Half a century after United States B-52 bombers dropped more than 500,000 tonnes of explosives on Cambodia's countryside Washington wants the country to repay a $US500 million ($662 million) war debt.

The demand has prompted expressions of indignation and outrage from Cambodia's capital, Phnom Penh.

Cambodia's strongman prime minister Hun Sen, a former Khmer Rouge commander who defected to Vietnam, hit back, saying "The US created problems in my country and is demanding money from me."

"They dropped bombs on our heads and then ask up to repay. When we do not repay, they tell the IMF (International Monetary Fund) not to lend us money," he told an international conference in early March.

"We should raise our voices to talk about the issue of the country that has invaded other (countries) and has killed children."

http://www.smh.com.au/world/fury-in-cambodia-as-us-asks-to-be-paid-back-hundreds-of-millions-in-war-debts-20170311-guvxyp.html

The IMF's Greek interventions are criticized by its own independent evaluation office.

I suppose this one's as stale already as the UK's Chilcot Report released just this year on Britain's rush to join the United States in the 2003 Iraqi invasion, but it's worth mentioning nonetheless given that this is purportedly the international political economy zone. Today, the IMF Independent Evaluation Office which monitors the IMF's conduct released its findings on the post-global financial crisis bailouts of Greece, Ireland and Portugal. Just as the Chilcot Report found Blair government guilty of a rush to war in 2003, the IMF has now been found unduly rash in lending money to the likes of Greece with insufficient scrutiny of the situation beforehand.

File this one under: no @#$%, Sherlock. First, the IMF did not predict how out of hand the situation in Europe could become and was thus unprepared for its onslaught:

The IMF’s pre-crisis surveillance mostly identified the right issues but did not foresee the magnitude of the risks that would later become paramount. The IMF’s surveillance of the euro area financial regulatory architecture was generally of high quality, but staff, along with most other experts, missed the build-up of banking system risks in some countries. In general, the IMF shared the widely-held “Europe is different” mindset[...]

Second, being part of a "troika" including the European Commission and the European Central Bank made the IMF just another voice in a politicized process where it lacked its usual abilities to conduct its activities independently and with due discretion. That is, the IMF was never in the figurative "driver's seat" and was a Johnny-come-lately to what was already arranged by the others:

In the circumstances of these programs, where there was more than one conditional lender, the troika arrangement (in which the Fund worked with the European Commission and the European Central Bank) proved to be an efficient mechanism in most instances for conducting program discussions with national authorities, but the IMF lost its characteristic agility as a crisis manager. And because the European Commission negotiated on behalf of the Eurogroup, the troika arrangement potentially subjected IMF staff’s technical judgments to political pressure from an early stage.

Third, as a result, traditional oversight in providing Greece and the rest with far more monies than they were entitled to--outside regular financing arrangements--was bypassed:

In May 2010, the IMF Executive Board approved a decision to provide exceptional access financing to Greece without seeking preemptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability. The risk of contagion was an important consideration in coming to this decision. Th e IMF’s policy on exceptional access to Fund resources, which mandates early Board involvement, was followed only in a perfunctory manner.

Current IMF Managing-Director Christine Lagarde dismisses much of the criticism over political interference, though. Her main line of reasoning is that the events were unprecedented and hence the IMF had to act quickly lest it be overtaken by events (and left unsaid but implied, global contagion effects):

In a statement released at the same time as the report, Strauss-Kahn's successor Christine Lagarde rejected the premise that there was European political influence on IMF decisions. Aside from that point, she stressed that the euro area crisis had been "extraordinary" and "unprecedented."

"The IEO's reports echo many of the lessons that we have drawn from our own internal assessments ... We must constantly aspire to do better in avoiding crises, managing crises, and learning from the past."

My belief remains unchanged:the IMF likes to portray its decision-making as "technocratic" in the sense that only economic criteria--as opposed to political ones--are taken into consideration. However, there is a large body of work in the IPE canon that begs to differ with this claim. Exhibit A nowadays is of course lending to war-torn Ukraine since the IMF has previously not lent to a country in the midst of civil war. What is different this time? Same as with Greece and the rest--Europe.

Can new Argentine President Mauricio Macri turn things around? His is not the only financially troubled G20 country.

Four days in, I am not seeing major improvements in 2016 for commodity exporters, although I could (and hope to) be wrong for the rest of the year. Whatever the rest of us think hasn't stopped longtime FT commentator Martin Wolf from placing odds on those three countries as potential borrowers from the world's lender of last resort, the IMF, this year. The prospect is certainly not one any of these countries looks forward to, but don't be surprised if one does go the poorhouse in 2016:

The G20 also contains 10 emerging economies. Some are being buffeted by sharp falls in commodity prices (Argentina, Russia and Saudi Arabia are prime examples). Some run significant current account deficits (Saudi Arabia again springs to mind, along with Brazil and South Africa). Both India and South Africa have fairly large fiscal deficits. Others, such as Brazil, have a smaller deficit but a sizeable burden of public debt. The countries that tick all the boxes for instability are Argentina, South Africa and Brazil. Under stress, those countries have recently changed finance ministers. Argentina has a new government that promises a new approach. The IMF stands ready. Will at least one of these countries call upon it? It seems likely.

It's odd that Martin Wolf doesn't mention how much foreign exchange reserves each of these countries holds. But, by that measure, the skimpiest belong to Argentina (surprise!) and South Africa. By this measure, Argentina is most at risk, followed by South Africa.

Here's another step towards the Chinese currency becoming a globally important one. Everyone sort of expected this, but for the Chinese, it's a major achievement nonetheless. While the inclusion of the yuan in the basket of currencies the IMF uses as reference will not result in a massive surge in RMB holdings there, the symbolism matters quite a lot. As in, China becomes the first developing country to have its currency included in the SDR. From the IMF blurb:

The Executive Board of the International Monetary Fund (IMF) today completed the regular five-yearly review of the basket of currencies that make up the Special Drawing Right (SDR). A key focus of the Board review was whether the Chinese renminbi (RMB) met the existing criteria to be included in the basket. The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound. Launching the new SDR basket on October 1, 2016 will provide sufficient lead time for the Fund, its members and other SDR users to adjust to these changes.

