The debate over bail outs

 

            The Uk government has been right to argue against a further Greek bail out, and right to keep the UK out of any direct Greek bail out. I have argued here that another bail out for a country which cannot afford its current debts will not solve the problem. it just means more money will be lost by the creditors in the end, when the underlying reality is faced.

            On Tuesday the government has to explain to Parliament why it goes along with an IMF bail out of Greece, when it correctly refuses to countenance joining in a direct bail out alongside the IMF.  I expect we will be told three things.  Firstly, the planned increase in IMF capital goes back to the time of Gordon Brown, when he was trying to save the world by nationalising risks and printing money. Secondly, the UK needs to remain as part of the IMF and  therefore has to play its part in increasing its capital. Thirdly, we will be told that the IMF issues stringent terms and has priority over repayments, so maybe it will get its money back.

              All this is true. It leaves  open some other questions which Ministers would be wise to ponder.

             The first is, why should the UK have to put in a larger percentage increase in her contribution than Germany, Belgium, Saudi Arabia and many others?  Why can’t we limit our increased contribution to the bottom end of the scale of increases, in view of the UK’s currently heavily indebted position?

            The second is, why can’t the UK find like minds in the IMF and have more influence over how the IMF spends the money?  The reason for the current large increases is partly the present and likely future commitments to Euro zone bail outs. Shouldn’t the UK be persuading the IMF that the UK’s position over Greece is correct -no more bail outs?  Should the UK be arguing that the Portuguese, and possible other future Euro bail outs may be unwise? If we won those arguments the IMF would not need so much extra cash.

            The third is, shouldn’t we say that the IMF should only lend to sovereign countries in trouble? Euroland members are no longer sovereign in any meaningful sense. The bodies which should go to their aid are the European Central Bank, the EU Euroland members acting as a whole, and individual richer Euroland states. The IMF would not consider making a loan to a County Council or major quango in the UK. It would say the UK authorities have the means and the responsibility to decide whether to lend or not to such a body. So why should the IMF lend to Euroland members, when the Euroland centre and its Central Bank are thought to be strong, supporting a fairly strong currency with low interest rates?

             Using IMF money to prop up a currency which is based on insecure foundations is a very bad idea. The IMF should send Euroland an essay on how single currencies can work and on the responsibilities of the government and Central Bank which back them. It should not lend a penny more to Euroland economies. It should not need the large UK capital contribution currently planned.