Fair shares at the IMF?


              The UK government is about to ask Parliament’s permission to subscribe for £9.5 billion of new capital to the IMF. I expect we will be told we have to do this, there is no alternative, it’s part of the price of our memebrship of this international club.

              So let me begin by saying I am not recommending we withdraw from the IMF or refuse all new subscription. What I would like us to do is to argue against the IMF making more money available for a second Greek bail out when the first does not work.

              I also think we could offer a lower additional subscription than the one currently proposed. The interesting  thing about the proposed new subscriptions is how variable they are. China and India are offering large percentage increases in their subscriptions, to reflect in their IMF share their growing stature in the world economy. Meanwhile despite their good oil revenues, Kuwait is only offering a 40% increase and Saudi a 43% increase in their sub compared to the UK’s proposed 88%.

             It’s not merely the oil countries that are below us. Germany at 83%, Switzerland at 66%, Holland at 69% and Canada at 73% are also all below us. Belgium at 39% shows that just like an oil country a rich European country can offer a much lower amount.

          If the Uk matched Belgium and Saudi our new subscription would be £4.3 billion rather than £9.5 billion. In our financial position that would be a lot more comfortable. It would also be a smaller loss in Greeece and fringe Euroland if we did not win the agrument about what the IMF should be doing with our money.

         The IMF needs to heed the market warnings about the dangers of Greece and maybe others  not being able to repay all their debts on time.  Greece would have to pay 17% interest to borrow 10 year money in the market today. Holders of 10 year Greek debt  have lost 40% overthe last three years (capital and income combined). Portugal and Ireland woudl have to pay 11% today for 10 year money. Holders of 10 year bonds have lost 20% over the last three years (income and capital combined) in these two cases.


  1. Martyn
    June 27, 2011

    Why must the the UK increase its subscription by 88% and who says that it is necessary to do so? Sounds to me like being a back-door way of siphoning money out of the UK to bail out Greece through the IMF instead of the ECB. If nothing else it will save Cameron from losing face after stating that the UK will not be a part of bailing out Greece.

    1. Acorn
      June 27, 2011

      The IMF “quota” subscription is calculated by a formula that includes GDP and a degree of little country bias. The Management of the IMF has decided they need to double the size of the fund resources, to circa 480 billion SDR ($768 billion). The UK quota percentage has actually dropped from 4.52% to 4.22%, resulting in the UK having to pony up 20.1 billion SDR rather than the 10.7 billion SDR previous. That is where the 88% increase comes from. Beware politicians quoting numbers 😉 .

      Greece has SDR 26 billion IMF overdraft facility currently; it has used half of it so far. The chances of getting any of it back are looking a bit slim; and this is just the IMF bit. I suggest the odds are better at Sandown Park.

    2. Tim
      June 27, 2011

      Cameron is proving to be as underhanded as his predecessors and cannot be trusted. Fullstop. I for one, will never vote Tory again until I see actions NOT words. The Deficit, mass migration, Foreign Aid, Human Rights, EU, worse NOT better under Cameron. It is not a coincidence and he needs to go.

    3. Tim
      June 27, 2011

      I have no doubt this is a backroom deal with Cameron and the EU bigwigs, Germany and France. We’ll sub the bailouts through the IMF not directly to save their banks!! This is more proof of the reason we need our In/Out referendum from the monstrous EU (£11.5 billion net contribution and rising) that has NO benefits for us. We can continue to trade at a deficit with them whether we are in or out. It also demonstrates yet again that regardless who is in power they do not look after our national interests. So we can keep voting for the mainstream parties getting the same result on the EU, mass migration, Foreign Aid, bailouts, free public services and benefits for foreigners etc or we can give UKIP a try. We have nothing to loose anymore as they are NOT listening.

  2. Ian
    June 27, 2011

    I wonder if any city institutions (banks, maybe?) have been urging the government to increase the taxpayer contribution to the IMF, as a way of trying to safeguard their Greek interests. Perhaps we should be told – after all, it’s our money that the government wants to speculate with.

  3. Mike Stallard
    June 27, 2011

    Thank you for your extremely thorough command of vital details. Much appreciated.

    Politicians must get a lovely warm feeling when they promise away a couple of billions of our money when they are up to their hocks in debt.

    Give me just £0.005 billion and I can start a new school here where one is desperately needed.

    1. Simon
      June 27, 2011

      Mike ,

      Some of us have become anaethnetised by the numbers that are being bandied around .

      Thanks for putting them back into perspective .

