Remembering my university days when we learnt about the IMF, the institution born in Bretton Woods, which had steered the World economies through the post-war decades and was then (early eighties) mainly used to help developping nations grow in a sustainable way, I couldn’t refrain from thinking of what it has become over the past few years and where it might be heading.
The IMF is involved in advising many governements on their ailing finances and economies; today it is not only the developping nations, but many among the supposedly most developped ones. And though the general public opinion trusts that they know what they’re doing, memories come back of my years in Eastern Europe, where I held board positions in various “Economic Interests'” bodies and I remember meeting IMF delegations to talk about the macroeconomic situation and required policies’ adjustments and evolutions to improve a country’s economy (no names). To be blunt, I was flabbergasted by their utter ignorance of real-life economic realities.
Their mission consisted of spending a few days in the capital’s best five-star hotel, briefed mainly by governement officials who were not overly enclined to see any problem (provided they had any clue) and even less to abide to any plan to “change their ways” (read: cronyism, corruption, abuse of position, …); and that would serve as the basis of their “expert-opinion” on which the IMF assistance plan would be based (cf. the “Criticims” section in Wikipedia’s chapter on the IMF for a broader reference).
Maybe I was just unlucky? I particularly remember one IMF representative (quite senior, may I add) who was a “political appointee” from the USA (read: big donor to the then president’s campaign, and yes it was Georges W. at the time) who clearly had a level of understanding of economics in the real-world comparable to the level of mine on metaphysics… boy oh boy, was I stunned!
The IMF’s key role beyond advising is to act as creditor to countries in need who can’t get the money elsewhere, and that is why they are being “sucked-in” everywhere right now. Historically many of the IMF Loans were reimbursed, though quite a chunk would regularly be written-off; the latter amounts would be relatively insignificant and part of a “broader plan” to restructure an economy. As the IMF is now being brought in to save the developped world, what amounts of possible future “bad loans” might we be talking about? That is anybody’s guess, though you can bet they will be “far beyond significant”.
Anyway, my point is that when the IMF lends, it is in the IMF’s currency, i.e. “Special Drawing Rights”, which is basically a virtual currency composed of a basket of world currencies “contributed” by all the members, weighted by the relative importance of such contributions versus the total (Ok, I am simplifying a bit, just to make it short).
So the IMF would be lending virtual money coming from already struggling contributors to many of those same contributors who might not repay? Where it starts to be funny is that it doesn’t matter, as a contribution to the IMF is not an expense, but comparable to an “equity investment”, so giving money you don’t have (by “printing” it!) doesn’t cost you anything. Then the loans are given out and you do not take any loss on them… marvelous, provided losses remain small. Now what would happen if the whole thing blows up? Well, who knows, but for sure it would be a mess…. and that is exactly what is the “trigger” in my book. So lending from the IMF could be the straw that breaks the camel’s back.
To illustrate the absurdity of it all, I can’t resist mentionning this recent piece of news: Japan came up with EUR 60 billion equivalent in extra contributions to the IMF to help out the EURO-Zone. So Japan who is the most broke of all (see previous blog) gives money they don’t have (but they don’t care as it doesn’t really cost anything) to see it being lent to borrowers who can’t repay!
Got it? Seriously, that is what’s going on…..
Hold on tight everyone!