    Coming Pan-European Sovereign Debt Crisis
    – introduces the crisis
    and identified it as a pan-European problem, not a

    Latest Pan-European Sovereign Risk
    Subscription Research – The Good Stuff!!!

    Actionable
    Intelligence Note For All Paying Subscribers on European Bank
    Research


    File Icon A Review of the Spanish Banks from a
    Sovereign Risk Perspective – retail.pdf

    File Icon A Review of the Spanish Banks from a
    Sovereign Risk Perspective – professional

    File Icon Ireland public finances projections

    File Icon Spain public finances projections_033010

    File Icon UK Public Finances March 2010

    File Icon Italy public finances projection

    File Icon Greece Public Finances Projections

    File Icon Banks exposed to Central and Eastern Europe

    File Icon Greek Banking Fundamental Tear Sheet

    File Icon Italian Banking Macro-Fundamental
    Discussion Note

    File Icon Spanish Banking Macro Discussion Note

    localized
    one.

  2. What
    Country is Next in the Coming Pan-European Sovereign Debt Crisis?

    – illustrates the potential for the domino effect

  3. The
    Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
    What Country Would That Be..
    – attempts to illustrate the highly
    interdependent weaknesses in Europe’s sovereign nations can effect even
    the perceived “stronger” nations.

  4. The
    Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
    European Countries

  5. The
    Depression is Already Here for Some Members of Europe, and It Just
    Might Be Contagious!

  6. The
    Beginning of the Endgame is Coming???

  7. I
    Think It’s Confirmed, Greece Will Be the First Domino to Fall

  8. Smoking
    Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
    Beware!

  9. Financial
    Contagion vs. Economic Contagion: Does the Market Underestimate the
    Effects of the Latter?

  10. Greek
    Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on
    Fire!

  11. Germany
    Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort
    of…

  12. The Greece and the Greek Banks Get the Word “First”
    Etched on the Side of Their Domino

  13. As
    I Warned Earlier, Latvian Government Collapses Exacerbating Financial
    Crisis

  14. Once
    You Catch a Few EU Countries “Stretching the Truth”, Why Should You
    Trust the Rest?

  15. Lies,
    Damn Lies, and Sovereign Truths: Why the Euro is Destined to
    Collapse!

  16. Ovebanked,
    Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

  17. Moody’s
    Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

  18. The
    EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

  19. How
    BoomBustBlog Research Intersects with That of the IMF: Greece in the
    Spotlight

  20. Grecian
    News and its Relevance to My Analysis

  21. A
    Summary and Related Thoughts on the IMF’s “Strategies for Fiscal
    Consolidation in the Post-Crisis

  22. Euro-Gossip
    Debunked, Courtesy of Trichet and the IMF!

  23. Greek
    Soap Opera Update: Back to the Bailout That Was Never Needed?

  24. Many
    Institutions Believe Ireland To Be A Model of Austerity
    Implementation But the Facts Beg to Differ!

  25. As I Explicitly
    Forwarned, Greece Is Well On Its Way To Default, and Previously
    Published Numbers Were Waaaayyy Too Optimistic!

  26. LTTP
    (Late to the Party), Euro Style: Goldman Recommends Betting On
    Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After
    BoomBustBlog

  27. Beware
    of the Potential Irish Ponzi Scheme!
    The
    Daisy Chain Effect That I Anticipated Appears To Have Commenced!
  28. How
    Greece Killed Its Own Banks!
    Introducing
    The BoomBustBlog Sovereign Contagion Model: Thus far, it has been
    right on the money for 5 months straight!
  29. With Europe’s
    First Real Test of Contagion Quarrantine Failing, BoomBustBloggers
    Should Doubt the Existence of a Vaccination