IMF Author of 100 Papers Warns a Third of the World Will Be in Recession

Sofia born IMF Managing Director Kristalina Georgieva said 2023 will be "tougher" than last year with slowdown in the US, EU and China expected. Inflation, interest rates and Covid in China are all playing a part. She has written more than 100 academic papers and was former CEO of the World Bank from 2017 to 2019.

Isabel Schnabel to run ECB Market Operations

Germany's Isabel Schnabel has been appointed to the Board of the ECB overseeing market operations.

This is part of the reshuffle implemented by new ECB President Christine Lagarde (previously Managing Director of the IMF, the highest possible position in the IMF, second only to the First Deputy Managing Director).

Lagarde succeeded Mario Draghi (formerly Governor of Banca d'Italia) on 1 November 2019.

Arg Peso Crisis As Pres Macri Invokes Austerity as Leliq Rate Rises to 60%, Brazil Struggling

Argentina has announced sweeping reforms to kill the budget deficit in the wake of the peso crisis and to create conditions to enable a $50bn funding opportunity from the IMF. 2018 has seen the peso slide to 50% of its value against the dollar. The raising of USD interest rates has made it harder for certain countries, Argentina included, to pay its dollar-denominated debts. Argentina's central bank  (BCRA - Banco Central de la Republica Argentina) also raised its benchmark Leliq rate to 60% at the end of August to stablise the currency. With the Turkish lira down 44% against the dollar talk of an emerging market contagion is worrying investors. The Brazilian real is the third-worst performing EM currency down 20% against the dollar.

Yuan Achieves Reserve Currency Status

The IMF has decided that renminbi qualifies for the SDR basket of currencies. The yuan joins the euro, dollar, pound and yen. London has emerged as the European hub for renminbi trading, with renminbi denominated sovereign bonds being sold in London (UK sovereign bonds in renminbi, used to finance Britain's reserves, lead managed by Bank of China, HSBC and Standard Chartered), with Hungary keen to follow suit. The yuan is now the fifth most used currency in international payments according to SWIFT, the first being the USD and the second being the Euro.

How 3Rs Impact the Global Currency Markets

Statutory versus Voluntary Reserve Ratios

Some countries have Required Reserve Ratios (RRRs) that are statutorily enforced whilst other countries have voluntary reserve ratios.

Required reserves apply to commercial banks and usually take the form of cash or deposits made with a central bank. If a bank holds more than the required reserve, it is said to hold excess reserves.

Variation by Country

The Bank of England used to have a reserve ratio but abandoned it in the early 1980s. Canada also has no reserve ratio requirement. The US Federal Reserve has a reserve ratio that operates in tranches.

Relationship between Reserve Ratio and Inflation

The greater the reserve ratio (and correspondingly the greater the reserves held at the central bank) the less money there is for individual banks to loan, leading to lower money creation and potentially higher purchasing power of the money in circulation.

All things being equal, there is an inverse relationship between the Reserve Ratio and Inflation.

Bigger RR -> potentially lower inflation
Lower RR -> potentially higher inflation

Reserve Ratios for Inflation Control

The People's Bank of China (PBC or PBOC) alters the reserve ratio in order to control inflation. Standard Chartered anticipates a RRR cut due to "easing headline inflation" and recommends USDCNH puts. The Reserve Bank of India also controls the Cash Reserve Ratio (CRR) to control the money supply and therefore inflation.

Central Bank Slang: Near Money or Quasi Money

Reading central banking websites you will come across many unusual economic terms, such as near money or quasi-money - which refers to stuff that's not cash, but very close to cash,

They mean one and the same thing, namely highly liquid assets that can be easily converted into cash.

The IMF and World Bank do surveys of money and quasi-money in the world financial system.

Examples of quasi money would be savings accounts, money market accounts, bonds near their redemption date, government T-bills, foreign currencies (especially widely traded ones like USD, JPY and EUR).

Currency War and the Big Five Reservists

By buying dollars and other currencies, China holds down the value of the yuan and makes its exports more competitive. IMF chief Dominique Strauss-Kahn does not like this and wants China to let the yuan appreciate, but China does not want to move too fast and hurt export businesses. China saves and exports, US spends and imports. This results in global imbalances.
Yuan in Chinese means round object or round coin. Difference between yuan and renminbi is like difference between Pounds and Sterling.
Last month South Korea's foreign reserves hit a record $290bn USD, the world's fifth. Who are the biggest? China, Japan, Russia and Taiwan. 80% of the world's largest FX reserve countries are in Asia. SK is one of the countries recovering fastest from the crisis. BoK estimates this year's growth to be 5.9%.