At the conclusion of the meeting, Ms. Christine Lagarde, Managing Director of the IMF, stated: “The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

The value of the SDR will be based on a weighted average of the values of the basket of currencies comprising the U.S. dollar, euro, the Chinese renminbi, Japanese yen, and British pound. The inclusion of the RMB will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies. The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies in the SDR basket. Authorities of all currencies represented in the SDR basket, which now includes the Chinese authorities, are expected to maintain a policy framework that facilitates operations for the IMF, its membership and other SDR users in their currencies. The paper presented to the Board will be released soon.

What weight will the yuan have in the SDR basket? Bloomberg suggests a bit over 10%. It may not sound like a lot, but it will immediately leapfrog the yen and the pound:

The addition will take effect Oct. 1, 2016, the IMF said. The fund said the yuan would have a 10.92 percent weighting in the basket. Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound. The dollar currently accounts for 41.9 percent of the basket, while the euro accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.

There is talk that China has been cautious about devaluing its yuan again after the tumult caused by events in August so that its currency could achieve this very event of SDR inclusion. With that out of the way, I hope PRC authorities avoid any sudden moves.

So broke he can't even spend the night: Venezuela's President Maduro.

We all have wastrel friends and relatives of no particular achievements, distinction or talents who get by through begging, borrowing or stealing money. Such is the nature of life, unfortunately. In the international community, there is a country which embodies such turpitude: It's called Venezuela. To put its senseless wastefulness into perspective, consider that it's already received $45B from China, most of which I guarantee you has already been poured down some rathole.

How do I know this? Well, unbeknownst to many, it's also been taking out its special drawing rights (SDRs) from the IMF absent any significant sources of foreign exchange these days when oil prices are comparatively low. From Agence France-Presse:

With its cash reserves in sharp decline, Venezuela withdrew $460 million from the International Monetary Fund last month in its third such operation this year. he IMF website showed Friday that Venezuela exchanged part of its Special Drawing Rights -- an international reserve asset created by the IMF -- account at the Fund for greenbacks. Some countries often buy SDRs to comply with their obligations at the IMF, and in other cases sell them for hard currency to raise their reserve level at home, the Fund said.

Venezuela depends almost exclusively on oil exports and has taken a big hit from a drop in crude prices. Its hard currency reserves have fallen 25 percent over the past year to $15.4 billion. Venezuela's three SDR-selling transactions this year at the IMF have netted it more than $2.3 billion. Until this year, Venezuela had not withdrawn assets from the IMF since 2006.

Pakistan's aid donors help bolster its reserves--not financial inflows for the most part.

It is sad that accumulating $20B in reserves--this in a country with a population of 182 million--is considered as a "record." However, that is the case for Pakistan and its recent report on foreign exchange reserves. As chronicled in this blog [1, 2], Pakistan is a habitual borrower from the IMF--a dubious distinction if there ever was one that even the IMF would prefer avoiding. Unfortunately, Pakistan's bolstered reserves, low as they are in ultimate terms--China has over a whopping 175 times more by my estimates--are mostly the result of the IMF juicing up the coffers:

Pakistan’s record foreign-exchange reserves are masking economic weaknesses that risk pushing the nation toward more aid from the International Monetary Fund. At least half of the country’s $20 billion stockpile comprises debt and grants, almost all of which have flowed in since Prime Minister Nawaz Sharif took office in May 2013. That money could leave quickly as Pakistan begins repaying the IMF in 2016 or if oil prices surge, leading to another balance-of-payments crisis.

"This is borrowed money and not a reflection of a stable economy," said Yawar uz Zaman, vice president for research at Karachi-based Shajar Capital Pakistan Pvt. "Finance costs will continue to grow in the years to come, which will mean we will go for another loan from an international lender."

Sharif won a $6.6 billion loan from the IMF soon after taking charge, triggering a stock market rally that has put Pakistan among the world’s best performers. Since then, however, he’s struggled to attract more stable inflows as a shaky global economic recovery damps demand and makes investors wary.

The rest comes with a little help from Pakistan's [self-styled] friends. Other contributions are from non-financial and more political- or security-related sources in the form of the Saudis chipping in another $1.5B and the American-led coalition another $2.8B. In other words, the inflows are not from financially sustainable sources like foreign investment or export proceeds.

People of goodwill wish Pakistan well, but the truth is that it hasn't really done anything to make itself attract more financial inflows outside of charity. Pakistan remains, in the words of Anatol Lieven, a hard country.

Sucking up to the IMF in all sorts of ways--now including reporting on forex reserves.

"Transparency" and "Chinese officialdom" are strangers to one another. That said, the PRC seems to be making improvements in one regard: After years of obfuscation, PRC authorities have only just begun reporting reserve data to the IMF Composition of Foreign Exchange Reserves (COFER). Previously, they furnished no data whatsoever--nada, zilch, zip, diddly-squat. But, all that changed recently with China partially--repeat, partially--reporting on its reserves.

How "partial" are we talking about? In aggregate, total reported reserves to the IMF jumped by $600 billion. Assuming that all the increase is due to China's new reporting, it falls well short of the $3.56 trillion it is believed to hold even with its recent sell-off of foreign exchange to slow the rate of yuan depreciation. From an earlier report in the WSJ:

The People’s Bank of China said Monday that its reserves fell by $93.9 billion, the biggest-ever monthly drop in dollar terms and the largest in percentage terms since May 2012. The decline in China’s foreign-currency reserves has accelerated, deepening a trend that illustrates the pressures of the country’s slowdown, rising capital outflows and expectations for monetary tightening in the U.S. China used its reserves to stabilize the yuan after the central bank devalued the currency on Aug. 11, a move that heightened worries about growth in the world’s second-largest economy and sparked a sharp selloff across global stock markets.

