Yesterday we highlighted the passage of the Cornyn Amendment to FinReg which essentially makes US participation in IMF loans to countries which have greater debt than GDP very difficult if not impossible. The amendment has received little if any press, until this morning, when Telegraph's Evans-Pritchard savages what it means for a now partially defunct Europe. "This is obviously aimed at Greece, which will have a debt of 130 per cent by the end of this year. The debt will rise to 150 per cent by the end of its the rescue/death package, leaving Greece in a worse position than before. The IMF share of the Greek bail-out is 30 times quota, more than double any other rescue in the history of the Fund. There is a very strong suspicion in Washington that the IMF is being misused by French chief Dominique Strauss-Kahn – French presidential candidate in waiting – to support ideological purposes regardless of economic logic or sanity. This can (and in my view most likely will) destroy the credibility of the Fund itself unless the US and Asians can wrench the institution back from the Europeans." As more people realize the ramifications of this Amendment, we expect the IMF to increasingly lose credibility as a backstop to any upcoming European risk flareouts.
In this case it fair to assume that China shares many of the Senate’s concerns. The latest US Treasury Tics data shows that China is rotating is vast reserves back into dollars, and presumably away from euro bonds. If we treat this as Chimerica – the US/Chinese single currency or condominium – we have a force in the world that cannot be pushed around.
And then we get this about face from one of the smarter mainstream pundits out there:
Personally, I have changed my mind on Greece. My initial reaction earlier this year was that it had to be saved to avoid a sovereign Lehman. Many posters on this blog cried “shame”, saying it was just another moral hazard rescue for bankers. They were right. I flagellate myself and wear a dunce’s hat.
The correct policy would have been – and still is – to help Greece out of its debt-deflation death spiral through an orderly “pre-emptive debt restructuring” along the lines of the IMF package for Uruguay. In Greece’s case it would require a haircut of 50 per cent or so for foolhardy creditors, ie your bank and mine, your pension fund and mine. This would not do much good unless Greece also devalued by 30 per cent to 40 per cent to retrieve competitiveness and put the whole fixed-exchange nightmare behind it.
This would be the normal IMF policy in these circumstances as countless ex-IMF officials have stated. I suspect that many in the Bundesbank and the Bundestag finance committee would have liked this policy too – making an example of a country that was so far gone, and had so flagrantly broken the rules.
The IMF-EU should instead have drawn up its defences in Iberia, along the Lines of Torres Vedras – to borrow from Wellington. Portugal and Spain are at least defensible – arguably – and more deserving.
The solution is being blocked because Brussels views any step back in the EMU Project as intolerable. So the IMF is squandering its scarce resources on an unworkable plan in Greece.
As we can now see, by misusing the IMF so cavalierly the euro-elites have provoked a reaction from Washington that will vastly complicate any future rescue for any eurozone state.
In fact, we are already living in a post-IMF world. There is no bailer-of-last-resort. Sobering, isn’t it?
Perhaps America is finally realizing that it is the bailer out of last resort not only of US, but European banks. We doubt it, but Cornyn was a loud shot across the bow. We hope that this morning's bounce in the EURUSD is sustainable because should Italy soon need IMF assistance, we doubt that a forewarned US will be as cavalier about spending another $100 billion or so, to bail out the next European nation (read banks that have trillions to lose should contagion spread), that comes begging to Washington. Little by little the escape mechanisms are being eliminated.