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The IMF Experts Flunk, Again

Tyler Durden's picture




 

Submitted by Steve Hanke via The Cato Institute,

My Globe Asia column in May was titled “Greece: Down and Probably Out.” Well, it’s out. Yes, Greece descended from drama to farce rapidly.

If all goes according to plan, the left-wing Greek government will come to an agreement with the so-called troika — the European Commission (EC), the European Central Bank (ECB), and the International Monetary Fund (IMF) — over the details of a third bailout program by August 20th. This rescue package will probably be worth €86 billion (U.S. $94.5 billion). So, since 2010, Greece will have received three bailouts worth a whopping €430 billion (U.S. $472.2 billion). This amounts to a staggering €39,000 (U.S. $42,831) for every man, woman, and child in Greece.

Like past bailouts, the third one will fail to stop Greece’s economic death spiral. The experts from the EC, ECB, and particularly those from the IMF have been wrong about the prospects for the Greek economy since day one. The experts have failed to embrace a coherent theory of national income determination. Indeed, they have often engaged in ad hoc theorizing that has, at times, appeared to be convoluted and politically motivated. The result has been a series of wildly optimistic forecasts about the course of the Greek economy followed by wrongheaded policies.

What has been missing from the experts’ toolkit is the monetarist model of national income determination. The monetary approach posits that changes in the money supply, broadly determined, cause changes in nominal national income and the price level (as well as relative prices — like asset prices). Sure enough, the growth of broad money and nominal GDP are closely linked. The data in the following chart speak loudly to the linkage.

image

Greece’s monetary tune started to be played by the ECB in 2001, when Greece was allowed to adopt the euro on false pretenses. Yes, the experts at the Hellenic Statistical Authority had cooked the Greek books, and the experts at Eurostat knew the Greek data were phony. Still, Greece was allowed to enter the eurozone.

Following the Northern Rock fiasco and bank run in September 2007 and the bankruptcy of Lehman Brothers in September 2008, the ECB allowed the supply of state money to grow. Then, in 2009, Jürgen Stark, the ECB chief economist, convinced the President of the ECB Jean-Claude Trichet that state money (the monetary base) was growing too rapidly and that excessive inflation was just around the corner. In consequence, the ECB withdrew its non-standard measures (read: credit facilities) to Greek banks in the spring of 2010. As the accompanying chart shows, that fateful ECB withdrawal marked a turning point in the growth of broad money in Greece. It, and the Greek economy, have been contracting ever since. This was in spite of a massive fiscal stimulus (a fiscal deficit of 12.7% of GDP) in 2009, prior to the October elections. Money dominates. The important thing to watch is the growth of broad money.

image

Shortly after the October 2009 victory of the Panhellenic Socialist Movement brought George Papandreou to power, his government passed a so-called austerity budget in which the fiscal deficit was supposed to be squeezed down to 9.4% of GDP.

Greece was clearly in trouble and needed a helping hand. But, the EC and ECB were untrusting of the Greek government. So, in March 2010, the IMF was called in to negotiate loan conditions for new Greek financing. Dominique Strauss-Kahn (DSK) was the IMF’s managing director and was preparing to run for the French presidency as the Socialist candidate. DSK was more than willing to give his socialist brothers in Athens a helping hand. In 2010, Greece received a massive bailout.

Just how massive? Normally, the IMF is limited to lending up to six times a country’s IMF quota subscription to that country. However, if the IMF judges a country’s debt to be sustainable, then that country can qualify for “exceptional access,” and the IMF credit extended to such a country can exceed the 600% limit. Thanks to DSK and the IMF experts, the debt sustainability reports were rosy, until recently. The IMF, as well as the other members of the troika, extended credit to Greece, and did so generously.

The following table tells the tale. Greece holds the record for the highest IMF credit level relative to a country’s quota.

image

The first and second bailouts of May 2010 and February 2012 did boost the growth rate of state money. But, bank money, which accounts for the lion’s share (over 80%) of total money (M3) contracted at a very rapid rate. In consequence, the money supply (M3) has generally plunged since the bailouts, and so has nominal (and real) economic activity. And the worst is yet to come: note that the last dismal data for state and bank money in Greece are for June. Since then, things have deteriorated, with bank closures and the imposition of capital controls. This spells more trouble for Greek banks that produce over 80% of Greece’s money and for the economy.