At $3.56 trillion as of the end of August, the currency reserves held by the PBOC still account for nearly one-third of all holdings by central banks world-wide. But the reserves have declined since a peak of nearly $4 trillion in June 2014 as more money leaves the country

Now, Dow Jones newswires reports on China's COFER contribution:

China has begun to report its currency reserves to the International Monetary Fund for the first time—a milestone in opening a key facet of the country's economy to the public view. The move comes as Beijing seeks to have its currency, the yuan, included in the basket of reserve currencies that comprise the fund's lending instrument.

The IMF said China has reported a "representative portfolio on a partial basis," meaning that what it has shared represents the fractional breakdown of its holdings of different currencies. China will gradually report its full foreign-exchange holdings over two to three years, the IMF said.

Reported currency reserves world-wide jumped by around $600 billion with China's new data. The IMF's numbers don't reveal how much each of the reporting countries holds. But based on the fund's breakdown of the aggregated share of different currencies held, it seems China's portfolio matches most central-bank holdings: roughly 60% dollars and 20% euros and pounds sterling—with the Japanese yen and other major currencies making up the difference.

So approximately $600B reported out of about $3.5T is, in the bigger picture, just a fraction of China's entire forex holdings. But then again, it's a start given how secretive the Chinese are. The prize the Chinese are after remains IMF inclusion of the yuan in the SDR basket of currencies:

To win reserve-currency status China has begun to liberalize its exchange-rate regime and provide more transparency about its currency policies. Last year China committed to providing more details about its reserve holdings, an effort that will allow economists to better gauge the degree to which the country is intervening in its exchange rate. China now discloses its foreign-exchange reserves every month, whereas in the past it reported the figures quarterly. It also has started to disclose its holdings of gold every month.

You didn't think the Chinese were doing this out of the goodness of their hearts, did you?

Roussef is probably nostalgic about her Marxist guerrilla fighter days right about now.

The seemingly inevitable just happened: after being hit hard by slumping global commodity prices, Brazil's sovereign debt has been downgraded back to below investment grade or junk status by Standard and Poor's. In 2008 Brazilian IOUs became investment grade; by 2015 it's yesterday once more. Add in the corruption case hounding the Rousseff leadership and all-around economic malaise to complete the rather dire picture. From building BRICs to stumbling blocks, it seems:

The Brazilian government’s sovereign debt rating has been cut to junk status by one of the major credit agencies, ratcheting up pressure on President Dilma Rousseff to find a way out of the country’s economic and political crisis. Standard & Poor’s said in a note on Wednesday night that Brazil’s hard-fought investment-grade status was gone and that its outlook on the country was negative, just as the nation entered recession and was expected to see an even worse 2016.

That means it will be far more expensive for the Brazilian government to tap international credit markets and that much investor money, such as mutual funds that only plough money into investment-grade nations, will automatically be yanked out of the country. S&P said that extreme political challenges for Rousseff “have continued to mount, weighing on the government’s ability” to shore up its finances as promised...

The downgrade, while widely expected, came earlier than many analysts forecast and arrives at a time of extreme volatility for the Brazilian economy, with inflation hovering around 10% and unemployment the highest it has been in decades. Additionally, Rousseff has almost no political backing, with her approval rating in single digits, the worst seen by any leader since the nation’s return to democracy three decades ago. S&P said that “the negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position”.

It now seems so long ago that Brazil had surmounted this seemingly regular lurch towards crisis. It was scheduled to host the World Cup and the Olympics to boot to show how times have changed. Apparently, many changes were just cosmetic. When the commodity surge receded, the same governance issues have reaffirmed themselves. How can it escape such a dire situation now? According to former Morgan Stanley man Stephen Jen, it's time for Brazil to turn back the clock in another way: take out an IMF bailout:

Stephen Jen has a proposal for Brazil to get out of the current economic mess: ask for a bailout from the International Monetary Fund. Not that Brazil needs the funding, said Jen, a former IMF economist. Latin America’s largest economy holds $371 billion in foreign reserves, almost 10 times the amount of the government’s foreign-currency debt.

But Brazil’s political system is in such disarray that the country can’t push through reforms needed to curb debt, tackle inflation and avoid more downgrades, according to Jen, the co-founder of London-based hedge fund SLJ Macro Partners LLP. Financial aid from the Washington-based IMF would require austerity measures such as tax increases and spending cuts, providing President Dilma Rousseff’s government with the political cover to implement unpopular measures needed to shore up the budget, he said.

“They cannot implement policies,” Jen said. “The whole system needs a cleanse. A quick way to bypass all these is to get the IMF. It’s a little wacky, but I think it makes so much sense.”

Strictly speaking, Brazil has built up substantial reserves over the years commodity prices were high, so there's little desperation for IMF loans. But, those reserves can go fast, and there is no guarantee for implementing political reform that the IMF would likely require for loan conditionalities.

IMF says...wait a while longer for RMB SDR inclusion.

The PRC has been strongly pushing for the inclusion of the Chinese yuan in the basket of currencies which constitutes the IMF's Special Drawing Rights (SDRs). After all, shouldn't the currency of the world's second-largest economy be included in such as a basket? Unfortunately, just as with Chinese stocks not being included in the MSCI index of emerging market equities, the IMF has deemed China and its currency not quite ready for the primetime. Ho-hum, we've seen this movie before:

The International Monetary Fund should put off any move to add the yuan to its benchmark currency basket until after September 2016, IMF staff said in a report which showed a mixed performance of the renminbi on meeting key financial norms.
The report, published on Tuesday, comes after Beijing launched a major diplomatic push for the yuan to be added to the IMF's Special Drawing Rights basket as part of its long-term strategic goal of reducing dependence on the dollar. 

The pushback against yuan inclusion mainly concerns the lack of yuan use outside of Asia. Aside from the widespread use of RMB as a store of value, medium of exchange, and a unit of account, another concern is that IMF members may not have enough time to adjust to its inclusion in the SDR if accomplished this November. The latter is a technical concern over timing and the mechanics of SDR allotment, whereas the former is a fundamental one as to whether the yuan deserves inclusion:

The IMF board is scheduled to make a decision in November on whether to include the yuan in a basket of currencies comprising dollars, euros, pounds and yen, although the decision could be pushed back if policymakers decide they need more information.

