Tag: International Monetary Fund

From The Fire Into Greece

Inkwell Institute

European Desk

World Economy/Economic Crisis

First of all, I am not the only person that sees the possibility of a total collapse of the economy in the future……we have been burned, economically and the fire is NOT out and it will be hotter the next time we get burned……

By now anyone interested in economics has heard or seen the reports on the problems in Greece….their economy is on the verge of collapse and if it does some of European will go with it……

For those interested:

Credit default swaps are insurance-like contracts that permit banks and hedge funds to place bets on whether or not a company, or even a country, will default on it debts. The nature of CDS trading, which is unregulated, is such that CDS speculators have an incentive to push companies or countries toward bankruptcy. According to one analyst, “Its like buying fire insurance on your neighbor’s house—you create an incentive to burn down the house.”

The role of CDS trading has been highlighted in relation to the financial crisis of the Greek state. Attracted to the highly indebted Greek economy like vultures to a decaying corpse, the CDS traders at major banks and hedge funds have moved in. According to the Depository Trust and Clearing Corporation, trading in credit default swaps linked to Greek debt has surged over the past year.

The overall amount of insurance on Greek debt hit $85 billion in February of this year. One year earlier, the same figure stood at $38 billion. The surge in such types of trading invariably drives up the cost of insuring Greek debt. The cost of insuring Greek bonds nearly doubled in February compared to early January. This, in turn, worsens the budgetary plight of the country and brings closer the specter of default—and a jackpot for CDS speculators.

The list of world players in derivatives and CDS trading is headed by the US banks JPMorgan Chase, Citibank, Bank of America and Goldman Sachs. According to the Office of the Comptroller of the Currency, United States banks held a total of $13 trillion in notional value of credit derivatives at the end of the third quarter of 2009.

US banks, however, are not alone in such trading. A number of Europe’s biggest banks, including Credit Suisse Group, UBS, Société Générale, BNP Paribas SA, and Deutsche Bank, are amongst the biggest buyers of swap insurance. Their activities on the derivatives market reflect their exposure to the Greek economy. The Bank for International Settlements reports that French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, and German banks, with an exposure of $43.2 billion.

Now Greece has had to make many concessions to the EU and the world, in an attempt to sure up the economy and try desperately to avoid a total collapse…….

It is increasingly doubtful, however, that Greece can obtain loans on American or Asian financial markets. The Daily Telegraph cited Simon Derrick of Bank of New York Mellon: “China is becoming concerned about Europe. Greece is going to struggle to find anybody to buy its debt. There is no road-show in Asia, and it may pull out of its show in the US.”

Moreover, financial commentators increasingly anticipate that Greece will be unable to repay its debts, even with European or IMF loans. While a joint European-IMF bailout of roughly €45 billion has been discussed, German central bank governor Axel Weber recently said that €80 billion might be needed. He told a closed-door meeting of German lawmakers that Greece’s position was worsening and “the numbers are changing all the time.”

In a Financial Times column, Wolfgang Münchau wrote: “Greece has a debt-to-gross domestic product ratio of 125 per cent. Greece needs to raise around €50 billion ($68 billion, £44 billion) in finance for each of the next five years to roll over existing debt and pay interest. That adds up to approximately €250 billion, or about 100 per cent of Greek annual GDP.” He concluded, “The best thing you can say about the rescue package is that it buys time to negotiate an orderly default.”

Greece has tried several things that involves the people making sacrifices but not the banks that have caused the problem…….

More than 10,000 civil servants and students marched to parliament, calling for cutbacks to be scrapped, beating drums and chanting: “No more illusions, war against the rich.”

Nurses, teachers, tax officials and dockers stopped work during the 24-hour strike, which paralyzed public services, while EU and IMF officials met in Athens for talks that could lead to a financial bailout for Greece.

Workers are protesting against public wage cuts, a pensions freeze and tax hikes imposed by the government to try to pull Greece out of a fiscal crisis that has shaken markets worldwide and driven Greece’s borrowing costs to a 12-year high.

You now know more about the problems in Greece and Europe than most of your elected officials….but you will no doubt ask……why?  Well sports fans you need to see what happens when a country’s economy collapses……why?  The way the US is going with its debt, in ten years this scenario could be playing out here and you will be warned…..but why would I say that?  Easy…NOTHING being done, by either party in Washington will control the risk of the CDS……since 2008, the banks have gone back to business as usual and the risk to the economy is STILL there waiting for the next glitch…..that will make them billions and drag the US economy down yet again……

UpDate:  Since I originally wrote this post there has been a further erosion of the Greek problem.  There bonds have been downgraded and are now JUNK!   And Greece has agree to more austerity programs and to raise taxes if they want the $145 billion carrot dangled in front of them…..now there is a novel idea….raise taxes to stem off any budgetary problems…..why did not someone think of that sooner (BTW that is called sarcasm)….BTW (again) it will be $8 billion of US taxpayer funds coming from the IMF……

World Recession Continues

As the recession continues in the US, the world is not doing so well either.  The International Monetary Fund’s updated World Economic Outlook, released Wednesday, predicts world economic growth of negative 1.3 percent this year, marking “by far the deepest global recession since the Great Depression”. Not since the 1930s has the global economy undergone a collective contraction.The IMF predicts that the world economy will grow by 1.9 percent in 2010. Advanced economies will stagnate, with average GDP growth of exactly zero. These estimates may prove optimistic, especially given the Fund’s repeated revisions of the 2009 figures. In any case, IMF Chief Economist Olivier Blanchard acknowledged that there would be no rapid recovery from the current economic crisis. He noted that, historically, wherever recessions are preceded by financial crises they are more severe and longer lasting.

