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business newsThe IMF Rumors: The Last Lifeguard or Yet Another Late, Muddled Scarecrow?
By
Peter Atwater
Jan 18, 2012 12:40 pm
Having exhausted all other options, world leaders must get this one right.
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Last year, as conditions worsened in the eurozone, the EU tried to assemble its own supraregional lifeguard to backstop troubled sovereigns and firewall the risk of contagion. Unfortunately, the end result, the European Financial Stability Facility, with its contingent support arrangements and clear sovereign ratings correlations, has been revealed to be more scarecrow than lifeguard, with its less than robust synthetic stuffing now clearly exposed by the markets and the rating agencies alike.
With the crows now threatening to clean out the cornfield, the question for Europe has once again returned to, “Who will save the lifeguards?”
To believe the media reports this morning, the lifeguard being called up for duty today is the International Monetary Fund, and whether the result is “up to” or “in addition to,” the figure of 1 trillion euros is being freely floated before the markets. And I saw one report last night that in an attempt to “shock and awe” the markets, we could also see up to 10 trillion euros in additional from the European Central Bank.
While I don’t have any doubt that some combination of both incremental liquidity from the ECB and incremental credit support from the IMF will see the light of day, I am afraid that short of discovering intergalactic support, we are rapidly reaching the point that we have exhausted both the financial and, more importantly, political and social limits for additional national, regional, and supranational assistance.
To me, the greatest risk policymakers face today is in suggesting oversized potential support from the IMF in the first place. And my reasons are twofold.
First, without clear national political solidarity in place, I am afraid that we risk the same potential for an “open and prolonged dispute” among world leaders that S&P referred to as its fifth rationale for downgrading European nations last week. Parents fighting in front of children is not what these markets need. If IMF support is to have any value, it must be delivered with unequivocal and unwavering unanimity. Given what has occurred to date, for the markets, “how” is as important as, if not more important than, “what.”
Second, and more importantly, by engaging the IMF, whether for an additional 500 billion euros, trillion, or even 2 trillion, world leaders will have called upon the last lifeguard. There is neither a second chance nor a second choice. The IMF is it.
I hope that world leaders truly understand that, and that the rumors today regarding the IMF are not just some kind of reactive attempt to mitigate the impact of the sovereign ratings downgrades from last week and the EFSF’s move to AA+ this week.
The IMF has one chance, and for everyone’s sake, what is served up cannot be another late, muddled scarecrow.
Position in SH and JPM
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