Delaying any change in the basket for nine months through September 2016 would avoid disrupting financial market trading on the first day of the new year, the staff report said. A senior IMF official said reserve asset managers would need about six months notice to adjust to a change.

The yuan, also known as the renminbi, meets the requirements as a significant currency in terms of international trade, but also has to be judged to be "freely usable", or widely used to make international payments and readily traded on foreign exchange markets.

The report shows a mixed performance on financial criteria. Although the currency is increasingly used in cross-border transactions and heavily traded in Asia, it is only thinly traded in North America and is not commonly used in international debt securities. Data was missing for some variables, the report said.

Since this is the IPE Zone, we should also take note of the geopolitics behind yuan inclusion in the SDR. To no one's surprise, the United States and its regional ally, Japan, are discouraging such inclusion at the earliest opportunity (November this year). Meanwhile, Western European countries wishing to cotton up to the rising power indicate they are ready to get the RMB on board the SDR ASAP:

European members of the Group of Seven major industrialized economies - Germany, Britain, France and Italy - favor adding the yuan to the basket quickly. Japan, like the United States, is more cautious, officials have said...

Chinese Premier Li Keqiang in March asked Lagarde to push for inclusion, saying Beijing would speed up the convertibility of the yuan on the capital account and open domestic individual cross-border investment and foreign institutional investment in China's capital market.

Still, as IMF Managing Director Christine Lagarde has noted, it's only a matter of time until the yuan is included in the basket--just as its stocks will be in the MSCI emerging markets index.  Just not now.

The quoted report is downloadable from the IMF site.

Vultures, the foreign debt board game and other Argentinian jollity.

Argentina has a wealth of attractions: The awesome natural grandeur of Perito Moreno Glacier. Ushuaia, the "end of the world" on its southern tip (next stop: the Arctic).  Tango, the dance of sultry romance. Call me weird but, as an IPE scholar, my first port of call would instead be the Museum of Foreign Debt at the University of Buenos Aires' School of Economics. I was peripherally aware that there was such a place, but a recent Bloomberg article jogged my memory:

Argentina’s fight with foreign banks and bondholders is more than just business. It’s part of the national psyche, enshrined in a special museum at the business school at the University of Buenos Aires. The Museum of Foreign Debt is nothing fancy. There are a few flimsy panels plastered with grainy photos, dates, text, and graphs.

Oh, but the saga portrayed on those panels! Banks, bond investors, and the International Monetary Fund flood crooked regimes with overpriced credit. The Argentine economy collapses, and the people suffer. International markets are roiled. It happens time and time again. The story has all the emotions of a good tango.

Argentina has reneged on foreign debt obligations at least seven times, starting in 1827. The latest was in July 2014, when Argentina defaulted rather than give in to pressure from Paul Singer of Elliott Management. The fight with Singer has been going on for a dozen years, and the term vulture investor—rather esoteric in much of the world—is now pretty much universally known in Argentina. It’s so much on people’s minds that Buenos Aires toy stores carry a homegrown board game called Vultures, packaged in a box depicting a pair of the birds picking at a pile of dollars.

The anti-foreigner attitude is well-entrenched in Argentina as demonstrated by those manning the museum:

One May morning at the debt museum, guide Antonella Fagnano, a 21-year-old business major, describes Argentines’ attitude toward default. She pauses by a black-and-white photo of the late General Jorge Videla, who led a 1976 coup that ushered in a seven-year dictatorship. Successive presidents in that period loaded up on foreign debt to finance, among other things, the 1982 Falklands War with the U.K.

Today’s Argentina, Fagnano says, has no moral obligation to make good on debts like those. In fact, it would be wrong to pay. “Foreigners financed a lot of leaders, like these dictators. They didn’t do what they were supposed to do with the money, and left future generations the debt,” she says, shaking her head. “So, of course, you cannot allow that.”

My belief remains the same: If foreigners are so evil, then why does Argentina put itself in the same position of having to borrow from abroad time and again? Therein lies my fundamental problem with structuralist theories: it is defeatist and fatalistic to assume that your inevitable fate has to be abject misery at the hands of foreigners. Why not get your economy sorted once and for all so that you won't be in a position to be "exploited" by international creditors you always resort to out of desperation?

The victim mentality--that it's never your own fault--is always easier to adopt. Foreigners may not have your best interests in mind, so continually putting yourselves at their mercy through your oafishness isn't well-advised.

A lot off the top, a lot off the side: Ukraine seeks to give its creditors a sizable haircut.

The unprecedented example of IMF lending to a country in the midst of civil war demonstrates US influence even now at the institution. If you are on America's side, the IMF will find all sorts of loopholes for you...but even if it means screwing over US investment concerns? At the moment, Ukraine is in rather worse financial straits than Greece, which at least is not in any danger of dismemberment. Yet, there are two conflicting interests with regard to the American treatment of Ukraine. On one hand, it wishes to keep the (American-recognized) Ukrainian government in Kiev intact in fear that further chaos will erupt if matters deteriorate financially and another regime is installed. However, the interesting thing is that many of Ukraine's largest creditors are American fund managers who mistakenly thought that either (a) the country's situation would stabilize in the near future or (b) Western powers-that-be would not give them a "haircut" if push came to shove.

A haircut is, simply, writing off the value of obligations. For instance, a 50% haircut would mean that Franklin Templeton Investments would only be repaid 50 cents for every $1 of face value of Ukraine sovereign bonds it possesses. For Ukraine, it's literally a life-or-death, lose-lose situation: They can stop paying creditors and be declared in default, but that *may* help fund the war effort. Or, they can continue paying their creditors but have less funding to keep whatever remains of (Western) Ukraine intact. What's interesting with the former choice is that the Yankees may be willing to allow Ukraine to shaft US investment funds to help keep Ukraine afloat:

Ukraine's premier warned Friday that Kiev will freeze its debt repayments if no immediate deal is found with private lenders because it has to fund its escalating campaign against pro-Russian fighters. Prime Minister Arseniy Yatsenyuk said on his return from a visit to Washington that the International Monetary Fund had given his embattled government a few weeks' reprieve to enact laws needed for the release of new loans.

