You know the game may be up when even the IMF starts flirting with the idea of you being thrown under the proverbial bus
Yet that’s one of the harsh conclusions to be found in the global lender’s devastating new report on the eurozone.
Its updated tome: ‘Article IV Consultation Report’ pulls no punches when it comes to policy prescriptions. In short, the eurozone faces the choice of either full steam ahead towards banking and (eventual) fiscal union, accompanied by a Europe-wide deposit protection scheme, or its break-up under a worst case scenario.
Arguing the euro area crisis has reached a new and critical stage, it’s difficult to disagree. Indeed, barely 48 hours after the report came out the regional administration in Valencia confirmed it’s preparing to tap Spain’s new €18bn emergency-loan fund (for the nation’s regions), for an undisclosed amount.
Unsurprisingly, Spanish bonds slumped, sending the 10-year yield up more than 25bps to 7.23 percent on Friday, while Madrid’s IBEX share index fell 5.8 percent – its biggest one day fall in two years. And this despite eurozone finance ministers agreeing on Friday to lend up to €100bn to Madrid so it can recapitalise Spain’s banking sector. Only last month, an independent audit from consultancy firms Oliver Wyman and Roland Berger, said Spain’s banks needed a total cash infusion of €62bn.
Against this backdrop the IMF is forecasting euro area GDP growth to be -0.3 percent this year (after 1.5 percent last year), rising to 0.7 percent in 2013. Headline inflation is projected to fall ‘well below’ two percent by 2013 and to remain there through 2014. “There are severe downside risks to the outlook, with possible substantial regional and global implications,” it notes.
Yet the global lender’s swipe at European politicians in general – and the ECB in particular – for their lack of leadership, has a certain ring of hubris to it.
This, after all, is the same IMF that already stands accused of doing too little, too late itself – former IMF senior economist and 20-year veteran, Peter Doyle, putting it succinctly in a pithy June 18 resignation letter only made public last week.
Doyle, who was a division chief for Sweden, Denmark and Israel in the organisation’s European department, accused the IMF of suppressing information on the difficulties in dealing with the global financial meltdown and eurozone crisis.
He added that the failure of the lender to issue timely warnings for both the 2007-2009 global financial crisis and subsequent Eurozone crisis, were a failing in the first order and are, if anything, becoming more deeply entrenched.
“The consequences include suffering (and risk of worse to come) for many including Greece, that the second global reserve currency is on the brink, and that the fund for the past two years has been playing catch-up and reactive roles in the last-ditch efforts to save it.”
Turning his guns on the IMF’s leadership, he accused it of being “tainted” by a selection process which always ensures a European is at the helm.
“Even the current incumbent is tainted, as neither her gender, integrity, nor élan can make up for the fundamental illegitimacy of the selection process,” he opined.
While the IMF has previously acknowledged some of Doyle’s accusations his missive will serve as a timely reminder that it isn’t only Europe’s leadership that appears to be rudderless. Which is precisely the wrong kind of message to be sending out to already fragile markets.