      1. alan jutson
        June 27, 2011


        “anaethnetised by numbers”

        Agree with you

        I blogged on this a couple of years ago, numbers should alwways be in number form, not words.


        Puts it all in a better perspective of its size.

        1. lifelogic
          June 28, 2011

          Also per person perhaps so instead of £60 billion – £1000 each person.

  4. Duyfken
    June 27, 2011

    If the Eurozone is confident of the strength of the Euro, despite bail-outs to tide some of its members over in the short-term, should it not collectively volunteer or be required to provide collateral for any loans made from outside – from the IMF and for other loans such as was made by the UK to Ireland?

  5. Alison Granger
    June 27, 2011

    What kind of lunatic policy is it that has the UK borrowing money to give to the IMF to lend to Greece to pay off the same lenders we’re borrowing from?
    The only possible beneficences are bankers and politicians that get to rake in wages and bonuses for a bit longer whilst pretending they know what they’re doing. I do advocate withdrawing from the IMF which is a racket to allow western control of developing countries and manipulation of money markets. The whole system is teetering on the brink of collapse so why prolong the agony?

    1. Javelin
      June 27, 2011

      “What kind of lunatic policy is it that has the UK borrowing money to give to the IMF to lend to Greece to pay off the same lenders we’re borrowing from?” –

      … well pointed out, but as John said last year politicans (and the public) are debt junkies … and the problem with junkies is they need to go cold turkey and stay off the weed. Unfortunately politicans are the biggest debt junkies of all because they love the easy votes and dont like being prescriptive. Politics needs to go cold turkey for a few years so that politicians can re-invent themselves with reasonable policies that dont involve running up debt. As long as one party can reach for the debt needle and shoot up they are all going to be at it and politics will be stuck in the “bigger spender than thou” game for years to come.

      Imagine a world where politicians couldnt compete by borrowing – out the window would go political correctness, red tape, easy pay rises, large pubklic sector pay rises and trying not offend anybody, and in would come frank honest spending and hard work. That day will have to come, why not now?

      1. Bob
        June 27, 2011

        Hear hear!

      2. Gary
        June 28, 2011

        Absolutely correct. And what would ensure this state of affairs ? Sound Money. Money that cannot be printed or otherwise counterfeited. A monetary system that could not extend endless credit based on ever smaller fractions of reserves. A system where inflation was impossible. But politicians don’t understand sound money, or cannot think of it, because it would be like turkeys voting for Christmas.

        We are run by the clueless and the feckless.

  6. lifelogic
    June 27, 2011

    I would probably withdraw from the IMF or at least refuse any increase – it would send the right signal in so many ways to the EU, to Greece, to financial markets and the world in general.

    I see that Jack Straw has finally noticed the personal injury legal racket and the fact that insurance companies are selling accident data on to companies who then pester the insured to drum up business for often false injury claims. TV ads even offer free Ipads to people for the same purpose. This together with employment tribunals are often simply legal muggings of insurance companies and businesses. Sort the legal system out – it is often simply legalised theft benefiting no one but these companies and the legal profession. With negative consequences all round for everyone else. Just sort out the risk reward/legal costs profile so it is fair and the claims will go away. Also tax (limit) legal fees in a way that makes the legal costs sensible (more like teacher pay levels of pay would be sensible) the job is no harder.

    Courts like to reward litigants as this creates endless new legal work – just stop this bias, limit awards/costs and release thousands of lawyers to do something more useful.

    1. lifelogic
      June 27, 2011

      Francis Maude on radio 4 this morning “I want state sector pension to be amongst the very best available” (But perhaps not as good as MP’s). Why? When they work far fewer hours, get paid more, have better work conditions, take more sick days and often deliver such poor take it or leave it monopoly service. Why should people, often with no pensions, pay taxes to fund these gold plated ones.

      Even Andrew Lansley, Secretary of State for Health, cannot get proper treatment for his dying father. If he cannot what hope for the rest?

    2. MickC
      June 27, 2011

      Off topic, I’m afraid but the problem with the litigation system started when “referral fees” (otherwise known as bribes to get business and illegal in other fields of business) were allowed by the Law Society at the behest of New Labour.
      The Woolf reforms which were supposed to make litigation easier and cheaper then achieved precisely the opposite (rather throwing doubt on the common sense of the judges-he was told!) leading to the current mess where the object is not to achieve justice but the maximum money for the lawyers and claim farmers.
      Clarkes reforms won’t even stop referral fees so not likely to much improvement.