But the Western-backed cabinet leader said the IMF had signalled its willingness to let Ukraine restructure debts at its own pace -- and that interest payments to Western commercial lenders and Russia may stop as early as next week."Today, Ukraine spends as much on foreign and domestic debt servicing as it does on defence," Yatsenyuk told a government meeting.

"The budget can no longer afford it -- and not just the budget. The Ukrainian people can no longer live like this," he said. "We will not take money out of Ukrainians' pockets to pay foreign debts."

So there you are: the United States may effectively be condoning Ukraine's default. Insofar as the likes of Franklin Templeton and BlackRock do not have holdings in the tens of billions of these papers, these large fund management firms should be able to cope anyway. US/IMF indifference appears to be emboldening Ukraine in dealing with its creditors:

The creditor group negotiating with Ukraine over its $19 billion debt restructuring has no plans to revise a proposal that was rejected by the nation’s government, a person familiar with the talks said. The bondholders oppose writedowns to principal because they’re not necessary to reach the International Monetary Fund’s targets and would therefore lead to restricted capital-markets access for the sovereign and companies, said the person, who asked not to be identified because the talks are private. Even if it did agree to a writedown, other creditors wouldn’t accept it, they said.

Ukraine’s Eurobonds fell the most in almost three months this week as a verbal battle between the government and creditors escalated. Finance Minister Natalie Jaresko said Wednesday that the country will stop servicing its debt if no progress is made on talks. The bondholder committee, led by Franklin Templeton, said yesterday it’s “deeply concerned” by Jaresko’s stance.

A two-month impasse in negotiations is hardening as coupon payments come due this month and a $500 million note matures in September. Jaresko has repeatedly said that any restructuring agreement must include a so-called haircut to the face value of bonds while creditors have insisted that is not necessary to fulfill three IMF-mandated targets.

So it appear that, with Uncle Sam's approval, the electric shavers are being readied for some action on Ukraine's creditors.

Welcome to scenic--and financially secure--Denmark.

I don't know what to make of this news for reasons I can briefly explain: The IMF has been among the international organizations at the forefront of liberalizing exchange rates. That is, changing the world's remaining fixed exchange rate regimes into floating ones has been part of its longstanding advocacy since flexible rates supposedly work better in adjusting to global economic conditions and in dealing with economic shocks. On a paper concerning exchange rates, IMF orthodox is pretty much summed up when the authors ask how, when and how fast countries should adopt flexible exchange rates without questioning "whether."

It is this with some consternation that the IMF reports Denmark's success in warding off speculation that it would follow Switzerland in abandoning a currency peg that had become too expensive in holding down the value of their respective currencies against the euro. It's almost like Dick Cheney lauding the lifting of sanctions on Iran. Sure, the IMF may suggest that it dislikes currency speculators betting against currencies, but the speculators' desired outcomes--replacement with a floating rate regime--is welcome. Go figure, then, when the IMF now says that the Danes have become one of the fortunate few to have faced down these vile, faceless speculators:
So the Danish krone has beaten back speculators. Then again, this feat is not quite remarkable when you have a current account surplus of, oh, 6.3%. 6.3%! What were these speculators thinking of?

The current account surplus, which reached 6.3 percent of GDP last year, is “reasonable” given the “current circumstances,” Dorsey said. “We don’t see anything unusual going on in the economy that would justify a change in the exchange rate assessment, though we would like to see a departure from the past, with growth picking up.” The IMF estimates that the current account surplus will shrink relative to the economy, and account for just 4.5 percent of Danish GDP in 2020 as output grows.

Still, you have to wonder why the IMF seems to regard this development positively when the IMF orthodoxy remains fixed exchange rates = bad, floating exchange rates = good.

Poor IMF: among the many ills supposedly attributable to its activities worldwide, chalk its historical emphasis on "structural adjustment" for weakening West African health care systems to the extent that the onset of Ebola crises in Guinea, Liberia and Sierra Leone hit them with full force. Yes, the IMF has since pledged additional emergency lending to these affected countries, but the seeds of failure to confront epidemics meaningfully were supposedly sown long ago. We begin with the current situation of IMF response:

As the spreading Ebola emergency took center stage in Washington, the World Bank and International Monetary Fund (IMF) have pledged $530 million to help Guinea, Liberia, and Sierra Leone. And in October 2014, at a special session with African leaders on Ebola during the IMF/World Bank annual meetings in Washington DC, IMF Managing Director Christine Lagarde said that in addition to the aid, the IMF would depart from its notorious budget austerity, and actually allow the hard-hit west African nations to increase their budget deficits: “We don’t normally say this!” she emphasized. To which the Guinean president, Alpha Conde, responded, “I’m extremely pleased to hear the IMF Managing Director [say]… that we can increase our deficit, which is quite a change from the usual narrative.”

This supposedly departs from typical IMF pressures that have weakened health care systems in developing countries:

if you really want to understand why several West African countries have been so ill-equipped to tackle the latest outbreak of the Ebola virus, then you also need to look at the “usual narrative” of IMF fiscal and monetary policy restraint. That’s because it is a major reason for the dilapidated public health systems that have proven to be such a vulnerability during the crisis.

Many experts note that the conspicuous unpreparedness of countries like Guinea, Liberia, and Sierra Leone is a direct consequence of years of insufficient public investment in the underlying public health infrastructure. “We know how to prevent diseases like this, if we can get the basic level of the healthcare systems up to speed,” said Columbia Business School Professor Amit Khandelwal. Critics point out that this lack of investment can be traced directly back to sparse spending on public goods dictated by IMF loan conditions and policy advice, which invariably entail adherence to its strict definition of “macroeconomic stability.”

