The Great Debate UK

Turkey – avoiding the glare of the IMF

The Turkish government has been in the news for all of the wrong reasons in recent weeks. Corruption scandals, accusations of a potential coup and fears that the government is trying to erode the independence of the judiciary have led to widespread protests. Prime Minister Erdogan’s reputation at home has undoubtedly been eroded in recent months; however the bad news could be spreading further afield.

Financial markets are a good gauge of international sentiment towards a country and right now they are dumping Turkish assets by the bucket load. The Turkish lira plunged to another record low against the US dollar this week and the Istanbul index has bucked the global trend and has fallen nearly 20% in the past 12 months.

The IMF recently published a note on how Turkey can try and reduce its increasing financial imbalances, which threaten its growth. When the IMF is writing blogs on how a country can improve, you know it means business. While Turkey isn’t exactly in bailout territory, its 10-year government bond yield is above 10%, which is higher than Greece’s 7.70%.

The post on the IMF blog entitled “Turkey: how to boost growth without increasing imbalances”, suggests that raising the domestic savings rate, both private and public, becomes a priority as this would lower Turkey’s dependence on external financing. This is important as tapering by the Federal Reserve can hurt countries like Turkey as they rely on external financing (and cheap money from central banks like the Fed) to fund their deficits. Practical steps to try and boost the savings rate include more incentives for pension savings and more ambitious public savings targets over the next few years, according to the post.

from The Great Debate:

An unstable global economic system that is being ignored

Today, the International Monetary Fund announced yet another a reduction in its global growth projections for 2014, with its estimate of U.S. growth also reduced (citing reduced government spending, but not the present U.S. government shutdown -- or the heretofore unthinkable notion of the U.S. government defaulting on its obligations). Despite the seeming urgency of global economic slowdown, when world leaders attended their annual fall confabulation at the United Nations in New York last month, they focused on the diplomacy of physical security (Syria, Iran, etc.). Thus another year has passed in which global economic security issues were on no one’s reported agenda.

Policy makers continue to fail to appreciate that the most formidable economic challenge today lies in the area outside the borders of any one nation or region -- and that multilateral action to address this challenge is arguably more important than efforts at increasingly less-effective internal stimulus.

from The Great Debate:

Stubborn national politics drag down the global economy

Four years ago world leaders, meeting in the G20 crisis session, agreed they would all work to move from recession to growth and prosperity.  They agreed to a global growth compact to be delivered by combining national growth targets with coordinated global interventions. It didn’t happen. After the $1 trillion stimulus of 2009, fiscal consolidation became the established order of the day, and so year after year millions have continued to endure unemployment and lower living standards.

Only now are there signs that the long-overdue shift in national macro-economic policies may be taking place. The new Japanese government is backing up a "minimum inflation target" with a multi-billion-dollar stimulus designed to create 600,000 jobs. In what some call the “reverse Volcker moment,” Ben Bernanke has become the first head of a central bank for decades to announce he will target a 6 percent level of unemployment alongside his inflation objective. And the new governor of the Bank of England, Mark Carney, has told us that "when policy rates are stuck at the zero lower bound, there could not be a more favorable case for Nominal GDP targeting.” Side by side with this shift in policy, in every area but the Euro, there is also policy progress in China. It may look from the outside as if November’s Communist Party Congress simply re-announced their all-too-familiar but undelivered wish to re-balance the economy from exports to domestic consumption, but this time the promise has been accompanied by a time-specific commitment: to double average domestic income per head by 2020.

from The Great Debate:

A good deal for Greece, its creditors, and Europe

Amid all the doom and gloom about Greece in the last few weeks, it is easy to overlook an important piece of good news: the debt exchange offer published by Greece on Friday with endorsement by its main private and official creditors. If implemented, this would be a major achievement and an important step toward overcoming the euro zone crisis, almost regardless of what happens next.

Under the offer, bondholders would receive 15 percent of the face value of their bonds in the form of short-term European Financial Stability Facility (EFSF) bonds, plus a set of new Greek sovereign bonds maturing between 2023 and 2042, with a 31.5 percent face value.

from Lawrence Summers:

It’s time for the IMF to step up in Europe

By Lawrence Summers
The opinions expressed are his own.

European leaders will meet today for yet another “historic” summit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last convened to deal with the financial crisis.

If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge.

from Lawrence Summers:

The perils of European incrementalism

By Lawrence H. Summers
The views expressed are his own.

In his celebrated essay “The Stalemate Myth and the Quagmire Machine,” Daniel Ellsberg drew out the lesson regarding the Vietnam War that came out of the 8000 pages of the Pentagon Papers.  It was simply this:  Policymakers acted without illusion.  At every juncture they made the minimum commitments necessary to avoid imminent disaster—offering optimistic rhetoric but never taking steps that even they believed offered the prospect of decisive victory.  They were tragically caught in a kind of no man’s land—unable to reverse a course to which they had committed so much but also unable to generate the political will to take forward steps that gave any realistic prospect of success.  Ultimately, after years of needless suffering, their policy collapsed around them.

Much the same process has played out in Europe over the last two years.  At every stage from the first signs of trouble in Greece to the spread of problems to Portugal and Ireland, to the recognition of Greece’s inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the quagmire machine.  They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter.

Greece deal is a compromise and, once again, the banks have won

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By Laurence Copeland. The opinions expressed are his own.

Whenever I see photos of Chancellor Merkel these days, I’m reminded of the lugubrious features of the creature in the Restaurant at the End of the World, as it recommended to guests which part of its own anatomy they should eat. The details of the “Deal to Save the Euro” are still mysterious and have been given a misleading spin in the official releases, but one or two points seem clear.

First, the package is a compromise – a little bit of default (as required by a reality check) plus assistance to Greece which looks very generous but is still not enough to give it a realistic chance of paying its remaining debts. So the can has been kicked further down the same road yet again.

Trichet’s United States of Europe?

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By Kathleen Brooks. The opinions expressed are her own.

Another week another round of EU officials proposing solutions to the Greek insolvency problem.

First there was the President of the European Council Jean Claude Juncker who suggested that bond holders could be tempted into rolling over their maturing debt and buying more Greek bonds as long as a few sweeteners like higher coupon or interest rates were thrown in.

from Felix Salmon:

The fraught politics facing Lagarde

To get an idea of the job facing the new head of the IMF, check out Patrick Wintour's interview with Vince Cable, a UK cabinet minister who, perfectly sensibly, says that Greece is going to have to restructure its debts. Cable puts a positive spin on the idea: a "soft restructuring", he says, with Greece staying in the euro zone, could lead to a closer political union.

Then, read the story of what happens when you so much as suggest such a thing to Jean-Claude Trichet, eurocrat-in-chief. Even if you're from Luxembourg:

from The Great Debate:

How Lagarde should be appointed at the IMF

By Mohamed El-Erian
The opinions expressed are his own.

Eager to retain a historical but outmoded entitlement, European politicians seem to be coalescing around Christine Lagarde to replace Dominique Strauss-Kahn as Managing Director of the IMF. Lagarde has the qualifications to successfully lead a multilateral institution that is central to the well being of the global economy. Her ability to do so, however, may critically depend on how she is appointed.

Lagarde has considerable skills and expertise; she has gained important experience in both the private and public sectors; and, judging from her stint as France’s Minister of Finance, she has navigated well the corridors of political power at the national and European levels.

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