The IMF under Mme Lagarde says it wishes to have more money at its disposal to be able to bail out the bigger states of Euroland if necessary. The lady tells us that their current facilities of $400 billion may seem like a lot of money, but they could spend it all quite quickly if one of the larger EU countries needed a rescue.
I thought the IMF was there to lend money to near bankrupt sovereign countries when all else had failed. They normally put in a programme of spending controls, asset sales and devaluation, to give the problem country a chance to work its way out of debt difficulties. They regard it as a sovereign risk, as the state in question can always print some more money to meet the nominal liabilities it faces.
If Scotland or California got into financial difficulties and needed to borrow more than the markets wanted to lend, the IMF would not go anywhere near the problem. The IMF would say that Scotland is part of the sterling currency union and UK federation, so it would expect the rest of the UK to sort it out. It would regard California as part of the US federation and a member of the dollar currency union, so again there would be no loan for that state.
So we have to ask why are there loans for states who have given away their monetary and currency sovereignty and are now members of the Euro currency union? They can’t print the money they might need, and they can’t devalue, so why should they be regarded as sovereign risks that the IMF might take on and tutor back to economic health? They are clearly riskier bets than sovereign states, because they do not control their own Central Bank and monetary policy.
In her new role Mme Lagarde should not be an apologist for a failing Euro model. She should not seek to distort the IMF portfolio by placing massive bets on failing Euro states. These loans merely put off making the proper adjustments to the single currency model. Greece and Italy have to become like Scotland and California are within their single currency areas, within the Euro union. They are the Euro area’s problem, not the IMF’s or the world’s.
As a leading member and contributor to the IMF I would like the UK to ask some sceptical questions about the wisdom of the IMF bailing more Euro countries. Without proper budget discipline, monetary reform and new political architecture the Euro cannot work properly, so it is a huge mistake to go on pretending and extending more credit as if it was fine.
Trying to bail out Italy if Italy finds it too difficult to borrow money in the normal way on the market should be too expensive for the IMF to contemplate. If Italy cannot finance herself in the Euro in the markets, there must be something very wrong with the design of the Euro.
I do see we have lost E1 trillion overnight in the latest briefings. Sunday’s newspaper stories of E3 trillion have become E2 trillion today. The longer the Euro authorities leave coming up with a plan which has been thought through in detail and looks as if it could work, the more damage the markets will do the exposed positions of Euro sovereign debts.