While austerity may not be directly at fault, it may have exacerbated the situations in these countries:

So the harmful effects of IMF policies on health systems are not direct; it’s not as if the IMF comes in and directly tells a country to spend less on public health. Instead it’s a two-step process: first the IMF policy targets constrain overall national spending levels, and this then limits the spending available for long-term public investment, including for the health infrastructure. Consequently, chronic and sustained underinvestment in public health infrastructure has become the norm in many countries, year after year, over the last few decades...

None of this is to say that the IMF is solely responsible for the Ebola outbreak. Of course, the wars in Sierra Leone and Liberia, corruption, ineptitude, and a host of other specific political, cultural, and socioeconomic factors have all contributed to the current state of the public health systems in West Africa. But if the international community is serious about addressing chronic under-investment in the public health systems in these countries, it will also have to revise the obvious shortcomings of IMF fiscal and monetary policies.

I do not have problems with the general notion that IMF policies have indirectly discouraged the development of West African health care systems via austerity policies. That said, I am not entirely sure that their systems would have been significantly better able to meet the Ebola challenge had the IMF not had a fashion for austerity for so long. It's a counterfactual that's hard to support insofar as there are (fortunately) no counterexamples where IMF non-involvement led to better preparedness in health among other countries affected.

There's "postwar reconstruction," but the IMF has completely lost the plot with "duringwar reconstruction."

I am unsure of many, many things, but this I know: Ukraine is a bottomless money pit. I figured this out a long time ago when I said that if the West really wanted to "punish" Russia, it should have let the Putinists "have" Ukraine. Think of the untold sums of money the Russians would have wasted instead of the West. Predictably if stupidly enough, the powers-that-be thought that the "country" of Ukraine was worth saving and have forced the IMF to act on their cause. You can read the hilarious econospeak elsewhere, but the situation remains the same: they believe a financial fix is possible for an ongoing security crisis. I have never heard of such a thing.

[I] As I keep repeating, there is no such country "Ukraine" anymore as the Crimea has been annexed and its eastern parts are controlled by externally-funded militias. To expect "Ukraine" to pull through is like expecting "Afghanistan" or "Somalia" to do the same--these are failed states whose problems are far beyond the salvation of IMF-style financial fixes. If there were IMF peacekeeping forces I'd be a smidgen more optimistic about its prospects, but no. Why does the IMF persist in this nonsense, though? Again, Western powers-that-be have forced it to "do something" about Ukraine despite its unsuitability to the task of keeping a crumbling nation apart. Witness:

The country has been choked by the loss of control to pro-Russia rebels of its key industrial region in the east, sapping productive output and revenues for the government. A new IMF program "will allow us to gain access to additional resources, which in turn will enable us to return to economic growth, restore adequate foreign exchange reserves, and ensure economic and financial stability going forward," said Ukrainian Finance Minister Natalie Jaresko.

Whoever this Natalie Jaresko woman is, she is completely nuts since she suffers from the same delusion that the IMF which has failed time and again to resuscitate Ukraine and must now do so under conditions of civil war will succeed. The situation is surreal:

With Ukraine it has to reach into its pockets for a country brought economically to its knees by nine months of civil war. "The IMF is entering unchartered waters," [former IMF Board Member Domenico] Lombardi said. "In recent times it hasn't supported a country at war with such a substantial package..."

Peter Doyle, a former economist with the IMF and strong critic of its policies, said it would be a mistake, and that the IMF is being "compulsive" in a desire to "be visible". "Until the civil war is successfully resolved, the IMF is absolutely the wrong institution to take the lead in financing," he told AFP.

"In particular, given the conflict, continued IMF lead compromises further its rules requiring that borrowing country policies are sufficient to secure sustainability." Moreover, the IMF is weighing more money for Ukraine just as it mulls a restructuring of the country's huge debt to commercial lenders, already equal to more than 73 percent of gross domestic output.

We then get to the kicker: Ukraine is estimated to need another $50 billion just to stabilize its financial situation--to say nothing of its security situation--likely making Greece like a bargain for the West since at least it's not at war (yet?):

It is a complicated equation, according to Mitov. A debt restructuring, especially one that forces investors to write off some debt, would alleviate financial pressures on the country. But it also "risks alienating foreign creditors for quite some time," meaning Ukraine would have limited access to debt markets, he noted.

The financing needs are Dantean. According to the Institute of International Finance, the country will need $50 billion from now through 2018, as it sinks into its worst recession since the Second World War.

[II] Speaking of which, one of those hoping for a bailout is Franklin Templeton, the American investment firm. It is on the hook for a lot of Ukrainian debt denominated [demoninated?] in US dollars. A massive haircut for those dumb enough to have bet on Ukraine is certainly in order, but we once again get into this Asian financial crisis-like situation that whenever American financial firms get in trouble during foreign misadventures, Uncle Sam is always there to bail them out:

[Franklin Templeton's Michael] Hasenstab will be an important figure in these [debt restructuring] negotiations. He runs bond funds for Templeton that held $8.8 billion of Ukrainian debt at the end of September 2014. (They have not yet reported newer data.) In June, the fund manager, who has won big on Irish and Hungarian debt in the past, painted a rosy picture of this investment...

Granted, it only constitutes a small part of the $185 billion in bonds he runs for Templeton, but for someone who has a reputation as a successful contrarian to maintain, the almost inevitable restructuring is a blow quite out of proportion to the actual financial effect of the losses. 

You have to give credit to Franklin Templeton though for daring to stay with their Ukraine, er, "investments." As the saying goes, no guts, no glory--but this time around it's been proven foolhardy more than anything else. That said, being paid, what, 60 cents to the dollar for bonds as the restructuring is believed to offer when they bought these bonds at 80 cents isn't so bad.

For the funders of the IMF, though, it's another story since their commitment seems limitless and open-ended--a money pit, in fact.

Vulture Man: NML Capital's Paul Singer v. Argentinian President Cristina Fernandez.

