It’s a nuance, but an important nuance.
The IMF isn’t a creditor in the usual sense of the word. It’s a collateralised bilateral swap agent that exists to help countries balance international payment obligations so that they don’t have to start wars, grab resources or asset-strip trade partners when they abuse their trust.
The clue comes in the ‘F’ of the IMF acronym, which of course stands for fund not force.
But even that is a misdirection, since the fund is actually made up of capital commitment quotas, not pre-paid lump sums of capital. Pre-paying would be dumb, you see — a waste of perfectly good capital. What if there’s no crisis to allocate the funds to? That capital just goes to waste, unused.
What the quotas really are then are capital pledges. This loosely translates to signed up IMF members agreeing to freeze their own potential counter claims on trade partners who can’t afford to balance their IMF account, until the country in question can afford to honour them. In the event the “creditor” nations don’t have counter claims, they simply agree to assign claims on their own capital resources, and so forth, in exchange for eventual claims on the country in question.
That’s why you can’t actually technically default. It’s not a loan. It’s a swap. A swap of one country’s relatively crappy currency, for currencies that can actually get you stuff on the market.
And the whole thing, of course, is balanced by way of the SDR — the IMF’s own unit of account which floats freely versus the combined value of what are considered to be the world’s most liquid currencies, the dollar, the euro, the yen and the pound.
Simple, right?
Here in any case are the mechanics as set out in the IMF’s own Financial Operations document:
But here’s why the whole arrangement breaks down with Greece and why this particular crisis must involve a tri-partite rescue committee. Greece is a user not an issuer of one of the four core “usable currencies” that are supposed to offer debt relief to member states. Greece, as a consequence, has no currency of its own to pledge in exchange for more euro currency.
This is problematic for the IMF which was set up to dish out “usable currencies” against inferior currencies as debt relief. Greece poses an oxymoronic situation for the fund as a result. Greece can’t just pledge its own currency; it first needs to establish access to that currency from the ECB, which in turn needs authority from the European Commission to break rules about the terms with which it is allowed to dish out fresh liquidity. As we all know, dishing out liquidity against non-existent collateral and/or to an insolvent entity, is a considered a big no-no in Frankfurt.
The IMF’s role here, consequently, is about facilitating an internal transfer between eurozone IMF members vis-a-vis their outright obligations to the fund.
That’s why there’s a bit of a hierarchy in the repayment schedule. The IMF itself hasn’t lent anything. It has simply facilitated a conditional swap that now allows non-euro countries greater claims over the eurozone as a whole, and that can be through a reduction of eurozone claims over other non-euro members or greater claims of non-euro countries over the eurozone. This doesn’t count as euro monetisation for as long as it remains an offset comprising of potential claims. The arrangement is closed out, meanwhile, as soon as the euros are repurchased from non-euro members. Conditions are added to the arrangement to ensure the country in question can be sure to meet the demands of claimants in actual output terms once the arrangement is closed out.
In this case, the true defaulting determinant isn’t the IMF, it’s the ECB, because it has the power to reject potential euro claims if it believes they weren’t issued in good faith. Which is why it all comes down to the collateral that sits on the ECB’s books which supports the euro claims in the system.
Let’s get back to the IMF specifics:
So why is the Greek crisis shaking the IMF to its core? And why is the IMF suddenly so eager to guarantee Greek debt relief?
Because it’s all fundamentally about the international system’s potential claims over the eurozone as a whole. The problem for the IMF is that there’s no easy way to unbundle these in the event the ECB decides that some euro claims are more equal than others. But it’s also the case that for as long as the eurosystem as a whole remains in credit vis-a-vis the rest of the system, there is no reason for it to chop one of its core organs off.
The eurosystem can afford the luxury of retaining Greece, especially in its currently saving obsessed mode. What’s more debt relief is an internal issue, not an international one, thus as far as the rest of the world is concerned there’s no-one out there that has to consume less because Europe as a whole insists on consuming more than it’s entitled to consume. Forcing Greece to repay principle at the cost of reduced consumption consequently serves nobody’s interests as a whole.
The only rationale in forcing Greece to consume less is if other eurozone members are prepared to consume more.
On which note, a relevant extract from Keynes about the pre-war generation’s tendency not to consume, by way of Brad Delong:
This entry was posted by Izabella Kaminska
on The IMF isn’t a creditor in the usual sense of the word. It’s a collateralised bilateral swap agent that exists to help countries balance international payment obligations so that they don’t have to start wars, grab resources or asset-strip trade partners when they abuse their trust.
The clue comes in the ‘F’ of the IMF acronym, which of course stands for fund not force.
But even that is a misdirection, since the fund is actually made up of capital commitment quotas, not pre-paid lump sums of capital. Pre-paying would be dumb, you see — a waste of perfectly good capital. What if there’s no crisis to allocate the funds to? That capital just goes to waste, unused.
What the quotas really are then are capital pledges. This loosely translates to signed up IMF members agreeing to freeze their own potential counter claims on trade partners who can’t afford to balance their IMF account, until the country in question can afford to honour them. In the event the “creditor” nations don’t have counter claims, they simply agree to assign claims on their own capital resources, and so forth, in exchange for eventual claims on the country in question.
That’s why you can’t actually technically default. It’s not a loan. It’s a swap. A swap of one country’s relatively crappy currency, for currencies that can actually get you stuff on the market.
And the whole thing, of course, is balanced by way of the SDR — the IMF’s own unit of account which floats freely versus the combined value of what are considered to be the world’s most liquid currencies, the dollar, the euro, the yen and the pound.
Simple, right?
