IMF changes its tune as business booms in crisis

ANALYSIS: Talk about intervention in markets is part of the fund’s attempt to shake off its reputation as a sadistic austerity…

ANALYSIS:Talk about intervention in markets is part of the fund's attempt to shake off its reputation as a sadistic austerity merchant

AT THE IMF’s annual spring meeting, which ended at the weekend, there was a buzz about the place. No wonder – the bailout business is booming.

How different from just half a decade ago. Then, the world economy’s firefighter had no fires to put out as every corner of the world enjoyed healthy growth, stability was the norm and policy-makers thought they had cracked economic management.

They hadn’t. Unnoticed, tinder had been piling up beneath many of them for years, mostly in the rich world. When it ignited in 2008, a firestorm spread quickly from the US to Europe and further afield. Since then, the developed world has been suffering its biggest economic shock since the second World War and alarms have been going off in the most unlikely places.

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The IMF people have hardly had a chance to catch their breath, with staff going hither and thither to bring flare ups under control and stop the flames spreading. From a single bailout in 2007, the fund has been involved in dozens since 2008, of which more than half have been – unprecedented – in Europe.

Indeed, so busy did it become in the immediate aftermath of the outbreak that its member countries agreed to triple its resources. And all this from a position only four years ago when serious questions were being posed as to whether it should even continue to exist.

The just-finished meeting, held with its sister organisation and Washington neighbour the World Bank, had a packed schedule of briefings, report launches and press conferences.

As is often the case at such events, more can sometimes be gleaned at low-profile sessions held in the bowels of buildings than at the bulb-flashing, shutter- clicking press conferences where world leaders strut their stuff.

That was the case last week. With so many countries being rescued, a poorly attended session by IMF staffers on Friday reviewing all 29 recent bailouts. Examining how today’s rescues differ from those of yesteryear was among the most enlightening from an Irish perspective.

Some take-aways included the fund’s contention that bailouts have fewer and less onerous conditions attached than those in the past. This, and a very deliberate effort to shake off its reputation as a sadistic austerity merchant, may lessen the chances of it looking for compulsory redundancies in the public sector if the Croke Park deal does not deliver.

Just how caring the IMF has become was illustrated by its self-portrayed role as a protector of social spending. To support this, the staffers presented findings showing that in almost every rescued country, social spending as a per cent of the total increased post-bailout.

Interestingly, Ireland is an exception, where social spending is expected to hold steady proportionately. That, though, has nothing to do with the IMF and everything to do with the indiscriminating and across-the- board nature of the spending cuts agreed by the previous government.

The forthcoming comprehensive spending review planned by the Coalition could change that.

The IMF folk also found that exchange rate depreciation since 2008 played almost no role in adjustments in bailed-out countries compared to the past, regardless of what kind of rate regime was in place.

They stressed the upsides of currency stability – fewer negative balance sheet effects and no runaway inflation – rather than the competitiveness-enhancing effects of depreciation. The findings will provide context for the debate on how the euro has, or has not, limited Ireland’s viable policy options.

From a wider global perspective, two big policy challenges preoccupied participants at the spring meeting: how to deal with the underlying cause of the crisis – the financial system – and what to do about its biggest long-term consequence – huge increases in public indebtedness in many countries.

In both contexts, Ireland was mentioned more times than any small country would want to be, and never positively.

The issue of public indebtedness was given added impetus by the fever pitch reached in the US capital over the past 10 days about America’s public debt.

The mood has changed quite suddenly on debt sustainability and new proposals are piling up on how to address the historically unprecedented peacetime budget deficit more radically and more rapidly than President Barack Obama had planned heretofore, including one proposal made last Tuesday by Obama himself.

Simon Johnson – an international celebrity economist – was in characteristically excitable form, giving out about mega banks being allowed to gamble with taxpayers’ money and warning of fiscal catastrophe if the madness did not stop.

He said the risk of another financial earthquake needed to be “war-gamed” so it could be prepared for. He pre-empted objections that catastrophe planning could have negative effects by saying no one accused epidemiologists of starting a pandemic when they modelled outbreaks of contagious diseases.

Although the analogy is imperfect – bugs don’t proliferate because confidence evaporates – Johnson is one celebrity economist who should be listened to.

Coinciding with the spring gathering was a meeting of G20 finance ministers and central bankers. The G20, which was set up in 1999, brings together most of the world’s 19 largest economies and the EU.

It owes its existence to the recognition that the G7 group of large, rich democracies could no longer effectively set the global governance agenda. China and India were needed too.

If the G20 didn’t do much in its first decade, it has become the main forum for global rule- making on financial matters since the crisis broke out.

On Thursday, the chairwoman of the G20 meeting, France’s finance minister Christiane Legarde, took time out from re-ordering international finance to tell reporters that Ireland would have to bend on its corporate tax. That matter did not arise on Friday when she briefed the media on the substance of the G20 meeting – and there was substance.

The big economies made some progress towards setting indicators that could flag destabilising imbalances among countries as they emerge. The history of this kind of surveillance is poor – just look at the euro zone – but rules-based frameworks have to begin somewhere.

In a further move towards interventionism and away from the let finance rip past, the G20 communiqué also raised the issue of speculation in food and energy markets, stating: “We stressed the need for participants on commodity markets to be subject to appropriate regulation and supervision” and putting forward possible ways “to address market abuses and manipulation”.

A decade ago, such language would only have been heard in IMF buildings if anti-globalisation protesters outside had cranked up their loudhailers to the max.

The same trend was seen earlier in the week when the IMF changed its views on what countries could and should do if subject to destabilising capital inflows. There was a time when the fund always included as a condition of bailouts the removal of capital controls.

This made about as much sense as not allowing countries to control that other mobile “factor of production”, labour. Now the dogmatic attachment to free- flowing capital has been abandoned.

Reflecting that less ideological and more pragmatic stance, the fund’s managing director, Frenchman Dominique Strauss- Kahn, said when wrapping the meeting up on Saturday, that economic theory and practice needed “rethinking” because they failed to recognise the fragilities that led to the global crisis.

He went on to talk about the importance of jobs in the recovery, noting that “most people on the street do not feel growth”. Such talk sounded more like the kind to issue from the mouth of an “I feel your pain” politician than an IMF technocrat.

It served merely to fuel already heightened speculation as to whether Strauss-Kahn would quit the IMF next month to throw his hat in the ring for the French presidency.

Most think he is already packing his bags and many will be sorry to see him go.

He is formidably intelligent, deeply knowledgeable on fund matters and an effective operator. He is also generally well-liked, in part because he is worldly and witty, characteristics not common among the bureaucratic/official types who usually do such jobs (nerdy Robert Zoellick who runs the World Bank is a case in point).

Long before washing up in Washington, Strauss-Kahn had a reputation as one who enjoyed life’s pleasures to the full. He didn’t take long to bolster that reputation after arriving in the US capital.

Within a year of taking office, he was embroiled in what passes for scandal in Washington – but would not raise an eyebrow in Paris – when it became public that he had had a liaison with a member of his staff and then helped her get promoted.

The married Strauss-Kahn was cleared of sex-for-favours charges and the matter was let lie when he expressed appropriate contrition. He hasn’t looked back since. The IMF will be duller without him.