NWL: Let's Open Our Door to the IMF

fungus · November 7, 2010, 2:20pm

Another wonderful piece by NWL:

namawinelake.wordpress.com/2010/ … mment-1581

The best reason for inviting the IMF in is that they will conduct a root and branch investigation into taxation and spending – we stand a better chance that the weeds will not just be cut, they will be rooted out. Our Taoiseach is unlikely to remain in the top five highest paid prime ministers in the world. Former Taosigh might lose benefits (I was saddened at the recent interview of former Taoiseach Garret Fitzgerald on the under-rated Vincent Browne show on TV3 where he said he wouldn’t be giving up his ministerial car “that is a situation and I have no control over that [Vincent Browne - do you think that is ridiculous?] I can understand people being unhappy with it, the expenditure but I can’t intervene in that matter”). These are high profile though low value examples of what many perceive as excess and waste, but hopefully the IMF would not stop before any sacred cow in considering cuts.

What_Goes_Up · November 7, 2010, 2:43pm

Meh.

Paul Sommerville was making the point that the IMF don’t do anything - they just simply lend you money with onerous conditions to make sure they get their money back. It’s up to the usual suspects to make sure they get repaid.

I would be more interested to see what would happen if the IMF was invited in and they simply said “No Thanks! You guys are super-fucked!”

No bond market. No IMF.

Real decisions would have to be made by us, ourselves!

Mossy_Heneberry · November 7, 2010, 2:50pm

I thought the way they worked was they give us a list of conditions of what we have to do. Then each time me meet a certain number of those conditions they give us money???

Pill · November 7, 2010, 3:13pm

Then you probably would be in deposit confiscation territory.

Puck_may_be_Famous · November 7, 2010, 3:15pm

I think the targets they set are just cash amounts of savings. They don’t care how you get them or if you reform your cartels etc.

roc · November 7, 2010, 3:17pm

Are you sure about this WGU? I get the impression that they put implicit pressure on governments to reform. ie. if governments don’t read between the lines, they don’t get loans.

I’m basing this on former chief economist of the IMF, Simon Johnson, saying in an article last year:

And,

I note he was talking about the US in this article, and drawing parallels to emerging market countries. And I think the IMF have enough sense to know that if they DON’T apply pressure for political reform here, then it is likely that any money they lend us will be spent on Eamon Ryan’s madcap schemes; and ill-advised attempts to prop up the property market and keep the sector in big salaries; and on the quango class; and all the rest of the politically motivated spending this country engages in… ie. Bye bye IMF money!

darwi · November 7, 2010, 4:09pm

I think I found one version of that article. Simon Johnson lays out his view on the IMF decision-to-lend process.

darwi

Edited for spelling

fedorov · November 7, 2010, 5:42pm

the IMF ‘helped’ Argentina. They lent them money when nobody else would. They made them cut their deficit, reduce domestic spending and benefits for the elderly, reduce social welfare payments, cut to public servants wages. Sounds familiar doesnt it.

Sunday, August 12, 2001

by Greg Palast

And news this week in South America is that Argentina died, or at least its economy. One in six workers were unemployed even before the beginning of this grim austral winter. Millions more have lost work as industrial production, already down 25% for the year, fell into a coma induced by interest rates which, by one measure, have jumped to over 90% on dollar-denominated borrowings.

This is an easy case to crack. Next to the still warm corpse of Argentina’s economy, the killer had left a smoking gun with his fingerprints all over it.

The murder weapon is called, “Technical Memorandum of Understanding,” dated September 5, 2000. It signed by Pedro Pou, President of the Central Bank of Argentina for transmission to Horst Kohler, Managing Director of the International Monetary Fund.

‘Inside Corporate America’ received a complete copy of the ‘Understanding’ along with attachments and a companion letter from the Argentine Economics Ministry to the IMF from … well, let’s just say the envelope had no return address.

Close inspection leaves no doubt that this ‘Understanding’ fired fatal bullets into Argentina’s defenseless body.

To begin with, the Understanding requires Argentina cut the government budget deficit from US$5.3 billion in 2000 to $4.1 billion in 2001. Think about that. Last September, Argentina was already on the cliff-edge of a deep recession. Even the half-baked economists at the IMF should know that holding back government spending in a contracting economy is like turning off the engines on an airplane in stall. Cut the deficit? As my 4-year old daughter would say, “That’s stooopid.”

The IMF is never wrong without being cruel as well. And so we read, under the boldface heading, “improving the conditions of the poor,” agreement to drop salaries under the government’s emergency employment program by 20%, from $200 a month to $160.

But you can’t save much by taking $40 a month from the poor. For further savings, the Understanding also promised, “a 12-15 percent cut in salaries” of civil servants and “rationalization of certain privileged pension benefits.”

In case you haven’t a clue what the IMF means by “rationalization” - it means cutting payments to the aged by 13% under both public and private plans. Cut, cut, cut in the midst of a recession. Stooopid.