      1. lifelogic
        June 27, 2011


        The private sector and individuals are attacked on so many levels:
        high taxation and over regulation
        huge margins and fees from the banks (often state owned) if they do lend
        a devaluing currency
        dis-functional government “services”
        appalling employment laws
        a legal systems of – pay up if your are in the right and pay up even more if you are in the wrong (plus absurdly high costs “taxed” pro legal profession manner) fines for almost everything late, parking, breathing, speeding, moving rubbish ………..
        Why bother?

  7. Guido Fawkes
    June 27, 2011

    Good point well made.

    1. Tim
      June 27, 2011


      Are MP’s pensions being reviewed the same as all other public sector workers i.e. CPI not RPI annual increases in retirement, more years and bigger contributions for less benefits? If not, why not?

      Reply: Yes MPs pensions are being reviewed – we have already had a pensions contribution increase.

      1. lifelogic
        June 27, 2011

        Increased to employee payment to the scheme circa 15% of the pension value received.

  8. Javelin
    June 27, 2011

    I once worked with a gentleman called Jess Tigre (sp?). He was the head trader at the Bank of England during the IMF exit and had the job of propping up sterling when we exited. He told me a story he was asked to “give away billions of pounds of taxpayers money” to try to keep us in the ERM. Everybody in the trading room knew the money was wasted, so did the civil servant who rang with orders from the Minister – Lamont. The civil servant kept calling and telling him to throw another billion at the problem. Meanwhile back at the Treasury they didnt even have a Reuters 2000 terminal to watch the Market with.

    Anyway so the story went. This guy got fed up and just before he was expecting the next tranche he called back. He knew he was wasting billions and passed a message back to the Minister – “The money has made no difference, would you like me to spend another billion?”. The reply came back 2 minutes later. “Not now, but thank you for asking”

    Which when you think about it FEELS very similar to the tens of billions being thrown at Greece. But Greece is happening over months not minutes. Time apparently helps the irrational. Everybody knows the billions are 50% wasted, except the men in Brussels and the IMF. We need to stand up to the IMF and tell them that enough is enough.

    1. lifelogic
      June 27, 2011

      Spot on I do not really agree with capital punishment but in the case of John Major’s entirely predictable ERM farce (apology still awaited) I might be persuaded (to go for an appropriate tough pulnishment-ed).

    2. Kenneth
      June 27, 2011

      Sounds like a bad day at the betting shop

  9. alan jutson
    June 27, 2011

    John your post today begs a few more questions.

    First, Is there a standard formula for how much each country contributes, like:
    A percentage of GDP.
    A cost per capita of population
    You give what you feel to gain influence, the more you give, the more you are listened to !.

    If the IMF is a Bank and a lender of last resort, why does it need more money, surely if it had been running its accounts correctly, it would be getting income from the loans already outstanding from past arrangements.
    Is this like a rights issue to bring in more capital for expansion, if so I assume all contributors will eventually get a return, if so what is it!
    Is it another example/type of foreign aid, money given which you do not expect to get back.

    1. Denis Cooper
      June 27, 2011

      On the “influence” point, the voting power of a country in the IMF is related to its “quota”.


      “(a) Each member shall have two hundred fifty votes plus one additional vote for each part of its quota equivalent to one hundred thousand special drawing rights.

      (b) Whenever voting is required under Article V, Section 4 or 5, each member shall have the number of votes to which it is entitled under (a) above adjusted … ”

      (Complicated details of the adjustments omitted.)

      “(c) Except as otherwise specifically provided, all decisions of the Fund shall be made by a majority of the votes cast.”

  10. Andrew Smith
    June 27, 2011

    This appears to be a transparent ploy for Cameron to claim we are not participating in the Euro bail out, while still pleasing his masters in Brussels.

    1. lifelogic
      June 27, 2011

      It certainly does and very transparent it looks too.

  11. Derek Duncan
    June 27, 2011

    If, as seems likely, the next bailout will not save Greece so that it will not be possible to disguise her bankruptcy any longer – with Portugal and Ireland perhaps following suit – what should our Government be doing now to reduce the consequences of these disasters for the UK?

  12. A.Sedgwick
    June 27, 2011

    Thank you for this detail alarming as it is, although I am not surprised at anything our governments have done in recent years particularly with economics. After 4+ years as LOTO I did not expect much from Cameron in government but he has exceeded my worst expectations by a distance.

  13. Sue
    June 27, 2011

    “David Cameron, has been assuring the UK population that it will not have to dig deep into its pockets in order to bail out Greece”.

    When I saw the headlines in the news last week, my thoughts were “another lie”. Quite honestly, I´m getting sick of being treated like a brain dead moron by the “geniuses” that are supposed to be running our country.

