March 25, 2013
Publicat în English content
The International Monetary Fund, at long last, has begun to open up. Gone are the days when it acted as a handmaiden of Western, mainly US, economic orthodoxy. It is even throwing a gauntlet down to the mighty US Federal Reserve, questioning the effects its constant monetary boosting has had on the rest of the world.
Given that the IMF is the key arbiter on many key issues of global finance and economics, and hence also over global fairness and equity, the change should be greatly welcomed. Over the past decade, the reform debate had centered mainly on giving emerging market economies more voting power, by commensurably reducing the voting shares of the "rich" world.
Also given the global economic dynamics, the adjustment was of course long overdue. One clear indication is that the IMF's senior-level staff members have become much less American and less European. But now, the first substantive consequence of these shifts are beginning to emerge.
The frontline of this fight is the IMF's Research Department, where old school guys (yes, mostly guys) and rich country governments battle the new thinkers. Take, for example, the third quantitative easing (QE3) the Fed announced in late 2012. From the American perspective, the big boost in money supply is intended to stimulate economic growth - and therefore job creation - at home.
The extent to which these measures actually achieve that goal continues to be the subject of much controversy even in the US. What is not controversial is that these measures can have a negative impact on emerging market economies. And policymakers there will generally agree that it is important to have a growth-oriented US economy.
But there is growing concern as to whether US authorities are not increasingly poking in the dark with their policy measures. QE3 has mainly boosted the stock market, not the real economy - and even the stock market effect is wearing off.
Either way, emerging market economies are no longer willing to acquiesce. Brazil has stepped forward to lead the defense. That has upset many US policymakers. Perhaps not surprisingly, that has also generated a lot of negative press about Brazil in the US media.
Enter the now more open-minded IMF, as Boston University professor Kevin P. Gallagher has documented, it has issued a whole range of reports that cast a critical eye on the spillover effects that quantitative easing in the US has had on emerging market economies.
The IMF found, for example, that lower interest rates in the US were associated with a higher probability of a drastic increase in capital flow into emerging market economies. And it declared that such increase in capital flows can cause currency appreciation and asset bubbles, which in turn can make exports more expensive and destabilize the emerging market economies' domestic financial systems.
Germany and the oligarchy will devise a new system that allows some euro member countries to leave while establishing they are not really "leaving". Rather, they will be "realigning" in a parallel system of quasi linked membership. This new "not leaving" system will allow its member countries to switch to an "associate euro" bound by new national rules with zero centralization -Translated : Countries will quit the euro, launch their own national currencies. Only no-one will be allowed to say that.
It seems to be curtains for the London based European Banking Authority – the new euro plan for "an integrated financial framework" does not even mention it.
The text says:
"An integrated financial framework should cover all EU Member States, whilst allowing for specific differentiations between euro and non-euro area member states on certain parts of the new framework that are preponderantly linked to the functioning of the monetary union and the stability of the euro area rather than to the single market."
It goes on to stress the importance of "a single European banking supervision system" without mentioning the EBA and highlighting a new role for the ECB.
There are also chilling words for the government with the strong emphasis of putting EU supervisory structures above national bodies. Germany will take no prisoners on this demand and is not inclined to give the City of London "safeguards" after repeated calls by Britain for members of the single currency to backstop banks.
"The current architecture should evolve as soon as possible towards a single European banking supervision system with a European and a national level. The European level would have ultimate responsibility," the text says.
A senior eurozone official told me: "If we want to protect our currency we need tighter structures, this view is shared by David Cameron because the UK also suffers when the eurozone is weak. Why should we pay a price to make safeguards to do what others ask us to do?"
Britain's only leverage, which could lead to a major summit row is a veto over the use of the ECB as a banking regulator, which requires unanimity.
Germany and France support putting the European Central Bank in charge of eurozone bank regulation. This means gutting the current London-based EBA, which would become a glorified single market watchdog, and shifting power to Frankfurt.
"Such a system would ensure that the supervision of banks in all EU Member States is equally effective in reducing the probability of bank failures and preventing the need for intervention by joint deposit guarantees or resolution funds. To this end, the European level would be given supervisory authority and pre-emptive intervention powers applicable to all banks. Its direct involvement would vary depending on the size and nature of banks. The possibilities foreseen under Article 127(6) TFEU regarding the conferral upon the European Central Bank of powers of supervision over banks in the euro area would be fully explored."
Many countries blame the EBA for failing to act on the Spanish banking crisis leading an EU bailout that is expected to cost the eurozone €100 billion.
"A credible EU banking supervisor is the right demand, the EBA in its present form is not credible,” said a EU official.
New Cypriot legislation agreed this weekend gives the central bank and finance ministry the power to restrict all banking transactions, including cash withdrawals and the use of credit cards, alongside "any other measure necessary for reasons of public order and safety".
Economic life in Cyprus has all but ground to a halt in the last few days, as the closure of the banks has turned the country into cash-only economy.