File this under: dream on, buddy. A few weeks ago I discussed the quandary faced by Argentina as a US court prohibited it from paying off restructured loans until it had compensated holdouts. To Argentina and the latter's critics, these are "vulture funds" who picked up defaulted debt for a few cents on the dollar, refused to participate in debt restructuring, and succeeded in using American courts to wangle a huge payday. Martin Khor of the South Centre, which my country and most other developing countries contribute to, offers this recap:

The vulture funds want their pound of flesh.  The main fund, NML Capital, would make an estimated 1,600% profit. Argentina’s President Cristina Kirchner refused to bow to these funds.  If she did, the country might have to also repay all the creditors the full value, which is US$120 billion, and that is impossible to do.

This incredible turn of events has caused outrage among many public interest groups and anger among developing countries’ governments.  The South Summit of the G77 in June in Bolivia criticized the vulture funds and called for a proper global debt restructuring mechanism. Finance Ministries of developed countries have been concerned as well.

After all, developed countries like Greece also went through debt restructuring, in which private creditors agreed to take a loss, a few years ago. Accepting the court decision as the new template would make it quite impossible for any country to restructure their debts, since the now emboldened vulture funds would pounce, and of course even more investors would imitate the behavior of such funds, since there is big and easy money to be made.  

The disorder caused by the American court has set into motion measures aimed at ensuring orderly debt workouts for sovereign defaults:

Influential Financial Times commentator Martin Wolf has supported Argentina in its battle with the vulture funds, even saying that it is unfair to the real vultures to name the holdouts such since at least the real vultures perform a valuable task! At the end of August, the Swiss-based International Capital Market Association, a group of bankers and investors, issued new standards aimed at reducing the ability of holdout investors to undermine debt restructuring.

Which brings us to the logical solution: why not create a restructuring mechanism for sovereign defaults? It makes sense, but the problems are manifold. First, LDCs want to house this mechanism at the UN which countries like the US, its ostensible host nation, deplores. Second, LDCs being the ones likely to experience financial distress lack the political-economy clout to push for the creation of such an organization unlike, say, the US promoting the G-20. So, we remain stuck in no-man's land:

On 9 September, the Group of 77, representing developing countries, succeeded in promoting a resolution at the United Nations General Assembly which recognized that a state’s efforts to restructure debt should not be impeded by hedge funds that seek to profit from distressed debt. The General Assembly, by a vote of 124 in favour, 11 against and 41 abstentions, also decided to set up a multilateral legal framework for sovereign debt restructuring by the end of 2014, to increase the stability of the international financial system.

A global system for debt restructuring will be a systemic solution, since countries with debt crises can have recourse to an international court or system and would not need to do debt restructuring on its own. Although the developing countries as a whole championed the resolution, there will now be an uphill battle to get it implemented, since the United States, Germany and the United Kingdom (which are key countries in global finance) were among those which objected.

Another resolution, initiated by Argentina and others, is now being considered by the UN Human Rights Council, aimed at setting up legal frameworks to curtail vulture funds’ activities and for sovereign debt restructuring. One good thing is that the UN, which is a universal body in which developing countries have a greater say in decision-making, is now at the center of the debt discussion. The negotiations ahead to set up a global system will be tough but well worth it since preventing and managing a debt crisis is now a priority for a growing number of countries.  

IMHO the developing countries are well-intentioned and their proposal generally makes sense. However, the reality remains that the UN General Assembly is a totally lame body in comparison to the Security Council. Ditto for the Human Rights Council. It is here where LDCs' lack of clout in global economic governance becomes obvious. The US, for instance, is hindering quota (voting rights) reform at the IMF. Things are not that much better at the World Bank where the US still gets to choose its president.

As it was at the G-77's creation, the UN General Assembly is a pretty useless venue to clamor for global economic governance reform that is LDC-friendly, and I am afraid things are not much different this time around. The rich countries will not play ball, and the poor countries are not strong enough to take it away from them after all these years.

Christine Lagarde is famously the first non-economist to head the International Monetary Fund. Aside from being in charge during a time of transition when more developing countries want greater representation at the lender of last resort--see the cartoon above and an earlier post on this matter--the economics profession is coming under fire post-global financial crisis. Do economists really know how to run an economy, let alone a world economy? Nowadays, of course, "everything else" is beginning to gain more consideration in global economic governance. Not only do we need to bring political, social and technological factors back into consideration, but also a gendered focus:

In truth, some IMF staff also fear that gender issues are a distraction from the more pressing problems of financial stability, say, or monetary policy. But to Lagarde these naysayers miss the vital point: she thinks the IMF, like the rest of the policy world, urgently needs to overhaul how it does “economics”. “When I got here I found silo-thinkers,” she explains. “They thought that things like women’s contribution to the economy, or climate change, or income inequality, didn’t matter. But it does.”

In many ways, then, she wants to consider all the other things economists neglect and have marginalized at the IMF for most of its history. She wants to practice IPE, in other words:

This partly reflects her own background: unlike most of her predecessors, Lagarde has not had economic training. Some critics consider this a handicap. She disagrees. “There are three things,” she says, ticking the points off her fingers, her spinach pushed aside. “Firstly, I am a quick learner. Secondly, I know when I am out of my depth. But thirdly, my management style is all about bringing people together. So I ask people to explain. And that is very important, because economics has too much jargon, so many models, that ordinary people just cannot understand it. And that is dangerous.”

She is particularly concerned about what she sees as a structural disconnect between economic and political structures. On the one hand, she notes, the global economic system is becoming increasingly integrated; on the other hand, the global political system is fragmented and becoming more so because of a backlash against the way that globalisation is hurting some people. “What we are seeing with all this regionalism, with the Scottish people wanting to go their own way, is going in the direction of less globalisation,” she says.

To be sure, this sort of stuff is old hat to IPE specialists. Dani Rodrik, for instance, questioned whether globalization has gone too far back in 1997. Given the copious amount that's been written about the IMF by IPE scholars of all stripes, for example, I think that Lagarde would do well to engage with our field since many of these areas have already been covered by political economists instead of mainstream economists.