    And what a compendium of “non-conservatives” we have at the moment! We´ve got Huhne(words left out) trying to wreck what´s left of the economy with his idiotic green schemes (whose bright idea was it to give “environment” to a Libdim?). Ken Clarke clearly needs a straitjacket, as his answer to saving money is to abolish prison for most offenders (watch out for vigilantes Ken). Lansley is (damaging-ed) pensioners to save a few bob and Cameron has set up his own overseas charity by (taking-ed) money from taxpayers and re-distributing it to enhance his global halo (competition for Blair no doubt).

    The whole shower of you are insane, we shouldn´t even be in the EU taking part in this incredibly undemocratic process. We are not even capable of defending ourselves should some third world country decide to invade what´s left of us, using weapons that “aid” has paid for!

    What on earth is going on?

    My, my, even Shakespeare couldn´t write a better farce!

    The extra money to the IMF is to cover the lack of bail out money we would have put into the “save the euro at all costs pot”. We know it and you know it! You lot continue to pump our money into a global, bottomless cesspit to ensure bankers and politicians have their nests nicely feathered while we all struggle with your insane “cuts” and tax rises.

    I can´t believe I used to be a Conservative.

    If this government is going to lie, at least give us the courtesy of doing it well!

    1. APL
      June 27, 2011

      Sue: “And what a compendium of “non-conservatives” we have at the moment! ”


    2. Jon Burgess
      June 27, 2011

      ‘I can’t believe I used to be a Conservative’

      Sue, it’s not you that isn’t a conservative anymore, it’s the Conservatives!

  14. Fernando
    June 27, 2011

    I thought the contribution to the IMF was based on a quota and our quota was the same as that of France, a shade under 5% of the total IMF funding.
    Is our increase any thing to do with sterling’s depreciation?
    Keep probing, John. We deserve an answer from the government.

  15. Norman Dee
    June 27, 2011

    I repeat the earlier question, on what basis do they increase our increase in contributions by such a large percentage ? I get the feeling as others do that this is a very crude recovery from our refusal to pay through Europe. Remember the MP’s expenses scam, “if you are not getting enough money put it on expenses”, Cameron is putting our Euro contribution on his IMF expenses, they really must have a low opinion of us. We see through all their tricks and they still keep trying it on.

  16. Caterpillar
    June 27, 2011

    How do these percentage increases factor in that Sterling is now worth nothing?

  17. Gary
    June 27, 2011

    Ah, bailout money via the IMF.

    So, it has become untenable for the taxpayer to directly give any more bailout money to the banks. It is becoming untenable to bail out the banks via the sovereigns, so now we bail out the banks via the IMF.

  18. Elliot Kane
    June 27, 2011

    Completely agree, Mr Redwood. Very well put.

  19. Zack
    June 27, 2011

    What a terrible shame we have only 30 Conservative MPs in Parliament – the ones who rebelled against further bailouts for the socialist & terminally feckless EU.

    The sooner Cameron & his cabal of neo liberal big state, high taxing Heathite Europhiles are gone from the party the sooner real Conservatives like me will return.

    John – what are you still doing in the party? Yourself, Carswell, Hannan & the other brave sould are just spitting in the wind remaining in that sham of Tory values & principles.

    Camerons Continuity Blue Labour – I am sick of it.

  20. Damien
    June 27, 2011

    Can you imagine what its going to be like when Christine Lagarde becomes head of the IMF?

    The only logical explanation for this largesse can be that the situation is so bad that the UK government believe that Greece will default and the contagion will spread to the periphery . This in turn could escalate the financial crisis in the EU which is our biggest trading partner. They think its in our interest to stuff the IMF wallet with taxpayers money.

    The problem for Greece is not one of liquidity but rather insolvency as Sir Mervyn indicated. Throwing money at Greece without reforms is kicking the can down the road.

    The World Bank ‘ease of doing business index’ shows that Greece lags behind Ethiopia. It is a terrible indictment that after 29 years as a member of the EU that Greece has not reformed its business practices. The same EU architects of this Greek tragedy are now putting themselves forward as candidates to solve this crisis, even putting themselves forward to lead the IMF.

  21. English Pensioner
    June 27, 2011

    Our government needs to explain to the public why they are giving this sum when wealthier countries are giving far less.