The four big Greek banks were already in trouble (as of Q1 2015). The accompanying table presents the Texas Ratios for the four banks that make up 87% of bank assets in Greece. Ratios over 100% mean that, if nonperforming loans must eventually be written off, a bank will become insolvent. If current data were available, I believe the nonperforming loans would be much higher than in the first quarter of 2015. In addition, with the collapse of the money supply and little chance of a recovery in the production of bank money, a high percentage of nonperforming loans will be written off. In consequence, the Greek banking system will be insolvent. This means that calls for a fourth Greek bailout are right around the corner.

image

 

The IMF failures in Greece bring back vivid memories of the Asian Financial Crisis of 1997-98. On August 14, 1997, shortly after the Thai baht collapsed on July 2nd, Indonesia floated the rupiah. This prompted the IMF to proclaim that “the floating of the rupiah, in combination with Indonesia’s strong fundamentals, supported by prudent fiscal and monetary policies, will allow its economy to continue its impressive economic performance of the last several years.”

Contrary to the IMF’s expectations, the rupiah did not float on a sea of tranquility. It plunged from 2,700 rupiahs per U.S. dollar at the time of the float to lows of nearly 16,000 rupiahs per U.S. dollar in 1998. Indonesia was caught up in the maelstrom of the Asian crisis.

By late January 1998, President Suharto realized that the IMF medicine was not working and sought a second opinion. In February, I was invited to offer that opinion and began to operate as Suharto’s Special Counselor. I proposed as an antidote an orthodox currency board in which the rupiah would be fully convertible into the U.S. dollar at a fixed exchange rate. On the day that news hit the street, the rupiah soared by 28% against the U.S. dollar. These developments infuriated the U.S. government and the IMF.

Ruthless attacks on the currency board idea and the Special Counselor ensued. Suharto was told in no uncertain terms — by both the President of the United States, Bill Clinton, and the Managing Director of the IMF, Michel Camdessus — that he would have to drop the currency board idea or forego $43 billion in foreign assistance.

Why all the fuss over a currency board for Indonesia? Politics. The U.S. and its allies wanted a regime change in Jakarta, not currency stability. Former U.S. Secretary of State Lawrence Eagleberger weighed in with a correct diagnosis: “We were fairly clever in that we supported the IMF as it overthrew [Suharto]. Whether that was a wise way to proceed is another question. I’m not saying Mr. Suharto should have stayed, but I kind of wish he had left on terms other than because the IMF pushed him out.” Even Michel Camdessus could not find fault with these assessments. On the occasion of his retirement, he proudly proclaimed: “We created the conditions that obliged President Suharto to leave his job.”

As the Indonesian episode should teach us, the IMF’s management can be very political and often neither trustworthy nor competent. Greece offers yet another chapter.

 

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Fri, 07/31/2015 - 20:28 | 6377436 JC-BI
JC-BI's picture

The IMF is the FED's little brother. If the Fed is corrupt and incompetent, ditto for the IMF. All these bankers are sucking the life out of every country in this world. It's time the citizenry everywhere demands that their governments be the ones to coin money, not the bankers.

https://biblicisminstitute.wordpress.com/2014/08/24/the-corrupt-federal-...

Fri, 07/31/2015 - 20:41 | 6377463 philipat
philipat's picture

All of which highlights the importance of the BRICS Bank and AIIB which will have no OVERT political Agenda and will operate independently.

Fri, 07/31/2015 - 23:19 | 6377813 Ultimate_Warrior
Ultimate_Warrior's picture

my roomate's sister-in-law makes $72 every hour on the laptop . She has been unemployed for nine months but last month her pay was $12384 just working on the laptop for a few hours. find out here... www.earnmore9.com

Sat, 08/01/2015 - 19:30 | 6379840 Chris88
Chris88's picture

Holy shit, how naive are you?  Apologies if you forgot the /sarcasm

Fri, 07/31/2015 - 20:29 | 6377441 00Billy
00Billy's picture

94.5 billion to spend on bitcoins... Go Greece !

Fri, 07/31/2015 - 21:14 | 6377535 Ness.
Ness.'s picture

It's a good thing they didn't heed your advise two years ago because they'd only have about $25 billion left.

Fri, 07/31/2015 - 22:55 | 6377658 Yen Cross
Yen Cross's picture

 The IMF seems to be the most sane of the Greek lenders.

 That begs me to ask the question; Why is the IMF defying TROIKA and other Greek debtors?

 Yes, Greece pulled a few stacked repayment games with the IMF.

 One possible scenario, is that the largest lender to/for the IMF, is the United States. ($86 billion is qe lite)

  The IMF get's to play bad cop, while the Troika funds the bailout, and back doors IMF re-funding secretly through a swap agreement, or bond agreement.

 Someone told LaGuarde to back off and play "bad cop", and that it would be taken care of.

 Paging...  Jack Lew? bueller-bueller-bueller

Fri, 07/31/2015 - 23:19 | 6377812 WTFUD
WTFUD's picture

Strategic Geopolitical Interest for the IMF (USSofA) and not so much for EU (Germany), me thinks.