Salted in with the IMF’s bone head recommendations and mean-spirited plans for pensioners and the poor are economic forecasts which border on the delusional. In the Understanding, the globalization geniuses project that, if Argentina carries out their plans to snuff consumer spending power, somehow the nation’s economic production will leap by 3.7% and unemployment decline. In fact, by the end of March, the nation’s GDP had already dropped 2.1% below the year earlier mark, and nosedived since.

What on Earth would induce Argentina to embrace the IMF’s goofy program? The payoff, if Argentina does as it’s told, is that this week the IMF lend $1.2 billion in aid. This is part of an emergency loan package of $26 billion for 2001 put together by the IMF, World Bank and private lenders announced at the end of last year.

But there is less to this generosity than meets the eye. The Understanding also assumes Argentina will “peg” its currency, the peso, to the dollar at an exchange rate of one to one. The currency peg doesn’t come cheap. American banks and speculators are charging a whopping 16% risk premium above normal in return for the dollars needed to back this currency scheme.

more

This is what got them into this mess.

To reduce its deficit per IMF decree, Argentina had cut $3 billion from government spending-a cut that was necessary, the authors note here, to “accomodat[e] the increase in interest obligations.” These obligations, the report did not need to add, were largely to foreign creditors, including the IMF and World Bank themselves. Since 1994, in fact, Argentina’s budget deficits had been entirely attributable to interest payments on foreign loans. Excluding such payments, spending had remained constant at 19 percent of GDP. Despite the visible harm caused by cuts, the new plan ordered more. This, the report promised, would “greatly improve the outlook for the remainder of 2001 and 2002, with growth expected to recover in the later half of 2001.” The Bank was slightly off the mark. By December 2001, Buenos Aires’ middle class, unaccustomed to hunting the streets for garbage to eat, joined the poor in mass demonstrations.

How had Argentina arrived at such an impasse? In the 1990s the nation was the poster child for globalization, having followed without question the IMF and World Bank program. The “reform” plan for Argentina, as for every nation, has four steps. The first of these, capital market liberalization, was achieved by 1991’s “Convertibility Plan,” which pegged the Argentine peso in a one-to-one relationship with the U.S. dollar. This peg was designed both to keep inflation low and to make deficit spending difficult, in hopes of attracting and comforting foreign investors. Liberalized markets free capital to flow in and out across borders. But once Argentina’s economy began to wobble, money simply flowed out…

The second step in the IMF/World Bank regimen is privatization. Both at the urging of lenders and out of financial necessity, Argentina throughout the nineties sold off what Argentines now ruefully call “las joyas de mi abuela,” grandmother’s jewels: the state’s oil, gas, water, and electric companies and the state banks. It was quite a fire sale. Vivendi of France won rural water systems; Enron of Texas the pipes of Buenos Aires; Fleet of Boston took the provincial banks…

In 1994, at the World Bank’s urging, Argentina partially privatized even its social security system, diverting much of it into private accounts. The U.S.-based Center for Economic and Policy Research calculated the revenue loss from this decision alone to be almost equal to the nation’s budget deficit during the period.

The third prong of the laissez-faire putsch is market-based pricing. In Argentina, the main target of this initiative has been labor, that most inflexible of commodities. “A major advance was made to eliminate outdated labor contracts,” states this report, noting approvingly that “labor costs” (i.e., wages) had fallen due to “labor market flexibility induced by the de facto liberalization of the market via increased informality.” Translation: workers who lost unionized jobs were forced into ad hoc arrangements, with far less protection. Here, the report asks the government to decentralize collective bargaining, a move that would reduce union power?.

Far from achieving this goal of “unemployment in single digits,” the World Bank and IMF saw the jobless figure in the Buenos Aires area rise from 17 percent to a staggering 22 percent in the year after the report’s issuance. The violence and looting that rocked that rocked the city in December 2001 thus represents a stage in the “austerity” process that Stiglitz terms the “IMF riot.” When a nation, he said, “is down and out, [the IMF] takes advantage and squeezes the last pound of blood out of them. They turn up the heat until, finally, the whole cauldron blows up.”…

Step four of the IMF/World Bank program is free trade. The loan terms of the two institutions had required Argentina to accept “an open trade policy.” As recession set in, Argentina’s exporters-whose products were effectively priced, via the peg, in U.S. dollars-were forced into a spectacularly unequal competition against Brazilian goods priced in that nation’s devalued currency. Argentina grows a special kind of long-grain rice favored by Brazilians, and yet even as Brazil faced a hunger crisis tons of rice went unsold…

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Mossy_Heneberry · November 7, 2010, 6:37pm

The main problems that Argentina had were nothing to do with globalisation or market liberalisation. The real problem was the currency peg to the dollar.

What_Goes_Up · November 7, 2010, 6:44pm

Some IMF stuff on Iceland:

imf.org/external/pubs/ft/sur … 02109a.htm

imf.org/external/pubs/ft/sur … 00610a.htm

Key seems to be:

imf.org/external/np/sec/pn/2010/pn10138.htm

fedorov · November 8, 2010, 4:36pm

Thanks but that was in one of the articles I quoted.

My point is that the Irish government are broadly carrying out what the IMF recommended for Argentina. The causes are a moot point as we now find ourself in a similar position (see Morgan Kelly article today which references Ireland being as screwed as Argentina).