    Their actions remind me of someone I once knew who had to belong to all the best clubs, was always happy to buy “drinks all round” and was always splashing out to show how important he was. He eventually went bankrupt!
    This country is doing much the same; we are a relatively unimportant country in the world scheme of things, and it seems that we are trying to pretend that we are more important than we are. We should withdraw from all international organisations wherever possible unless we can see some real benefits; we can’t afford unnecessary subscriptions, nor can we afford the equivalent of “drinks all round” or all these international meetings.
    Perhaps we should ask the question: “what are countries like Norway or Switzerland doing? If they don’t join the party, why should we?

    1. Gary
      June 27, 2011

      “Our government needs to explain to the public why they are giving this sum when wealthier countries are giving far less.”

      Because our banks are on the hook for far more ?

  22. Subrosa
    June 27, 2011

    Once again the UK government prove that their own position in the pecking order is far more important than the care of the people they supposedly represent.

    1. Iain
      June 27, 2011

      Yes we have a political class that has very twisted set of priorities, Cameron will splash out on any and all foreign causes that cross his desk, yet takes pleasure in telling us to wear hair shirts, the disconnect is total.

      I really struggle to understand what goes through their heads, is it Cameron taking Blair’s strategy of getting plaudits by attacking his party by taking it one stage further
      and attacking the country he rules which is to attack England? Have they swallowed so much anti nationalism/ patriotism from the left that they glory discriminating against us? I really do not get it, Marie Antoinette would be embarrassed at being so insensitive to the people she ruled.

      Cameron has given away to foreign causes all and more of the budget savings we have made.

      John Redwood can you explain your leaders actions?

  23. Foreign Aid is Evil
    June 27, 2011

    John, will you be proposing an ammendment in the House for a limit of £4.3 billion?

    It should be remembered that this money is not really for Greece. It is not to help them whilst they reform to become a more dynamic and fairer society. It is simply another bank bail-out in disguise. The money paid to Greece, and other countries, will go straight through and be used to pay back bank loans and hedge funds, giving the latter huge bonuses, mostly in France and Germany, and so helping all of Europe to live beyond its means for a little longer whilst eschewing reform.

    Reply: You cannot amend an SI – it’s take it or vote against it.

  24. forthurst
    June 27, 2011

    The UK being stitched up again by France, Germany, Alister Darling: what’s new? France and Germany offloading the consequences of the malfunctioning of the Eurozone onto the EU (ie us) and the rest of the world via the IMF, and Alistair Darling providing yet another poison pill for the government.

    The Greek debt is entirely a matter for the Eurozone; we did not set the rules and therefore should not be required to pay the cost of its malfunctioning: the solution to the Greek debt problem lies with France and Germany not with us. Let them pay up or kick Greece out.

    Should the IMF give our money to a Greece within the Eurozone, there will be a need for an immediate provision for the reasonably anticipated loss and for an emergency budget correspondingly to cut further spending preferably in Scotland.

  25. Denis Cooper
    June 27, 2011

    I don’t suggest that we should leave the IMF, but I don’t think it should be used to launder money for intra-EU bailouts.

    Since 1993 there has been a legal incompatibility between the EU treaties as amended by the Maastricht Treaty, which comprehensively prohibit intra-EU bailouts and make no exception for bailouts mediated through the IMF, and the pre-existing IMF Articles of Agreement.

    It’s a cardinal rule of the EU that in the event of any conflict its treaties must take precedence over any other treaty to which a member state is a party, including a treaty concluded prior to EU accession, unless the other treaty is expressly excepted in the EU treaties – one such example being the NATO treaty, specifically excepted in Article 42.2 TEU.

    The ECJ has ruled against member states on their failure to eliminate incompatibilities between their other treaties and the EU treaties, referring to what is now Article 354 TFEU, eg here in 2009:


    Under the EU’s own rule, it must follow that member states cannot use the IMF to circumvent the EU treaty prohibition on intra-EU bailouts, and they cannot cite their legal obligations under the IMF treaty to justify doing so.

    In our case the Maastricht Treaty, including the comprehensive prohibition on intra-EU bailouts, was incorporated into our national law through primary legislation, the European Communities (Amendment) Act 1993, which added the new treaty to the list of treaties in Section 1(2) of the European Communities Act 1972.

    While Parliament could certainly authorise the government to break the EU treaties in this respect that would require the force of primary legislation – not secondary legislation, an Order.

    Going back five years to Bill Cash’s proposed New Clause 17 for the Legislative and Regulatory Reform Bill, which would have given Parliamentary approval for ministers to disapply EU laws, he explained at that time, Column 751 here:


    “… the only way in which it is possible to assert the legislative supremacy of this House is under, and by virtue of, primary legislation … In my legal opinion, it would be impossible to seek to override section 2 of the European Communities Act merely by order.”

    and that must hold true in this case as well.