The IMF is not the only source for doubt.

The global financial crisis could become “a human and development calamity” for many poor countries, the World Bank said, urging donor nations to speed delivery of money they have pledged and consider giving more.

Developing countries, its main constituency, face “especially serious consequences with the crisis driving more than 50 million people into extreme poverty, particularly women and children,” the bank said Sunday.

Ministers attending the IMF-World Bank meetings said they saw signs that the world economy is stabilizing, but it will take until mid-2010 for the world to emerge from the worst recession in decades. They said stimulus packages, bank recapitalization and other actions taken by governments and central banks to deal with the crisis are beginning to show results.

IMF Wants So Of The Bailout Pie

The head of the International Monetary Fund says it will need more funding if it is to play a bigger role in aiding a global economic recovery.

Dominique Strauss-Kahn told the BBC that the IMF was likely to need at least $100bn (£68bn) of extra funding over the course of the next six months.

Mr Strauss-Kahn also called on states to continue cutting interest rates.

His comments came as the Japanese economy officially entered a recession, shrinking 0.1% in the third quarter.

This follows a 0.9% contraction in the world’s second-biggest economy in the previous quarter from April to June.

The former French finance minister also called on countries to tackle the economic crisis themselves by cutting interest rates and using government finances.

How nice!  The world is suffering through this economic crisis, so I ask where would all this cash come from?  Who will supply the money for all these out stretched hands of the bailout?

World Economic Growth

The International Monetary Fund (IMF) has become even gloomier about the prospects for the world’s economies.

It is predicting that developed economies as a whole will shrink by 0.3% next year, having predicted growth of 0.5% less than a month ago.

It would be the first time there has been an overall contraction in developed economies since World War II.

Worst hit will be the UK, shrinking 1.3%, followed by Germany at 0.8% and the US and Spain contracting by 0.7%.

Emerging economies have also been downgraded, with the forecast of Chinese growth down from 9.3% to 8.5%, India down from 6.9% to 6.3% and Russia down from 5.5% to 3.5% growth.

The IMF is still expecting the overall global economy to grow in 2009, but it has cut its growth forecast to 2.2% from the previous estimate of 3%

“Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen,” the IMF said in its report.

Not looking good for the world in the coming year.  It will be interesting to see where the Obama team wioll take the US and eventually the world.

Fed To Bailout Foreign Banks

The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up “liquidity swap facilities with the central banks of these four large systemically important economies” effective until April 30, the central bank said yesterday in a statement. The arrangements aim “to mitigate the spread of difficulties in obtaining U.S. dollar funding.”

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than” the Fed’s rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It’s a step in the right direction and prevents things from getting worse.”

The Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries while waiving demands for economic austerity measures.

The Fed and IMF actions “show international resolve to support strong performing emerging-market economies adversely impacted by the current financial market turbulence,” U.S. Treasury Secretary Henry Paulson said in a statement.

Emerging-market investors have created “massive demand for dollars and a reduction of liquidity in other currencies” by going back to investing in the U.S. currency, said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York.

The Fed swap lines “are designed to help restore liquidity so that a vicious negative spiral doesn’t occur,” he said.

“The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,” said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York. “These are large, relevant emerging countries that have followed responsible fiscal and monetary policies for the past several years and now are going through tough times.”

The Fed also created this week a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia’s central bank last month and then tripled it to $30 billion.

“The hoped-for result is that we don’t see the global financial crisis worsen still more,” said Lyle Gramley, a former Federal Reserve governor who is now senior economic adviser at Stanford Group Co. “The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.”

What happened to Main Street?

IMF Bends Ukraine Over

The International Monetary Fund is prepared to give Ukraine up to $14 billion to help stabilise the country’s financial system, a senior Ukrainian official said on Friday, as it sought to cool nerves over its debt and currency.

IMF officials met the country’s leaders on Friday and an adviser to the ex-Soviet state’s president said two to three weeks were needed to clinch an agreement on a credit facility.

Other countries, like Hungary Iceland and Serbia, are also seeking help to find remedies to jolts sustained from the world financial crisis. Ukraine’s approach is complicated by divisions in its leadership after a government break-up.

But the IMF wants certain things done if the country is to get the cash it needs.  All adjustments made by a government is geared toward business and not the best interests of the people.

The IMF is almost always in the news in one form or another.  But what is the IMF all about.

The IMF describes itself as “an organization of 185 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty”.  That is the official statement, but is it a true statement?

Countries that need an infusion of cash are put through a rigid plan of domestic adjustments to include:

1–cut government spending on education, health care, the environment and price subsidies on necessities like food, and cooking oils.

2–Devalue the national currency, accelerate the plunder of natural resources, cut real wages.

3–Liberalize financial markets so that short erm speculation portfolios will be attracted.

4–Increase interest rates to attract foreign capital, thereby increasing the failure of domestic businesses and creating new hardships on indebted individuals.

5–Eliminate tariffs and other controls of imports, which will put furthewr strain on domestic producers bec uase of cheap imports and that will increase the external indebtedness of the government.

None of these “adjustments” will be good for Ukraine, for exporters yes, Ukraine no.  Watch the business news and see which of these conditions are met by the government of Ukraine.