That’s the difficult choice which faced Hungary as its international support package was put together in the last couple of weeks. One thing that happens between the initial announcement that a package has been agreed and its final endorsement by the International Monetary Fund’s board is that we get to find out a lot more about the specifics of what has been agreed.
Author Archives: P O Neill
Our new monetarist overlords
The Board of the International Monetary Fund yesterday approved a $16 billion loan facility for Ukraine, with $4.5 billion being drawn immediately. Perhaps the main news, at least for anyone not paying close attention to the details of the package as it evolved, is that any attempt at an exchange rate peg for Ukraine is dead. The IMF announcement makes repeated references to a “flexible exchange rate regime” and in particular —
Base money will be the near-term anchor for monetary policy until an inflation targeting regime can be implemented.
In other words, targets will be set for the growth of a narrow definition of the money supply and that will be the only explicit basis for interest rate adjustments. Among other things, the Fund doesn’t want the central bank to be blowing reserves on a futile defence of a particular level of the exchange rate.  And money targets are back in style. It’s the 1970s all over again.
Iceland accepts the hairshirt
From the growing list of countries in discussions with the IMF for a crisis loan program, Iceland has made the first concrete move. As explained in today’s statement from the Fund, there is an agreement between the staff mission and the government on a huge $2.1 billion loan (huge relative to Iceland’s size) in return for what is billed as a macroeconomic confidence-building program, a program which takes as its premise that the liabilities of the banking system will need to be fully recognized as fiscal liabilities. In particular, other governments that end up refunding deposits of Iceland banks (not least Britain and Germany) will presumably have to get their money from Iceland’s government sometime down the road.  It remains to be seen (a) who else Iceland might have lined up to provide additional support and (b) whether the Fund’s board will balk at the size of the loan to a small and recently wealthy country.
Facility? What facility?
IMF Managing Director Dominique Strauss-Kahn yesterday —
The Pakistani authorities have requested discussions with the IMF on an economic program supported by financial assistance from the Fund to meet the balance of payments difficulties the country is experiencing as a result of high food and fuel prices and the global financial crisis … The amount of Fund financing under a Stand-By Arrangement has yet to be determined. Financing could be made within framework of the Fund’s Emergency Financing Mechanism.”
Prime Minister of Pakistan’s economic adviser, today —
Outside looking in
White House announcement today —
Today, the President is inviting the leaders of the Group of 20 countries to a summit in the Washington, D.C. area, on November 15 to discuss financial markets and the global economy. The G-20 finance process, which includes key developed and emerging market countries, was established in 1999, after the last financial crisis with worldwide implications.
… G-20 members are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States, and the European Union.
This will be a strange event. Â
IMF tries to defuse geopolitical speculation in DSK affair
The Board of the International Monetary Fund has issued a seemingly matter-of-fact statement concerning the status of the Fund’s investigation of its Managing Director Dominique Strauss-Kahn and allegations of abuse of power in a relationship with a subordinate. The purpose of the statement seems to be to address an inference that might be drawn from media reports that some members of the board were gunning for DSK — in particular the person in overall charge of the probe, Shakour Shalaan, who is Egyptian. Egypt is on a quiet roll in international policy circles at the moment with its finance minister becoming chairman of the International Monetary and Financial Committee, the first developing country minister to get that job. But don’t leap to the conclusion that Egypt must have had the trump card to explain this success:
Distraction at the top
Edward has been keeping you all up to date on the resurgence of calls to the IMF fire extinguisher due to the global banking crisis, and the Fund has no doubt welcomed the renewed interest in its present and future functions. But in an unfortunate weekend news dump, it’s been revealed that IMF Managing Director Dominique Strauss-Kahn is being investigated by the Fund over an affair with another staffer [UPDATED].
Annals of embarrassed academics
Iceland Chamber of Commerce working paper May 2006, “FINANCIAL STABILITY IN ICELAND” by FREDERIC S. MISHKIN & TRYGGVI T. HERBERTSSON —
There are concerns that the banks could experience refinancing problems. Although the banks’ reliance on external financing poses the biggest risk to the financial system right now, the probability of a credit event occurring is low. The rapid credit growth in the banking system and the banks’ transformation from concentrating on domestic lending, to becoming international financial intermediaries, also presents some risk because the banks may not have been able to develop organizational capital fast enough to run their new business safely. These concerns have led to criticism of Iceland’s banks for lack of transparency. However, the Financial Supervisory Authority’s awareness of these risks and the fact that Iceland has high quality governmental institutions make it unlikely that there are serious problems with safety and soundness in the banking system.
OK, it’s easy to go back 2 years and do this. But Mishkin is a big name who went to a 2 year stint on the US Federal Reserve Board of Governors right after this paper came out.  Thus if nothing else it’s symbolic of the optimistic conventional wisdom at the very top that financial globalisation could be handled. It’s unlikely many Icelanders feel now that they had “high quality government institutions”.
UK banking bailout grows in scope
So to avoid the awkwardness of a Eurozone summit in Paris excluding Europe’s biggest financial centre, Gordon Brown went to Paris before the meeting and it sounded like he and Nicolas Sarkozy were on the same wavelength about how bailouts should work. One section of the Elysée summit declaration (version fr) says
A new two-speed European Union
A few days ago, Edward explored the gap between the Eurozone’s monetary and political architecture (and the lack of the latter) as a potential risk to the Eurozone itself.  But in what looks likely to be a weekend of rapidly changing events, here is a new wrinkle: Nicolas Sarkozy has convened an emergency heads of state/government summit for the Eurozone countries, along with the ECB and EU Commission presidents, at 5pm in the Elysee Palace on Sunday. Since it is a Eurozone and not EU summit, neither Gordon Brown or most of the eastern European EU heads will be present; thus the outcome at best will be a coordinated initiative among the euro countries rather than the EU as a whole. Which is still better than nothing, but it does raise the question of how any spillover from a new initiative (e.g. a Eurozone interbank liability guarantee) would be handled.  It also puts a new spanner in the works of the G7 and G20 finance/central bank meetings in Washington this weekend, since the outcome of the Paris summit won’t yet be known when they meet.  About the only statement we can make with certainty is that the bankers and politicians better keep their Blackberries charged.