  26. Kenneth
    June 27, 2011

    I agree with your sentiments, Mr Redwood. However other posters have mentioned a formula that is used to calculate our IMF payments. Assuming that this formula has been previously agreed by our government it doesn’t sound like we can do much to reduce it.

    That said, as the IMF’s centre of gravity appears to swing more towards Europe I fear that its management way be moving away from financial criteria to political criteria with possibly some idealism thrown in. In which case perhaps we should be pushing to review the governance of this organisation to ensure that it doesn’t take reckless gambles with our money in the future.

  27. norman
    June 27, 2011

    I can’t imagine the temptation Dave must be feeling to instruct Merv to press the ‘print’ button.

    Give it a year.

  28. Gary
    June 27, 2011

    German economist, Stefan Homburg , questioned today in Der Spiegel sums it up :

    “In a market economy, even in the case of a plumber whose customers don’t pay their bills, it’s never a question of getting creditors “involved” (in helping to deal with a bankruptcy). Instead, when push comes to shove, it is creditors, and creditors alone, who have to write off their loans. Only then do they have an incentive to carefully choose who they lend money to. A market economy with no personal liability cannot function. The government bailout initiatives create misdirected incentives that continuously exacerbate the problems on the financial markets.”

    But we are relentless in our attempt to refute this simple truth.

    Homberg says further :

    If the bankruptcy of little Greece were actually to trigger a global financial crisis, new bailout programs couldn’t solve the problem: They would actually exacerbate it. If no more states or banks are allowed to go bankrupt because this might precipitate a financial crisis, then we’re finished. Then the problem continuously escalates and leads to a much greater crisis.”

    But we press on under this folly.

    “The contagion spreads in precisely the opposite direction, because many banks and hedge funds benefit from the following business model. Step one: They sell the bonds of the country concerned. Step two: They spread negative rumors about the country. Step three: After bond prices have fallen, they buy them back cheaply. And, finally, they take governments for a ride with this nonsense that a default would have devastating consequences. In a zero-sum game, there are not only losers, like us taxpayers, but also winners. After the Greek bonds have been paid back at full value, the gamblers will turn to the next candidate, such as Portugal. If creditors suffered losses in Greece, however, they would renounce this business model. In this sense, the rescue measures are exacerbating the problem.”

    And so, we exacerbate the problem.

  29. Javelin
    June 27, 2011

    Here is the section from the ISDA restructuring event docs – I have put comments in [ ] brackets. Basically the trigger is in 2 parts. First part, needs (i)-(v) triggered. Second part is about whether its voluntary.

    So seeing as the French banks are looking at a 30 year replacement bond then this will definately trigger part (iii) because the payments are “deferred”. The next part is whether it’s voluntary. This is where it gets interesting because “voluntary” here means whether “all” holders are “bound”.

    So if the Greeks announced a voluntary scheme and most people choose to do it then it is apparently OK – AS LONG SOME people are allowed to stick with the original 5 year bond being paid out as per the original agreement AND are not “bound” to take up the new 30 year bond.

    So to object to this you would have to claim that you were “bound” to take up the new bond on offer because you felt under the circumstances it was a better offer. Which basically means the new bond needs to be worse on every quality. And its very difficult to argue that the Greeks paying over 30 years is not a better offer than paying over 5 years.

    So if the credit agencies decided that restructuring event had occurred and this downgraded the value of the 5 bonds in favour of the 30 year bonds then you were obliged (or bound) to take up the better off of the 30 year bonds – because you had a duty to get the best return on your fund. You could argue that Greek 5 year bonds had become a joke and you had no other choice than to take the deal up.

    Any way there are a lot of ifs here – but I’m sure a determined bond holder could argue, for what ever reason they were “bound” to take up the 30 year bond as it was a better offer for them and trigger the default.



