The IMF and the crucifixion of the Greeks

The tenth anniversary of the Troika’s intervention in Greece passed barely noticed amidst the COVID-19 tragedy. It was May 2010 when the Greek program was agreed—initially for EUR110bn, including financing from the IMF and EU. The occasion ought not pass without comment, however. In fact, today’s Coronavirus challenge demands an honest reflection upon failings past. The international monetary system is creaking under the virus, and a thoughtful response by the international community is needed to avoid unnecessary damage. We cannot afford politically-influenced rather than analytically-driven responses. To this end, casting a critical eye on the work of the IMF is more important than ever before. Continue reading “The IMF and the crucifixion of the Greeks”

Monetary madness in the Pampas

Argentina’s reliance on persistent monetary financing of the fiscal deficit continues despite obvious deleterious consequences, reminiscent of the Einstein’s notion that “the definition of insanity is doing the same thing over and over and expecting different results.”

Reflecting upon the plan initiated by the incoming Macri administration in 2015, former BCRA Governor Federico Sturzenegger recently explained how the “speed of disinflation … was constrained by the fact that it was agreed that part of the fiscal deficit would be monetized in order to diminish the need of debt financing during the transition to a healthier fiscal result…” And this could not be sterilized owing to the “weakness” of the BCRA balance sheet. Continue reading “Monetary madness in the Pampas”

The Myth of IMF Macroeconomics

“… the Fund obviously has program expertise, expertise of dealing with crises, an expertise in seeing how the things add up and fit together… I do think that program design overall has benefited significantly from us working as a Troika and I know this view also shared by our two partners.”

Poul Thomsen, Greece Mission Chief, International Monetary Fund, April, 2012.

“…in retrospect, it was a very good thing that the IMF came, because they had the technology, they brought money, but first of all they had the technology of dealing with this kind of situation that the Europeans didn’t have…”

Jean Pisani-Ferry, Bruegel, 2012.

How many lies and how much gibberish are we expected to tolerate?

Announcing earlier this year a new “integrated policy framework” approach to emerging markets, International Monetary Fund (IMF) Managing Director Kristalina Georgieva suggested in a Financial Times Op-ed that the IMF’s current macroeconomic framework is inadequate as it is “grounded in more conventional economic thinking.” Thus, the new framework would unshackle the understanding of macroeconomic policy for EMs unlike anything employed before.

However, there is a problem. Georgieva’s understanding of IMF macroeconomics is nonsense—though she cannot be expected to know this. In fact, the IMF’s financial programming framework for thinking about macroeconomic challenges facing members is anything but “traditional.” Continue reading “The Myth of IMF Macroeconomics”

Three Unique Roles of the Bundesbank within the Eurosystem

All national central banks (NCBs) within the Eurosystem are equal. But one is substantially more equal than the rest.

Indeed, Deutsche Bundesbank (Buba) plays at least three unique roles in the structure and evolution of the Eurosystem: (i) in the creation of currency in circulation—that is, physical euro cash-in-hand; (ii) as reservoir for surplus claims of non-euroarea reserve managers—that is, as a substitute for Bunds when global safe assets run short; and (iii) as final destination, particularly in periods of stress, for excess liquidity created across the euroarea. Continue reading “Three Unique Roles of the Bundesbank within the Eurosystem”

Banca d’Italia balance sheet: April 2020

Not quite the fireworks of March, the Bank of Italy balance sheet in April nevertheless provides a puzzle for understanding the pace of ECB asset purchases and the support for BTPs throughout the month.

The table below updates a decomposition on the change in TARGET2 balance used last month. The only difference being the change in currency in circulation has been improved to fully reflect Italy’s share in total flows for the month. The March numbers have been adjusted also. Continue reading “Banca d’Italia balance sheet: April 2020”

The German Constitutional Court ruling, the ECB, and the offside rule

What a mess.

Today’s ruling by the German Constitutional Court (GCC), or Bundesverfassungsgersicht—even the name sits like some poison on the tongue—resembles a fishing exhibition to find some technicality to trip up the ECB’s public sector purchase program (PSPP).

Indeed, it feels like a marginal offside decision taken by the recently instituted Video Assistant Referee (VAR) in Association Football (aka Soccer). Though part of the striker’s shoulder had indeed drifted beyond the defender, it was a perfectly timed and bended run. The striker’s feet were clearly onside. Is it the offside rule that needs changing? Or should VAR be disbanded?

To wit, GCC couldn’t quite find anything wrong on ECB monetary financing or decisions potentially encroaching on the budgetary responsibility of Bundestag—crucial as these are. They instead picked holes in the “principle of proportionality”—the idea that EU institutions should only take necessary action within their remit, and not exceed their respective powers. More on this shortly. Continue reading “The German Constitutional Court ruling, the ECB, and the offside rule”

COVID-19 and the poverty of IMF macroeconomics

“Twenty years of schooling and they put you on the dayshift.” Subterranean Homesick Blues, Bob Dylan, 1965

This month revealed the official macroeconomic policy response, channelled through the International Monetary Fund (IMF), of the impact of COVID-19 in terms of global macroeconomic prospects, financial sector stability, and fiscal tendencies. Respectively, the Fund’s flagship publications were thus laminated for public consumption as the World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Fiscal Monitor (FM).

Through these vehicles, official country and region responses—ad hoc and uncoordinated—are somehow brought into harmony. And these forecasts are lapped up by the financial press. The Financial Times (FT) being one, where Martin Wolf reels off the IMF’s forecasts as sacrosanct and serious.

However, upon closer inspection, the IMF offers up only gibberish for public consumption. User beware. Continue reading “COVID-19 and the poverty of IMF macroeconomics”

Banca d’Italia balance sheet: March 2020

The publication of the Bank of Italy (BdI) balance sheet for March provides the first glimpse of how the Italian economy is navigating the COVID-19 Crisis through the lens of the official sector. However, there are several moving parts—APP and PEPP purchases, VLTRO access, and USD swap facilities—which makes interpreting the balance sheet trickier than usual. Still, March 2020 will go down as one of the most remarkable in the history of the euroarea as witnessed through BdI balance sheet changes. Continue reading “Banca d’Italia balance sheet: March 2020”

The fiscal response to COVID-19: The time to act is now

It’s becoming increasingly clear that the fiscal response to COVID-19 in Europe and the United States will fall massively short. Policymakers are, as yet, not up to the task.

The “principle of effective demand,” the cornerstone of immediate post-war macroeconomics, requires that the government spends when the private sector might otherwise refuse—preventing a depression in spending and unemployment that would otherwise emerge. In so doing, the government ensures that employment and income across the community remains higher than individual spending choices alone would deliver. Government spending reasonably offsets private prudence. Continue reading “The fiscal response to COVID-19: The time to act is now”

Interpreting the ECB’s EUR120 billion APP envelope

Amongst the policy innovations introduced last week, the ECB’s new EUR120 billion Asset Purchase Program (APP) envelope was most interesting. The policy statement described: “a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.”
Meanwhile, when asked about the capital key, Lagarde confirmed that: “we will make use of all the flexibilities that are embedded in the framework of the asset purchase programme, and that, second, at the end of the asset purchase programme we will converge towards the capital keys.”

Continue reading “Interpreting the ECB’s EUR120 billion APP envelope”