A Word Of Thanks To The IMF

That was the week that was, it’s over, let it go…….

Well I don’t suppose it’s that often that people get the opportunity to enthuse about the International Monetary Fund. Normally you find people like Joseph Stiglitz, or Naomi Klein, who are bitterly critical (often for many of the wrong reasons, here, and here). But I would like to express my gratitude to the Media Relations department of the Fund (and in particular to Mr Murphy – I think I have the name right), for enabling Landon Thomas to have access to the members of the Spanish team to talk about my role, which hasn’t been, let’s be clear, that earth shattering – don’t believe everything you read in the press: it is certainly ridiculous to suggest, for example, that I actually wrote the last report. All I have done is provide some analysis, for consideration, on the evolution of the current account deficit, some opinions over the actual levels of bad debt in the banking system, and some data on off-balance sheet public sector debt.

Anyway, it can’t be that easy for a major multilateral organisation to handle a sensationalized “IMF turns to blogger for advice on Spain” type story sweeping the globe. So I am grateful for the mature and intelligent way they handled a tricky situation which landed in their in-tray.

Of course, let’s be clear, offering advice does not mean 100% agreement. Evidently the Fund do not (at this point anyway) share the opinions of people like myself and Paul Krugman that growth will only be restored on Europe’s periphery by a series of substantial internal devaluations. They have confidence that a combination of fiscal restraint and long term structural reforms should be sufficient to do the trick. And they surely would in no way contemplate my “plan B” option, which is that if wage and price competitiveness is only returned slowly, then the only realistic way to “unblock” the situation may be to encourage Germany to temporarily return the Deutsche-mark.

In fact, my differences with the Fund over this sort of issue have been on record for some time now, as in the case of the amicable but clear debate I had with IMF Regional Representative for Central Europe and the Baltics Christoph Rosenberg about the desirability, or otherwise, of Latvian devaluation at the time when the IMF programme was initiated there (see my original argument here, Christoph’s reply here, and my response to Christoph here). Or again, take the Hungarian situation, where I have been arguing there will be no solution to the problems that country faces without biting the bullet of converting the Swiss Franc loans to forint. Back in January I warned that the way the programme was being applied was leading to a build up in fiscal liabilities which the incoming government would need to face up to (Hungary Isn’t Another Greece…. Now Is It?), and on this occasion the ongoing IMF Programme was defended by the then Finance Minister, Peter Oszko.

And, coming right up to date, it is hard to be in agreement with the assessment of the stresses the Spanish banking system is under which is made by former Bank of Spain deputy governor José Viñals and his team in their recent Global Financial Stability Report. My view – which I communicated to the Spanish team – is that their evaluation substantially underestimates the likely extent and duration of the Non Performing Loan problem in the Spanish financial system.

Yet despite these ongoing differences, I still favour IMF interventions here in Europe, as in the Greek case, where I was arguing in favour of what eventually became the adopted solution from the beginning of January. I think IMF involvement in resolving the problems facing many peripheral Eurozone economies is desirable given the Fund’s accumulated expertise, and relative political distance. On the other hand, it is unrealistic to expect the Fund to take a radically different policy stance from the one determined in Brussels, whose attitudes and opinions must always condition IMF involvement in Europe. So if policy changes are needed, then it is in Brussels and not Washington that these must be initiated.

And nowhere are the insights the Fund can offer going to be more important and useful than here in Spain, where, if the recent leaks to the Financial Times Deutschland are accurate, a call for intervention may not be that far off. Certainly everyone who I have talked to recently is very nervous about the severity of the financing problems currently facing the public and private sector. This week’s decision by the ECB to extend the short term financing operations for another three months, and to continue the programme of buying government bonds will buy time, but that is all. Strategic decisions have now to be taken, the Spanish economy may well be on the point of slipping back into recession in the second half of the year, and the two steps forward, one step back pace of the reforms being implemented by the current administration is painfully slow. So let’s here it for them then, what about a round of applause for all those boys and gals over in Washington who tirelessly labour, day in and day out, in their constant effort to keep Europe’s troubled economies from going “belly up”.

And now, as far as I am concerned, it’s high time life got back to normal.