    (a) “Restructuring” means that, with respect to one or more Obligations and in relation to an aggregate amount of not less than the Default Requirement, any one or more of the following events occurs in a form that binds all holders of such Obligation, is agreed between the Reference Entity or a Governmental Authority and a sufficient number of holders of such Obligation to bind all holders of the Obligation or is announced (or otherwise decreed) by a Reference Entity or a Governmental Authority in a form that binds all holders of such Obligation, and such event is not expressly provided for under the terms of such Obligation in effect as of the later of (i) the credit event Backstop Date and (ii) the date as of which such Obligation is issued or incurred:

    (i) a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals; [This looks like it will trigger the event]

    (ii) a reduction in the amount of principal or premium payable at maturity or at scheduled redemption dates; [This can be worked around by making the maturity payment the same]

    (iii) a postponement or other deferral of a date or dates for either (A) the payment or accrual of interest or (B) the payment of principal or premium; [depends on wording of the bonds – but looks like it may cause the event]

    (iv) a change in the ranking in priority of payment of any Obligation, causing the Subordination of such Obligation to any other Obligation; or [Eu/IMF taking priority over the debt payments]

    (v) any change in the currency or composition of any payment of interest or principal to any currency which is not a Permitted Currency. [leaving the Euro]

    1. Javelin
      June 29, 2011

      Interesting to see Peston agree with my analysis on a ‘n’ shaped risk curve for Greek defaults – basically when their fiscal deficit reaches ZERO is the best time for the Greeks to default.


      I find this especially interesting because the elections in March 2013 coincide with the Eurpean Stablity Fund in July 2013 – as which point the EU will take seniority of Greek bonds – they will be “captives” of the EU. So this will be an important point. I also get the impression that the 10% reduction they are trying to achieve will “kind-of” be getting close to zero as the election approaches.

      One tactic would be for the Socialists to default the year before the election and hope to win by claiming the popular vote. Another tactic would be for the conservatives to default just after the election. Either way the odds of a default now look “M” shaped rather than ‘n’ shaped.

      Also interesting to see conflicting opinions on whether a voluntary hair cut would represent a credit event. I think everybody agrees that the first part (the default) would be triggered but the sticking point is whether the “voluntary” second part is triggered and it all boils down the term “bound”

      These guys take the view that the CDS would not be triggered because the term “bound” would not be true.


      Meanwhile the ex Bundesbank banker says the voluntary scheme is not voluntary because the banks are “bound” by company law to choose the better option for their shareholders. If the new bonds are better then they are “bound” to take them. Which is the interpretation I would take.

      Even so other commentators are now picking up on how useless soverign credit default swaps are if they will never be triggered.

      For example – Christian Dinesen, head of international corporate credit research at Bank of America Merrill Lynch, said: “If you sell insurance policies, and you don’t pay them, people won’t buy them again from you.”


  30. Mark Stockwell
    June 27, 2011

    I’m not disputing the central point about ‘fair dues’ here but I would welcome some clarification around the exact numbers.
    If £9.5bn represents an 88% increase on what we were paying before, then, according to my back-of-a-fag-packet calculations, we were paying around £5bn before. So how would matching the 39% increae paid by Belgium or the 43% increase paid by Sa’udi Arabia mean we would ‘only’ pay £4.3bn? Surely the numbers would be in the range £7bn-£7.3bn. Or have I missed the point?
    I’d be glad to be put right – as things stand the difference between £7bn and £9.5bn is quite large enough to make your point, even in this brave new world of trillion dollar deficits and the like.

    Reply: We have put in more than £10 billion so far, so £9.5bn is 88% of it.

  31. Shaun Richards
    June 27, 2011

    Thank you John for pointing out some of the problems with the International Monetary Fund as it now stands. I analysed its position back on June 6th a year ago in the article I have put a link to below.


    For those who want just two main points let me put these two.

    1. It’s role has been fundamentally changed.

    “It has plainly changed from an organisation which helps with balance of payments problems to one which helps with fiscal deficits. Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.”

    2. The impression given is that is has money but from where the money comes it is deliberately vague.

    “Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong. Just to quote the IMF itself there are “doubts” over Greece. Any proper accounting system allows for the possibility of things going wrong. After the experience of the last two years we should know the implication of sticking your head in the sand like an ostrich and assuming there are no problems around…”

  32. lojolondon
    June 27, 2011

    There is only one reason why the IMF needs to double it’s funds – so the governments of Europe can pretend they will not bail out Greece, but allow the IMF to do so, lose more than 50% of the value, and gain the delay in the crash of the Euro that they all desire. This is why we need a new non-European head of the IMF, and in the UK we need to say ‘NO’. It is shallow and transparent deception and they are fooling the public with the collusion of the media.

  33. Lindsay McDougall
    June 28, 2011

    If organisations like IMF did not exist, countries like Greece would default, either directly or by leaving the Euro and inflating (partial default). I know it is in our interest that such countries do not default but is it in their interest? Russia and Iceland seem to have done better than Greece, Ireland and Portugal, have they not?

