Will The IMF Save The World?

By Simon Johnson

The finance ministers and central bank governors of the world gathered this weekend in Washington for the annual meeting of countries that are shareholders in the International Monetary Fund.  As financial turmoil continues unabated around the world and with the IMF’s newly lowered growth forecasts to concentrate the mind, perhaps this is a good time for the Fund – or someone – to save the world.

There are three problems with this way of thinking.  The world does not really need saving, at least in a short-term macroeconomic sense.  If the problems do escalate, the IMF does not have enough money to make a difference.  And the big dangers are primarily European — the European Union and key eurozone members have to work out some difficult political issues and their delays are hurting the global economy.  But, as this weekend’s discussions illustrate, there is very little that anyone can do to push them in the right direction.

The world’s economy is slowing down, without a doubt.  The latest quantification was provided Tuesday of last week in the IMF’s World Economic Outlook, which is perhaps the most comprehensive forecast of global growth and its main components (see Table 1.1).  (Disclosure: I helped produce and present this view was I was chief economist at the IMF, but I left that position in summer 2008.)

The IMF has reduced its forecasts for both 2011 and 2012, but the latter is a more notable change (we can already see the gloomy 2011 picture all around us).  Compared with its view in June, the IMF expects global growth in 2012 to be 0.5 percentage points lower (than previously expected).  Part of the pessimism is for the United States – total GDP growth in 2012 is only expected to be 1.8 percent; anemic at best.  (Remember that our population typically grows at just under 1 percent per annum, so this level of growth would barely put a dent in unemployment.)

But the really stark message is for Europe.  According to the IMF, the eurozone as a whole will expand at only 1.1 percent in 2012 and hopes that troubled countries will grow out their debts seem increasingly like a stretch.  Just to take one example, Italy’s forecast for 2012 has been marked down to just 0.3 percent – and even in the best case scenario, credit availability there seems likely to get tighter over the coming months, which may further slow growth.

A potential recession in the eurozone and a weak recovery in the United States does not make for a world crisis.  Beware people who demand that the world be saved – usually they are making the case for a bailout of some kind.

Don’t get me wrong — a serious crisis could still develop.  There are plenty of warning signs regarding the situation in Greece and its potentially broader impact.  According to the IMF’s Fiscal Monitor, also released last week (see p.79) Greece’s general gross government debt is now forecast to rise to nearly 190 percent of GDP in 2012, before falling back towards 160 percent by the end of 2016.  At this point, Greece needs a global growth miracle – and there is no sign of this on the horizon.

If Greece pays less on its debt than currently expected, this will push down the market value of other sovereign debts in Europe.  As The Economist argued recently, the government debt of some large eurozone countries has unambiguously moved from the category of “risk-free” to “risky” in the minds of investors.

The numbers involved are big.  Italy, for example, had public debt over 1.84 trillion euros at the end of 2010 (using the latest available Eurostat data, “general government gross debt,” annual series).  The GDP of Germany is around 2.5 trillion euros and there is no way that German taxpayers would be comfortable in any way guaranteeing a substantial part of Italy’s debt.  The entire eurozone has a GDP of around 9.5 trillion euros but no one is volunteering to take on debt issued by someone else’s government (again, I use end of 2010 data from Eurostat).

To put the scale further in perspective, compare them with the IMF’s ability to lend to countries in trouble.  The technical term is the fund’s “one year forward commitment capacity” which for “Q3 to date” is 246.0 billion SDRs (September 15 update; SDRs are “Special Drawing Rights”, which exist only at the IMF.)  On September 20, 1 SDR was worth 1.57154 US dollars, so the IMF could lend no more than 386 billion dollars — as one euro is worth about 1.37 US dollars this week, this is about 280 billion euros. 

Or you could think of it as 15 percent of Italy’s outstanding debt.  This is not the only way – and not a precise way – to think about what the IMF could bring to the table, financially speaking.  But it makes the right point; the European issue is way above the IMF’s pay grade. 