Here in any case are the mechanics as set out in the IMF’s own Financial Operations document:
Members draw on the IMF’s pool of members’ currencies and SDRs through a purchase-repurchase mechanism. The member purchases either SDRs or the currency of another member in exchange for an equivalent amount (in SDR terms) of its own currency; the borrowing member later reverses the transaction through a repurchase of its currency held by the IMF with SDRs or the currency of another member. The Fund only draws for its GRA financing operations on those members that are considered to be in a sufficiently strong balance of payments and reserve position. These members are included in the Financial Transactions Plan (FTP) which is reviewed by the Board on a quarterly basis (Section 2.2.1)They go on:
A member that provides SDRs or other member’s currency to the IMF as part of its quota subscription payment or whose currency is used in GRA lending operations receives a liquid claim on the IMF (reserve tranche position) that can be encashed on demand to obtain reserve assets to meet a balance of payments financing need.20 These claims earn interest (remuneration) based on the SDR interest rate and are considered by members as part of their international reserve assets (Figure 2.2). When IMF loans are repaid (repurchased) by the borrower with reserve assets, these funds are transferred to the creditor countries in exchange for their currencies, and their creditor position in the IMF (reserve tranche) is reduced accordingly.And here’s the key point:
The purchase-repurchase approach to IMF lending affects the composition of the IMF’s resources but not the overall size. An increase in loans outstanding reduces the IMF’s holdings of usable currencies and increases the IMF’s holdings of the currencies of countries that are borrowing from the IMF.Got it?
But here’s why the whole arrangement breaks down with Greece and why this particular crisis must involve a tri-partite rescue committee. Greece is a user not an issuer of one of the four core “usable currencies” that are supposed to offer debt relief to member states. Greece, as a consequence, has no currency of its own to pledge in exchange for more euro currency.
This is problematic for the IMF which was set up to dish out “usable currencies” against inferior currencies as debt relief. Greece poses an oxymoronic situation for the fund as a result. Greece can’t just pledge its own currency; it first needs to establish access to that currency from the ECB, which in turn needs authority from the European Commission to break rules about the terms with which it is allowed to dish out fresh liquidity. As we all know, dishing out liquidity against non-existent collateral and/or to an insolvent entity, is a considered a big no-no in Frankfurt.
The IMF’s role here, consequently, is about facilitating an internal transfer between eurozone IMF members vis-a-vis their outright obligations to the fund.
That’s why there’s a bit of a hierarchy in the repayment schedule. The IMF itself hasn’t lent anything. It has simply facilitated a conditional swap that now allows non-euro countries greater claims over the eurozone as a whole, and that can be through a reduction of eurozone claims over other non-euro members or greater claims of non-euro countries over the eurozone. This doesn’t count as euro monetisation for as long as it remains an offset comprising of potential claims. The arrangement is closed out, meanwhile, as soon as the euros are repurchased from non-euro members. Conditions are added to the arrangement to ensure the country in question can be sure to meet the demands of claimants in actual output terms once the arrangement is closed out.
In this case, the true defaulting determinant isn’t the IMF, it’s the ECB, because it has the power to reject potential euro claims if it believes they weren’t issued in good faith. Which is why it all comes down to the collateral that sits on the ECB’s books which supports the euro claims in the system.
Let’s get back to the IMF specifics:
The total of the IMF’s holdings of SDRs and usable currencies broadly determines the IMF’s overall (quota-based) lending capacity (liquidity). Although the purchase-repurchase mechanism is not technically or legally a loan, it is the functional equivalent of a loan. Financial assistance is typically made available to members under IMF lending arrangements that provide for the phased disbursement of financing consistent with relevant policies and depending on the needs of the member. The arrangement normally provides specific economic and financial policy conditions that must be met by the borrowing country before the next installment is released. As a result, these arrangements are similar to conditional lines of credit. The IMF levies a basic rate of interest (charges) on loans that is based on the SDR interest rate and imposes surcharges depending on the level and length of total credit outstanding on the part of the borrower (level and time based surcharges; see Chapter 5).What this amounts to from the perspective of the IMF borrower is a credit agreement, wherein another more creditworthy country underwrites the borrower’s claims on the international system whilst bolstering the domestic position by preventing too many claims from being redeemed against the borrower at the same time.
So why is the Greek crisis shaking the IMF to its core? And why is the IMF suddenly so eager to guarantee Greek debt relief?
Because it’s all fundamentally about the international system’s potential claims over the eurozone as a whole. The problem for the IMF is that there’s no easy way to unbundle these in the event the ECB decides that some euro claims are more equal than others. But it’s also the case that for as long as the eurosystem as a whole remains in credit vis-a-vis the rest of the system, there is no reason for it to chop one of its core organs off.
The eurosystem can afford the luxury of retaining Greece, especially in its currently saving obsessed mode. What’s more debt relief is an internal issue, not an international one, thus as far as the rest of the world is concerned there’s no-one out there that has to consume less because Europe as a whole insists on consuming more than it’s entitled to consume. Forcing Greece to repay principle at the cost of reduced consumption consequently serves nobody’s interests as a whole.
The only rationale in forcing Greece to consume less is if other eurozone members are prepared to consume more.
On which note, a relevant extract from Keynes about the pre-war generation’s tendency not to consume, by way of Brad Delong:
On the one hand, the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of society into accepting, a situation in which they could call their own very little of the cake that they and nature and the capitalists were cooperating to produce and on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.
The duty of “saving” became 9/10 of virtue, and the growth of the cake the object of true religion. There grew around the nonconsumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world has neglected the arts of production as well as those of enjoyment. and so the cake increased; but to what end was not clearly contemplated. Individuals be exhorted not so much to abstain as to defer, to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory–the virtue of the cake was that it was never to be consumed, neither by you, nor by your children after you.
Nessun commento:
Posta un commento