On the Swiss, the IMF and the G-20
There will be some drama, and few splashy headlines out of the G-20 meeting in D.C. this weekend. Europe is cracking up (again), and the IMF and big guns of the G-20 will spout about “expanded firewalls” and “global co-ordination” in the final communique Sunday evening. If we don’t get a big dose of “happy talk” then the markets will crap out.
A big agenda item for the weekend is the $400b capital raise for the IMF. There will be plenty of corridor conversations and side deals regarding which country puts up what, and what deals it gets for the money. There are two sideshows of interest in the IMF's new money raise. The first is the USA; the second is Switzerland.
The USA is not going to be a player in the IMF deal. That blows my mind. The USA is the biggest stakeholder in the IMF, but when push comes to shove, and there is a Rights Offering of the common shares, the USA says, “No thank you”.
The USA "no-show" at this critical juncture is due to election year politics. Tim Geithner knows that he could not sell Congress (much less the American people) on a plan where US funds are used to bailout the EU, while there is so much pain at home.
The “We’ll take a pass on this one” attitude by the US speaks volumes about the credibility of the happy talk we will hear on Sunday. Without the US involvement in backstopping the Euro Zone, there is no backstop. This reality will undoubtedly be a topic of those corridor chats.
It will be an important weekend for Switzerland and its citizens. Every indication is that the Swiss will be big players in the IMF deal. As of this writing, the amount the Swiss are in for has not been revealed. The head of the IMF, Christine Lagarde, hinted at what the Swiss were willing to pony up when asked about the size. She responded:
What does that mean? The following countries have made commitments to the IMF:
Switzerland has a GDP of $0.6T. Based on the above information, it might be expected to commit about 2% of GDP, or approximately $12B. I suspect the amount will be much higher. The reason is that Switzerland has a mountain of reserves that it has accumulated on the backs of the EU countries. The Swiss have built up these reserves through years of currency intervention. Now it will pay the price that comes with an undervalued currency.
All of the big hitters from Switzerland will be in attendance this weekend. The President, Eveline Widmer-Schlumpf, the Minister of Economics Johann Schneider-Ammann, and the new boss at the Swiss National Bank (SNB), Thomas Jordan, will all be at the party. The big shots should be there, after all, they are about to give a large chunk of the country’s money away.
The side deals on the Swiss IMF participation should be interesting. What would the Swiss get in exchange for a giant check?
One thing that will be up for discussion is the SNB’s currency peg. A month ago, the IMF blasted the SNB over the peg. My guess is that the criticism goes away if the Swiss write a check for $25 large. What a system…
China is expected to play in the IMF deal for $50B. And the USA can’t come up with a dime. Just who is the economic super power these days? What did China get for playing big in the IMF bailout deal? Happy talk, of course:
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