Germany, France, Italy and their colleagues need to sort out how to bring the situation under control – to decide who will definitely pay all their debts and who needs some kind of restructuring.  About a quarter of the world’s economy therefore remains in limbo, beset by repeated waves of uncertainty.  And financial market fear can spread to other places, including the United States.

Complaints may be heard this weekend, but there is no one at the IMF meetings who can persuade the key European players to move faster in their decision-making.  The politicians will take their own time – prodded periodically, no doubt, by the financial markets. 

Do not expect a fast resolution or, therefore, a quick turnaround in the global economy.

An earlier version of this column appeared on the NYT.com Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

35 thoughts on “Will The IMF Save The World?

  1. You issue ’16 bonds, and what do you get?
    A no-confidence vote and deeper in debt
    Athena don’t you call them ’cause we can’t pay
    We owe the Aegean
    to Société

  2. I listened to Christine LaGarde this weekend….all I discerned was blah, blah, blah, blah, blah…blah.

    $1.5 QUADRILLION CDS exposures, how can this be saved?

  3. To save time, I’m going to simply recycle my comment for February 2010 – it seems to still work well enough…

    The weaker Euro is being generated by perceptions of Default Risk, not by monetary expansion. There’s a big difference. That difference is manifested in the 4%-5% rate premium that the CDS markets suggest is being charged on Greek debt, which is of course killing growth. (and that 4-5% may be an understatement since much of it could be owned by greek banks, who are facing asymmetric risks – if greek govt defaults, they’re gone anyway)

    The DEFAULT risk represents a rate premium that Greece is paying to keep its real wages high, which is killing Greek growth and Greek demand for just about everything (not to mention destabilizing financial markets).

    Germany is, in point of fact, using a weak Greece to pull the Euro down to boost its own exports, which is utterly cowardly. Mr. Trichet of the ECB doesn’t wish to actually print some Euros, but he’s OK sacrificing Greece to achieve his objective.

    Meanwhile, Bernanke’s Fed doesn’t dare respond by easing dollars, because he cares more about floating the next US Treasury auction (this Wednesday) than preventing catastrophe. Indeed, the flight-to-dollar helps him sell his bonds.

    Remember, this is the first auction after the Fed ended its emergency liquidity programs (Feb 1), and the MBS program ends next month. Bernanke is more concerned about proving to everyone how wise he is – that the Fed can follow its exit plans as announced. So the dollar-carry-trade unwind is just perfect timing for him. So what if exports stew…

    Sweet vengeance against all those dollar short selling gold-loving nutcases! Besides, he sees his hands as tied by all the short-maturity debt incurred by Dubya, and needs to roll it over before he can inflate (or risk a real dollar flight).

    February 7, 2010 at 10:35 pm

    OH, I forgot to mention the really funny part… Greece kicks off a flight FROM the Euro. Some portion of traders moving out of Euro go into dollars, which pushes dollars up. Suddenly, the rest of the world (which is shorting the dollar by borrowing in dollars to buy foreign securities in places like Brazil or Australia) realize they are leveraged on a trade that is moving against them. They rush for the exits as they risk margin calls and liquidity challenges to their carry trades.

    What began as a flight from Greece becomes a rush to the dollar, even though Trichet accurately points out the dollar is not in great shape either.


    February 7, 2010 at 10:44 pm

  4. “I conclude, after carefully thinking,
    That the options for action are shrinking;
    If we take evr’y pail out
    We still cannot bail out
    The deadbeats whose dinghies are sinking.”

  5. “Beware people who demand that the world be saved – usually they are making the case for a bailout of some kind.” –SJ

    “The Wall Street Journal published a report on the breakdown of the EMS. I liked the way it started out:

    When the history of the rise and fall of postwar Western Europe is someday written, it will come in three volumes. Title them “Hard Facts,” “Convenient Fictions” and – the volume still being written – “Fraud.”