For those who've run their country into the ground, we salute you.

If nothing else, you have to admire President Robert Mugabe's longevity. Once a pro-independence protagonist, he's turned into...someone else. At 90 he's still fit as a fiddle. That he's been up to no good for so long, however, deserves additional comment. Despite encountering international opprobrium for a very long time, there's always been China offering financial gestures of third world solidarity with Zimbabwe. To be sure, Comrade Bob has not changed Zimbabwe into a socialist republic by constitution. However, he's been able to draw on China in tight spots time and again. He is still on top at age 90, after all.

To make a long story short, Zimbabwe is an economic basket case. After Comrade Bob expropriated white farmers in in 2008, annualized inflation reached 500 billion percent. Ever the political survivor, he hangs on somehow. Being especially strapped for cash at the moment even by Zimbabwean standards, he is in the process of negotiating with the IMF for restored funding. His country has effectively been in default with the IMF for a number of years, but seeks to become "current":

The International Monetary Fund is appointing a resident representative in Zimbabwe for the first time in 10 years as the southern African country seeks to mend relations with the lender. Christian Beddies is the IMF’s first appointment in Zimbabwe since 2004 when the Washington-based lender closed its office in the country, two officials with knowledge of the situation said, declining to be identified because they aren’t authorized to speak to media on the matter. Beddies has arrived in the country, one of the people said.

The IMF is “finalizing the process for appointing a resident representative in Harare,” who should be in place in July, the IMF said, without identifying the appointees. Zimbabwe has been in default to the IMF since 1999, former Finance Minister Tendai Biti said last year. The government said in March it will make a “token payment” to the IMF as the country works on a program to reduce its debt.

As always, the IMF will demand politically unpopular concessions--conditionalities--that Comrade Bob would rather avoid. Aside from not getting IMF emergency funding, being in its doghouse usually means not being able to access international financial markets (which the country is at least a decade away from anyway). Hedging his bets, Comrade Bob recently made a trip to Beijing for his first meeting with new President Xi Jinping. Who wouldn't welcome large, no-strings-attached soft loans? He's received them before, you know. However, he was not able to wangle cold, hard cash this time around but only some token projects. What's more, it seems the Chinese are wising up to him as they have asked for and received all sorts of collateral in return:

In recent years, perceptions have grown in the west that China builds ties and reaps economic rewards in Africa and elsewhere in the developing world through no-strings-attached deals. But Beijing’s relatively hard-nosed reception of Mr Mugabe shows that its open-wallet policy has limits. Mr Mugabe, one of Africa’s longest-serving leaders, was hoping for a $10bn financial bailout package, with an initial tranche of $4bn as sanctions cut off his ability to tap western loans, according to Zimbabwean media.

Instead, he obtained a $2bn deal for the future construction of a coal mine, power station and dam. For this infrastructure deal, Chinese loan payments had to be secured against future Zimbabwean mining tax revenues.

On top of this, Zimbabwe received a token agreement to conduct feasibility studies for other telecoms and infrastructure projects, $8m in donated rice and a $24m grant to build schools and clinics. For the feasibility studies, it had to commit to set aside revenues from state-owned companies in order to obtain loans from China’s state-owned banks – a sign of the depth of Beijing’s unease over Zimbabwe’s economy.

Ideology aside, let's just say Comrade Bob's public financial management chops are, er, non-existent. Commie bonding has its limits. Namely, inability to manage public finances to any appreciable extent. Comrade Bob, the IMF still beckons.

 If we go by the Weberian definition of what a state is, "Ukraine" fails on the counts of territorial integrity and having a monopoly on the legitimate use of force. Into this muddled picture comes the IMF. The characterization of the IMF as a Western tool is well-founded and not subject to much debate, at least in IPE circles. Today's case in point is the "country" of Ukraine. While Ukraine as we know it has ceased to exist and so has its economy, the IMF is busy shoveling wads of cash in Kiev's direction and will do so for as long as it doesn't go over to the dark side (Russia). Being broke would hasten that process. If you enjoy Orwellian official-speak, get a load of this IMF press release:

In completing the review, the Executive Board approved waivers of nonobservance of performance criteria related to international reserve accumulation and the cash deficit of the general government on the basis of corrective actions taken. The Board also approved waivers of applicability of performance criteria related to the cash deficit of the general government, the cumulative change in net domestic assets of the central bank and publicly guaranteed debt. In addition, in light of the slight delay in completing the first review of the program, the Board approved the authorities’ request for merging the remaining two reviews scheduled for 2014, while keeping the total financing under the arrangement unchanged.

Reading between the lines--in plain English--let me restate that for you:

Ukraine has met few to no conditionalities because its Eastern half is embroiled in civil war. Its economy is expected to contract by 6% in 2014. The so-called "government" in Kiev has made half-hearted reform gestures that won't work anyway so we'll give them credit even though the country has ceased to exist. Part of it has already been dismembered (Crimea) and another may soon follow (Eastern Ukraine). Because it's a warzone where they shoot down commercial jetliners, IMF officials would rather not visit Ukraine for security reasons. We'll just fork over the money without going through the motions of sending officials to "approve" of Ukraine's actions (which are insufficient anyway but what the hell, keeping "Ukraine" on the West's side is a cost-no-object endeavor). 

They're probably wishing they had Yanukovych back right about now. Christine Lagarde is marginally less obtuse:

The Ukrainian authorities have firmly implemented policies to stabilize the economy and revive growth. This strong policy record despite the much worse-than-expected environment is encouraging in light of the implementation problems that derailed previous programs and thus augurs well for the authorities’ ability to keep the program on track. However, the escalating conflict in the East and ongoing geopolitical tensions have weighed heavily on the economy and society, causing a deeper recession and deviations from program targets in the short term, in particular on the central bank’s net international reserves and the budget and Naftogaz deficits.

Elsewhere there's talk of "downside risks" and other euphemisms. The IPE Zone's refreshing candor on world politics: Don't leave home without it as an old advertising catchphrase used to say.