Town centres are all but deserted, and retailers, facing cash-on-delivery demands from suppliers, have warned that stocks are running low.
Wolfgang Schaeuble, German finance minister, noted that financial markets were calm and the euro stable despite the Cyprus crisis, in a veiled warning that the eurozone may force the island's exit from the single currency.
"Framework for the assistance programme will not change and the European Central Bank cannot guarantee its relief assistance until after Monday. Cyprus has a hard road to go either way," he told German newspaper Die Welt this morning.
The 20 per cent rate on high-value accounts at the Bank of Cyprus is likely to trigger political conflict on the island, which has seen widespread protests in the last week. It is expected to particularly hit Russian investors, who make up the bulk of the Cypriot financial sector's high-value clients.
Nicos Anastasiades is to see Christine Lagarde of the IMF and Mario Draghi, head of the European Central Bank, as well as the presidents of the European commission and European council, Jose Manuel Barroso and Herman Van Rompuy, who have cancelled an EU-Japan summit to return to Brussels because of the Cyprus emergency.
Anastasiades is expected to unveil new proposals to hit wealthy Cyprus banking clients with heavy levies on their deposits in order to come up with about one-third of the €17bn bailout the country needs.
A week ago he insisted on minimising the levy to less than 10% to prevent foreign investors, mainly Russians and British, pulling their money out of Cyprus. Now he is being forced to double that levy to 20%, according to reports from Nicosia late on Saturday, while sparing all savers with less than €100,000.
With the stakes never so high for Cyprus, the European Central Bank is threatening to pull the plug on short-term funds propping up the Cypriot financial sector on Monday unless a last-minute deal is struck that satisfies the island's increasingly hawkish eurozone creditors, led by Germany.
The eurozone's biggest economy is determined that the island deflates a bloated financial sector that exceeds the size of the Cypriot economy by a factor of eight.
"It is well-known that I won't allow myself to be blackmailed, by no one or nothing," said the German finance minister, Wolfgang Schäuble. "I'm aware of my responsibility for the stability of the euro. If we take the wrong decisions, we'll be doing the euro a great misservice," he told a German Sunday newspaper.
Anastasiades's meetings in Brussels will be followed by an emergency meeting of eurozone finance ministers in the eurogroup on Sunday evening. It will also be attended by Lagarde, the European commissioner Olli Rehn and top officials from the European Central Bank – which will be the crucial venue for striking a deal.
In talks on Saturday in Nicosia with the "troika" of EU, ECB and IMF officials, according to Reuters, Anastasiades conceded a much bigger confiscation of wealthy depositors' cash. Anyone with more than €100,000 in Bank of Cyprus, the country's biggest bank, would lose 20%, while similar deposits in other banks would be hit by a 4% levy.
The proposed deal would still need to pass the Cypriot parliament, which last Tuesday unanimously rejected an agreement to tax savers. The parliament is expected to convene quickly if the Cypriots and the eurogroup reach agreement on Sunday evening.
"There are only hard choices left," said Rehn.
"We are undertaking great efforts. I hope we have a solution soon," Anastasiades tweeted.
Schäuble said Cyprus could not avoid very tough times. "But that is not because of European stubbornness, but because of a business model that no longer functions," he said.
The eurozone's terms for an agreement could not be changed, he added, also insisting that depositors with savings under €100,000 had to be spared.
A senior policymaker at the ECB also served Cyprus notice that it would be given little leeway in the crucial talks by predicting that the island's financial woes would not tip its eurozone peers into economic crisis.
Ewald Nowotny, the head of Austria's central bank, echoed the view of his German counterparts in an interview this weekend, warning that the Cypriot economic model – with its reliance on offshore banking and Russian money – was unsustainable.
"This system is certainly no longer able to continue," said Nowotny.
Speaking in an interview with the Austrian newspaper Österreich, Nowotny indicated that failure to agree a deal by Monday's deadline – when the ECB has threatened to cut off financial assistance to Cyprus – would not trigger a systemic crisis across the eurozone.
"We see clear signs of improvement in Spain, Portugal and Ireland. I see no massive economic problems in Italy as well, so I do not believe that it will come to contagion," he said, reiterating that Cyprus accounts for only 0.2% of eurozone GDP. Nowotny also ruled out the prospect of the Cypriot depositors' haircut being implemented on Austrian savers. "Austrian savers' money is absolutely safe," he said.
The original rescue deal for Cyprus collapsed last week when legislators rejected proposals that included a levy of 6.75% on all deposits below €100,000. Observers have warned that the haircut has damaged public trust in the euro project, because deposits under €100,000 are protected across the European Union.
Cypriot banks hold €68bn in deposits, including €38bn in accounts of more than €100,000. With so much of the Cypriot banking system predicated on deposits rather than wholesale debt funding, officials at the IMF, the ECB and the EU have told the Cypriot government that depositors must carry some of the pain of a bailout, or risk their savings being wiped out altogether.