Trapped in the Eurozone: Why Greece MUST reduce Fiscal Deficit

The IMF has asked Greece to focus on reducing its fiscal deficit. It can't ask it to change interest rates or exchange rates since Greece is in the Eurozone. There have been other situations when borrowers only had fiscal policy to rely on e.g. $30bn rescue of Brazil in 2002 (the indexing of Brazil's debt to USD or STIRs precluded the use of monetary policy). The bailout of Brazil was also in American interests: General Motors had invested a large amount in Brazil, Citigroup had $9.7bn in Brazilian loans.

G20 Protests in London

The G20 summit (consisting in fact of 22 nations) was held at the ExCel centre in London's Docklands (which has parking for 4000 cars). The protests cost £7.5m to police, with an estimated 5000 protestors gathering outside the Bank of England and police erecting a "ring of steel" around the ExCel centre to prevent protestors entering the complex.

Sarkozy and Merkel (representing France and Germany) objected to the large fiscal stimuli propounded at the G20, stressing "red lines" needed to be drawn on remuneration (i.e. bankers' bonuses), banking transparency, hedge fund regulation and tax havens.

Russian president Dmitry Medvedev, who succeeded Vladimir Putin, and Argentinian President Cristina Fernandez de Kirchner, asked for more voting power for emerging economies. China floated the idea of a new global reserve currency based on IMF special drawing rights. Brazil's President Lula da Silva stated rich nations should accept responsibility for bringing about the crisis.

The summit lasted 7 hours, versus the 22-day meeting in 1944 at Bretton Woods, out of which the IMF and the current global financial system was born. It begins with a working breakfast for leaders, finance ministers and central bankers as well as a working lunch. Japan's PM, Taro Aso at the G20, was later replaced in September 2009, by Yukio Hatoyama.

GazProm saga continues...IMF extends loans...Rouble Devaluation Results

Gazprom accuses Ukraine of stealing gas.

In the supply dispute of 2006 there were similar claims.

25% of EU gas consumption (it is estimated) comes from Russia. 80% of the 25% comes from Ukraine, the rest through Belarus (landlocked country south of Lithuania) and Poland.

Belarus also landed a $2.5bn loan from the IMF following a sharp decline in its international reserves, sparked by falling demand for exports and lack of external financing (a direct result of the global financial turmoil). The Central Bank of Belarus allowed the Belarusian rouble to tumble thus increasing competitiveness of exports and stemming the decline in reserves, something the IMF insisted on as a precondition for the loan. Earlier the Russian government had agreed to grant Belarus a $2bn stabilization loan.

Public Sector Borrowing and its impact on FX rates and CDS prices

GBPEUR

In the FX markets, December saw the GBP trading at parity with the EUR, its worst performance yet this year but a price target predicted by analysts in a self-fulfilling prophecy. Alastair Darling's remarks earlier in the year accelerate the sell-off.

GBPUSD

In July sterling was trading at $2, then dwindled to $1.50. Why? Partly Britain's public finances - the Treasury's pre-Budget report forecast UK public borrowing will rise to £78bn for 2008-09 and then to £118bn in 2009-10 (8% of GDP). These figures though are not consistent with data from the ONS.

Analysts point out a high level of government borrowing tends to spell trouble for sterling. A post-war high was reached in 1974-75 (6.9% of GDP), which led to Britain asking the IMF for emergency funding in 1976. The Treasury's counter is that it believes the recession will be shallow and brief. The UK has been running a deficit since 2002/2003.

The CDS market for sovereign debt has indicated the cost of insuring default by the Treasury on its gilts over 5 years has reached 100bps over Libor (7.2 bps a year ago). Analysts CEBR announced (speaking about the recession across Europe): "The United Kingdom economy is likely to be the hardest hit by the credit crunch due to its reliance on consumer borrowing and the financial sector for growth".

But who is trading in the sovereign CDS market and why? BoA research provides some answers.

What is the precise role of the IMF in the credit crisis? What's the precise role of the World Bank?

Dominique Strauss-Kahn, head of the IMF, has said the IMF was willing to lend to countries in dire need of capital.

To understand what role the IMF should play in this saga, we must know the history of the IMF. The IMF and World Bank were both established in July 1944 at a conference in Bretton Woods, NH during the closing phases of WW2. The main debate was between the US and British delegation, debate revolving around liberal and conservative visions of what a global economic institution such as the IMF should provide. In a nutshell, should the IMF operate as a fund (the liberal view) or more like a bank (the conservative view)?

Keynes, who led the British delegation, imagined the IMF as a co-operative fund which member states should draw upon during periodic crises, to maintain economic activity and employment. The US view was an institution like a bank to ensure borrowing states could pay their debts, less concerned about preventing recession and unemployment. The tougher, US conservative view prevailed.

Since WW2, IMF has loaned funds to governments facing economic crises. These loans, which have engendered controversy, have been termed structural adjustment loans as their purpose is to help borrowing governments adjust the structure of economic activity.

The World Bank has pledged aid to developing countries over the weekend to help stem the crisis. WB President Robert Zoellick declared the financial crisis a "manmade catastrophe" and added that despite the crisis "aid flows must be maintained".