  34. Alex
    June 28, 2011

    John, I thought you would have more intelligent debate than this on here. This is the first increase in the IMF’s capital since 1998 and world GDP has increased by 93%, whereas the capital of the IMF is set to increase by 100%. The extra 7% might be questionable but if you are going to have an IMF it has to remain capitalised in line with the growth of world economic activity if it is to retain its functions

    Since then. The UK has agreed to increase its quota by 88% which is less than the average increase in capital, so I really don’t see what the fuss is all about.

    Reply: The fuss is about using the extra capital to prop a single currency that has design faults which lending cannot resolve.

    1. Alex
      June 28, 2011

      Your “fuss” doesn’t stand up to much analysis. The “extra” capital is nothing of the sort, but merely brings the IMF capital back into line with historic values relative to GDP. There is nothing disproportionate about the UK quota which is calculated by an objective formula applied in the same manner to every member of the IMF.

      You imply that there is some political imperative in “propping up the currency” rather than imposing fiscal rectitude on the Greeks, but you don’t say how the Germans, French and other Euro-zone members manage to overcome their minority of votes and persuade the Americans, Japanese and British to vote against their own national interests in doing so. The answer is that they can’t, but the Greeks will be given credit by the IMF if they agree to a stringent set of fiscal austerity measures, just like any other nation that suffers at the hands of a profligate government.

      Reply: They are not like any other governemnt, as they cannot devalue and they are not sovereign to make eocnomic decisions

      1. Gary
        June 29, 2011

        The point is not how much money the IMF is entitled to. The point is that we should not have ANY of these risk abrogators and socialized insurers at all. They cause havoc. The point is that a market ceases to function when risk and responsibility is absolved. It is not that is damages a market, the market ceases to function at all. When people, corporations or countries have no fatal consequences to fatal policies, then they have no incentive to make prudent decisions. When players in a market are not proceeding prudently with self-survival and risk factored into their decisions, then you don’t have a market. The signals eminating from this non-market are false and so then are all decisions based on these signals.

        In any case we have a financial pyramid scheme operating that mathematically has zero chance of survival, no matter how much money we throw at it. It is cast in stone. The only hope we have is to turn the system into a non-ponzi scheme, and none of the so-called regulations proposed so far will achieve that. You cannot regulate a ponzi scheme, other than to abolish it. We are headed for the rocks and the politicians are fiddling.

        If you want the mathematics of the pyramid scheme here is the formula, courtesy of Greg Pytel:

        We have a divergent series, because we fraction reserves/deposits to make loans, given by :

        lim n->infinity An+1/An = r

        If r 1, then the series diverges.

        1. Gary
          June 29, 2011

          should read “if r greater than 1 the series diverges”, in this case loans > deposits.

  35. Conrad Jones (Cheam)
    June 28, 2011

    Mr Redwood,

    Could you shed some light on whether you believe that the shady world of Credit Default Swaps (which were supposed to be used to hedge against risk) are in fact being used by speculators to influence the demise or default of major organisations or Countries for pure profit?

    Should there not be more regulation as:
    “The size of the credit default market dwarfs that of the stock market and the bond market they represent. Therefore, this shows that credit default swaps are being used for speculation and not insuring against actual bonds.”

    There is – therefore; a vested interest in large purchasers of CDSs in seeing the organisations – who they are alledgedly insuring themselves against a payment default – go bankrupt.

    Sellers of these CDSs have a vested interest in recovering their losses through demanding that any Government that does default insures the debt against future tax revenue recovered through massive public taxation.

    All this surely leads to stagnant (at best) or depressed financial circumstances.

    1. Conrad Jones (Cheam)
      June 28, 2011

      CDSs can be used to assess a Company or Country’s credit worthiness and therefore influence the Interest Rate or yield it has to pay on it’s Treasury Bonds.

      I could be mis-infomred, of course.

      If Banks have risked money lending it to Greece, then surely they have purchased Credit Default Swaps to insure against that Risk. In which case – Greece could default and the Banks that lent them money will be reimbursed by the sellers of said CDSs.

      So what’s the problem?

  36. fn
    July 1, 2011

    According to John Redwood a fair contribution to the IMF should be in line with the economic stature. Of course there is nothing fair about such an allocation. The allocation should be in line with the benefit each country derives from the IMF. As the predominant purpose of the IMF is to bail out international banks when they get into trouble as they always do and to push the globalization agenda the allocation quotas should be more in line with those. As the UK banking and multinational sectors have historically benefited massively in excess of $10bn I would suggest that a fairer allocation to the UK should be at least $50bn to start with and increasing by $50bn for each year the current financial collapse persists.

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