Christine Lagarde said the money available to the organisation “pales in comparison to the potential financing needs of vulnerable countries”. In the wake of the global credit crisis, the funding of the IMF tripled and Britain’s exposure to it rose to £20 billion. This figure is poised to rise again if financial troubles engulf bigger economies such as Italy and Spain. Yesterday, Alistair Darling, the former Labour chancellor who was in office during the previous crisis in 2008, warned that the problems facing the global economy were worse than three years ago. “There are lessons to be learnt, and they are not being learnt by those responsible at the moment,” he said. “Lehmans [the investment bank that collapsed in September 2008] taught us one thing which is if you know there is a problem, take action, sort it out [in a way] that is more decisive than people expect if you are going to stop it. “The problem with the Greek crisis is that it has been allowed to run on and on and on.” This week could prove crucial in the attempts by European leaders to get a grip on the Greek economic crisis, and financial markets are braced for another turbulent few days. Germany and Greece will have detailed negotiations over an emergency rescue package for the Mediterranean country before a German vote on Thursday to approve a new eurozone bail-out plan. There is growing German anger at helping southern Europe, which will effectively involve taxpayers underwriting other countries’ debts unless they agree to sweeping reforms. Greece may be allowed to go bankrupt and write off some of its debts with other loans restructured and guaranteed by a eurozone bail-out fund. Banks in several countries, including France, may also be recapitalised, although the French central bank chief insisted yesterday that taxpayers’ money would not be used. In total, the scheme could cost up to £2 trillion, and the IMF is also expected to be involved. During talks in Washington, Mrs Lagarde warned that the IMF may need to extend it $400 billion war chest.
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Monday, September 26, 2011
Christine Lagarde said the money available to the organisation “pales in comparison to the potential financing needs of vulnerable countries”. In the wake of the global credit crisis, the funding of the IMF tripled and Britain’s exposure to it rose to £20 billion. This figure is poised to rise again if financial troubles engulf bigger economies such as Italy and Spain. Yesterday, Alistair Darling, the former Labour chancellor who was in office during the previous crisis in 2008, warned that the problems facing the global economy were worse than three years ago. “There are lessons to be learnt, and they are not being learnt by those responsible at the moment,” he said. “Lehmans [the investment bank that collapsed in September 2008] taught us one thing which is if you know there is a problem, take action, sort it out [in a way] that is more decisive than people expect if you are going to stop it. “The problem with the Greek crisis is that it has been allowed to run on and on and on.” This week could prove crucial in the attempts by European leaders to get a grip on the Greek economic crisis, and financial markets are braced for another turbulent few days. Germany and Greece will have detailed negotiations over an emergency rescue package for the Mediterranean country before a German vote on Thursday to approve a new eurozone bail-out plan. There is growing German anger at helping southern Europe, which will effectively involve taxpayers underwriting other countries’ debts unless they agree to sweeping reforms. Greece may be allowed to go bankrupt and write off some of its debts with other loans restructured and guaranteed by a eurozone bail-out fund. Banks in several countries, including France, may also be recapitalised, although the French central bank chief insisted yesterday that taxpayers’ money would not be used. In total, the scheme could cost up to £2 trillion, and the IMF is also expected to be involved. During talks in Washington, Mrs Lagarde warned that the IMF may need to extend it $400 billion war chest.
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Diagnosing what has gone wrong in the past few years and how we've ended up on the brink of another crisis is the easy bit. But how do we get out of the mess? What would a "collective and bold action plan", which is what the G20 is promising, look like? There are no easy answers but here are five suggestions:
1. Inject more capital into the European banking system. The IMF is screaming for it, and rightly so if its €200bn-€300bn estimate of the sovereign debt risk is even remotely correct. Fiddling around with the 16 mid-sized laggards who failed, or marginally passed, the summer stress tests is not enough. Big French banks may offer plausible arguments for why their capital cushions are sufficiently plump to withstand more than a Greek default, but markets have moved on. The sheer size of balance sheets is intimidating investors who don't know where the losses will land. More capital is the best way to create confidence. Likelihood factor: 4/5
2. Get the Greek default done. Piling austerity on austerity in Greece is no solution. The numbers don't work, even with mini-haircuts for bondholders announced in July: growth isn't happening and the road to a competitive economy is too long. The debt write-off has to be larger – probably at least 50%. The "orderly" part of default really means a plan to contain contagion. For investors to be confident that Greece is a one-off, the eurozone has to throw protective arms around Portugal, Ireland, Spain and Italy. That means Germany, in particular, has to decide what guarantees it is prepared to give and what it wants to see in return. Likelihood factor: 3/5
3. More stimulus. The risk of inflation is fading fast as recession grows closer and commodity prices fall. The Fed's "operation twist" looks too little to stimulate demand. Stronger medicine is required. That may mean more quantitative easing. But measures to get loans directly into the hands of small businesses may be better. In the UK cutting national insurance, a tax on jobs, may be required. Likelihood factor: 4/5
4. Less austerity. Investors' greatest fear now is lack of growth. With low-term cost of borrowing for governments so low, the case for more spending on infrastructure is strengthening. It's tricky for any government to do it alone without upsetting its local bond market. This is one area where co-ordinated international action is critical. Likelihood factor: 2/5
5. Free the renminbi. Persuading China to loosen its currency peg to the dollar may sound like mission impossible. But imbalances in global trade lie at the heart of the crisis – a new deal for the global economy has to give rebalancing a greater chance of happening. Even China, let's hope, can now see the need to change direction and encourage more domestic consumption and fewer exports. Likelihood factor: 1/5
The French newspaper Le Journal du Dimanche fuelled expectations by reporting that French officials were ready to put up to €15bn in a special contingency plan if recapitalisation was needed. But Noyer was adamant this was not necessary. "They are very solid," he said. "They have a solid capital base comparable to other European banks and they are profitable … none of them is hiding any toxic assets".
Despite his protestations – and those of the bosses of BNP Paribas and Société Générale – markets are gripped by speculation that the banks will seek fresh funds. BNP Paribas has been linked with Qatar but denied any talks and avoided a downgrade by ratings agencies after announcing plans to cut the value of its balance sheet. SocGen insists its exposure to Greece is manageable.
While the French banks have become of the major focus of the markets' concern about the impact of a default by Greece on its debt pile, other banks are not immune.
Schmitz, who is also the head of the Düsseldorf-based private bank HSBC Trinkaushaus, said: "German banks could cope with an isolated insolvency of Greece. Such a scenario would not endanger their survival. But if a wave of bankruptcies sweeps through Europe, the situation looks different; many banks would get into trouble – and not just in Europe."
This is one of the reasons why there is talk of the authorities trying to put a firewall around Greece.
Banks are already expected to take a loss of 21% on their holdings of Greek debt – as agreed under the terms of the bailout – but after speculation this weekend, the loss is expected to rise to at least 50%.
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