Sat, 08/01/2015 - 00:51 | 6377939 Yen Cross
Yen Cross's picture

 Where's that German gold? ;-)

Fri, 07/31/2015 - 22:43 | 6377741 WTFUD
WTFUD's picture

We're all fallible! sarc

Sat, 08/01/2015 - 01:17 | 6377961 Maestro Maestro
Maestro Maestro's picture

INDICTMENT

Americans are criminals because Americans violate the Constitution of the United States of America.

The U.S. President Obama, the entire U.S. Congress, the CIA, the FBI, the U.S. Military, and the entire Police Force of these United States SWORE to protect, serve and uphold the U.S. Constitution.

The U.S. Constitution forbids usage of debt as money (referred to as 'notes') and stipulates that only gold and silver can be used as money.

Yet,

Americans commit or support and condone the murder and torture of human beings throughout planet earth in the name of democracy and freedom, all for the sake of acquiring Constitutionally fraudulent and illegal Federal Reserve Notes a.k.a (counterfeit) U.S. Dollars.

Since the United States is a democracy and Americans only elect Democrats and Republicans who perpetuate this unlawfulness,

Americans are indicted criminals according to the United States Constitution.

Spread the word.

Sat, 08/01/2015 - 04:10 | 6378081 Batman11
Batman11's picture

Take money creation away from bankers.

“The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilization.” Otto von Bismark (1815-1898), German Chancellor, after the Lincoln assassination

Wise and prophetic words.

Why was Lincoln so important?

“The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of  consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” - Abraham Lincoln

Lincoln was assassinated like Kennedy who had the same idea.

Why is it important to take money creation away from bankers?

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” – Napoleon Bonaparte, Emperor of France, 1815

 

Sat, 08/01/2015 - 02:57 | 6378027 quasi_verbatim
quasi_verbatim's picture

Tanned, toned, coiffed, ex-Chicago lawyer looking for a new position.

A Clinton/Lagarde ticket is only a moment away.

Sat, 08/01/2015 - 03:04 | 6378034 TheRicker
TheRicker's picture

All my information that I am reading tells me all this shit rolls into our backyard here in the U.S. between Mid-September of 2015 and Mid- October 2015. Anyone differ from that?

Sat, 08/01/2015 - 04:16 | 6378083 Batman11
Batman11's picture

Bankers want all their reckless debt issuance to be paid back.

Lending more money to make repayments seems to be their crazy idea to get this to work (although it never can).

Debt reductions early on would have provided creditors with the lowest losses.

Tip - Don't lend money to people who can't pay it back.

It's called prudent lending.

 

Sat, 08/01/2015 - 04:15 | 6378084 Batman11
Batman11's picture

Are there any other bubbles bankers can lend money into?

Debt has been around for 5,000 years but bankers still don't understand their product.

“What is wrong with lending into the Chinese stock market?” Chinese banker before last month

“What is wrong with lending more money into real estate?” Chinese banker last year

"What is wrong with lending more money to Greece?" European banker pre-2010

"What is wrong with a NINA (no income no asset) mortgage?" US banker pre-2008

“What is wrong with lending more money into real estate?” US banker pre-2008

"What is wrong with lending more money into real estate?" Irish banker pre-2008

"What is wrong with lending more money into real estate?" Spanish banker pre-2008

"What is wrong with lending more money into real estate?" Japanese banker pre-1989

"What is wrong with lending more money into real estate?" UK banker pre-1989

 “What is wrong with lending into the US stock market?” US banker pre-1929

 

Banking, a job for every nation's half-wits.

Sat, 08/01/2015 - 08:38 | 6378213 SHRAGS
SHRAGS's picture

Just what they want you to believe.  Sir Desmond Glazebrook as the bumbling banker is pure disinfo.

Sat, 08/01/2015 - 05:30 | 6378123 Couvrot2
Couvrot2's picture

Stop blaming others! Live within your means, fiscally and from a balance of payments standpoint, and you will never need the "help" of IMF or any other organización.

That goes for countries. A similar argument can be made for individuals.

Sat, 08/01/2015 - 15:09 | 6379114 Wild E Coyote
Wild E Coyote's picture

If every body borrow money to pay a higher price for water, what are you going to do? Live within what?
That's exactly what happened to the world.
U.S. Handed out candies in the form of cheap US dollar loans to everyone.
That included Suharto of Indonesia. The whole Indonesian industrial base was created based on US dollar based loans until the rug was pulled out from under Suharto for whatever reasons,

Sat, 08/01/2015 - 12:08 | 6378636 Undutchable73
Undutchable73's picture

meanwhile, one more Greek Island sold.. this time to C. Ronaldo who will use it as wedding gift tomorrow for his agent J. Mendes.

this is one fucked up world.

 

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