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In converation with the IMF General Counsel

February 18, 2012 Leave a comment Go to comments

This is based on my understanding after a candid, off-the-record conversation with Sean Hagan, General Counsel of the International Monetary Fund (IMF), wherein he shared the latest economic challenges and the road ahead for IMF.

The current economic turmoil is unprecedented with the “crisis in emerging economies” shifting to a “crisis in the advanced economies”. Today’s world is upside down. And we are at a time where IMF is seeking finances on a large scale from emerging economies (you heard it right!) to create a firewall to save these advanced economies.

And a global problem such as this needs a global solution. In a typical situation, when capital markets dry down, the economy naturally reacts with a currency depreciation but in the current European crisis (esp. Greece as a case in point), the challenge for these local economies is that they need to stay in the euro zone so there is no chance of currency depreciation… however, there is an alternative of private debt restructuring and internal devaluation i.e., lowering domestic prices, which could result in more pain for the local economy.

IMF plays a catalytic role to get foreign creditors to refinance loans without changing NPV of their claims. This has previously worked in Brazil and Mexico but in this case, the debt level is so “unsustainable”. In this case, IMF is precluded from providing any financing unless debt becomes sustainable so the country seeking IMF funding has to go through a “free default restructuring” to avoid defaults. In this case, IMF ensures that the borrowing government and its creditors follow the same macro-economic assumptions as prescribed by IMF. This is very controversial in that IMF has to tailor these assumptions on a case-by-case basis and not everyone would be in agreement with these assumptions.

At the same time, IMF is also advocating preventive strategies whereby they support through an LC (Line of Credit) without having to use these funds. This is where IMF is seeking augmentation of EFSF by $500 billion as a demonstration effort.

Sean Hagan suggested 4 key actions that EU should pursue:
1. Create a single euro supervisory authority to license and authorize cross-border banks
2. Create a resolution authority to wind down insolvent banks
3. Set up a single deposit insurance fund
4. Provide immediate liquidity from ECB

The main message was that markets need to regain confidence in the global economy. And when Sean Hagan was asked this very natural question that whether IMF should consider reverting back to the GOLD standard to build this confidence, Sean feigned lack of a thought to respond to this.

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  1. March 17, 2012 at 8:53 am

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