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The IMF is on a fool’s errand

By Desmond Lachman
December 15, 2010

INDIA/By Desmond Lachman, a resident fellow at the American Enterprise Institute, who previously served as deputy director in the International Monetary Fund’s Policy Development and Review Department and was a managing director and chief emerging market economic strategist at Salomon Smith Barney. The opinions expressed are his own.

As the euro zone debt crisis spreads to Portugal and Spain, one has to pity Dominique Strauss-Kahn, the IMF’s managing director. For the IMF’s European taskmasters are putting the IMF in the worst of no-win positions on the issue of how to deal with the deepening euro zone debt crisis.

If Strauss-Kahn were to acknowledge, as the markets are now doing, that a number of the countries in the European periphery are insolvent, he risks courting the full wrath and fury of the IMF’s main European shareholders. That’s because those shareholders are rightly fearful that any sovereign debt rescheduling in the periphery right now will trigger contagion and a full blown banking crisis in Europe’s core countries.

Yet if Mr. Strauss-Kahn goes along with the European charade that countries like Greece, Ireland and Portugal can address their major budget deficit and balance of payments problems without a debt restructuring or an exit from the euro, he risks getting the IMF more deeply involved in supporting adjustment programs that are almost certain to end in tears.

An irony of the present European situation is that the IMF has to know from its own experience in countries like Argentina, Ireland and Latvia that draconian budget deficit reduction in a fixed exchange rate system is bound to lead to years of depression and deflation in countries like Greece, Ireland, and Portugal. And with increasingly violent political opposition to austerity now becoming the order of the day across Europe at this very early stage in the adjustment process, the IMF would have to be blind not to recognize the risks that their programs pose for the political fabric of the countries in question.

It is no secret that Strauss-Kahn entertains ambition to become France’s next president. He has to be hoping that the euro-zone debt crisis does not spin out of control before the 2012 French presidential elections. However, the way that market confidence is rapidly eroding for the euro zone’s periphery despite the show of massive international financial support for those countries, it is far from clear that Strauss-Kahn and the IMF can hold Europe’s periphery together till 2012.

Photo caption: Dominique Strauss-Kahn, December 2, 2010. REUTERS/B Mathur

Comments

the IMF, and obviously you as well, need to understand that the entire West is insolvent. The media and the goold ol’boys decided to focuse their attention on the so-called PIIGS (literally name-calling), forgetting that countries like the UK, the US, France and even Germany have a huge debt crisis on their own. WHat makes you think they’ll manage to pay their debt in the same way Portugal or Spain will? The UK’s foreign debt for instance accounts as high as 420% of its GDP! The US has a public debt of almost 100% of it’s GDP and holds the biggest debt in the entire world! COuntries like Portugal, Ireland, Spain, are small fish. Attack them, if you feel that will make you gain time or something. Although I think we should be tackling this crisis together, for decades the west has been overspending. The PIIGS are (or represent) the west at its best, overindebted, and growing slowly (especially when compared to developing economies). It won’t be until people realise this that the so called debt crisis will be solved. Portugal’s public debt represents a small percentage of the US or the UK or France’s debt…. what is more worrying to the World? Or the IMF? SMall little Portugal or bigger countries, that have debts that have gone way beyond their control? thinking otherwise is either not wanting to see it, or being extremely gullible.

Posted by PedTeles | Report as abusive
 

top five countries with highest foreign debt as percentage of GDP:

1-Luxembourg 3854%
2-Ireland 1004%
3-Liberia 606%
4-Netherlands 470%
5-United Kingdom 416%

top ten countries with highest public debt as percentage of GDP:

1 Zimbabwe 282.60 2009 est.
2 Japan 189.30 2009 est.
3 Saint Kitts and Nevis 185.00 2009 est.
4 Lebanon 156.00 2009 est.
5 Greece 126.80 2009 est.
6 Jamaica 124.50 2009 est.
7 Italy 115.20 2009 est.
8 Singapore 113.10 2009 est.
9 Iceland 107.60 2009 est.
10 Sudan 103.70 2009 est.

top 5 countries with highest deficit in the EU (%)

Greece -15.4
Ireland -14.4
United Kingdom -11.4
Spain -11.1
Latvia -10.2

so tell me where is the insolvency of Portugal? Please…. like a famous Englishman said once

“Take a look at the lawman, beating up the wrong guy, oh man, I wonder if they’ll ever know, they’re in the best selling show!”

Posted by PedTeles | Report as abusive
 

It seems that the old boys at the head of each government have been acting out what they see fit and they give a different version to the general puplic as everything is OK and growth is our way out and therefore, please, use your credit rating to obtain a new car, house, appliances, summer home, etc and when you cant afford it any more and when you loose your job, your credit rating, your insurence policy and your retirment fund, dont worry because the government will give you 100 dollars per month until you die in slow misery with nothing else left on your name as you are not a credit worthy person anymore.

This senario is unraveling in many industrial countries where easy credit to fuel growth has now come back to bite not only the general public but also the governments which are the most corrupt of all on this planet.

Sure.

Countries like Greece etc, can pull themselves out of their own induced debt crisis. maybe in 1.000 years as the country itself has no real means of earning much and therefore nobody worthy enough to tax as everybody is unemployeed and staying at home with their parents.

Great life. This is why we need facebook…….. something to do while we are doing nothing.

Posted by Trikeriotis | Report as abusive
 

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