  6. What exactly is the IMF? Where does it’s funding originate? What are it’s charters and mandates? Who exactly manages IMF funds. What are the IMF’s legal structures? To whom is the IMF accountable? What are the enforcement, regulatory, and accounting policies and doctrines administering IMF practices. The same questions can and should be applied to the socalled World Bank, and the “Creature from Jekyl Island”, and all the worlds Central Banks.

    The entire socalled global financial system is a cancer metastasizing the life blood of the entire worlds poor and middleclass populations and the global economy, to feed the superrich, – the predatorclass.

    Burn it all down! Reset!

  7. I agree with you Simon there are plenty of challenges for the IMF going forwards. This comes back to the issue of the change in its role from helping with balance of payments problems to being a lender of last resort to governments who are in trouble with their fiscal position.

    However another player is in distress right now and it is the European Central Bank. I hear calls for it to help Greece and for some sort of financial alchemy where it loans to the EFSF (yes loans to an organisation based on loans…). All this ignores the distress its balance sheet is already in which as I have pointed out today would be exposed by the planned Greek default!


    Yes they would depth-charge their own central bank!

  8. There is on “savior of the world” who has yet to be called upon. That is because, were “he” to be asked
    to help, a gigantic shift in global power would be the result, and a blow would be dealt to American
    hegemony. Consider the 320 million ounces of gold sitting on the balance sheets of the Eurozone central
    banks. At a high enough free market price, all those debts would be fully backed by an asset which is no
    ones liability. Consider the central banks of China, India, the gulf arabs, and the physical gold held by
    citizens. If this “free market price” were allowed to float, independent of the manipulations of governments,
    with the mechanism of futures markets as the lever of control, against each currency, then the old international stabilizing mechanism of the gold standard (but without the FIXED price) could once again
    perform its function in international trade settlement.

  9. The centuries old incremental push by the global banking cartel to establish a worldwide totalitarian feudal corporate fascist state has hit a bump in the road. Beware the puppet politicians and their smoke and mirrors game. There is no way that the banksters will allow any significant haircuts to their positions. The end result will be more debt enslavement of sovereign nations and their people and selective asset stripping, whether by economic stealth (Ireland, Greece) or by military involvement (Libya, Iraq, Afghanistan).

  10. The interdependence engendered by CDS’ will put stress on all financial entities. The strain will manifest as riots, bombings, and asset grabs by creditor nations on the assets of debtor nations (Germany will get a pound of Greek flesh, or at least attempt to get it). Bailouts will bring inflationary pressure, and the band will play on (bonuses will be awarded to those luminaries in charge).

    This is not a recoverable condition. We are metastable, waiting for a little push over the precipice. The IMF will most emphatically NOT save the world. Problems that are too big to fix are what we have. Gold and silver will, I expect, move back up dramatically. It may play out slowly, but I expect there will be a shock at some point this fall that provides the downward impetus. I still wish I had bought silver at $20/ounce…

  11. The problem in economics today is the widespread false belief a Monetarily Sovereign government (i.e. the U.S., Canada, China) is the same as a monetarily non-sovereign entity (i.e. the PIIGS, Illinois, Chicago), and so should reduce deficit spending.

    Those who do not understand Monetary Sovereignty do not understand economics.

    Rodger Malcolm Mitchell

  12. Save the world?

    Well, all we continuously do is save the banks. Let us rather get rid of these corrupt banksters and change banking back to what it should do, namely ensure a smooth payment system and evaluate credit with diligence and avoid leverage and speculation. And last but not least, put those looters in their place, namely jail.

  13. @Annie

    Yes, the whole house of CDS cards is apt to tumble. It would be nice if there was a central registry to track the interdependence, as that would allow interbank lending in times — otherwise bank A won’t lend to bank B because bank A doesn’t know what bank B’s exposure is. Recall how all the lending dried up in ’08 because of this ignorance.

    But requiring documentation of these shadowy transactions would crimp the bankster’s inimitable style (it would reduce the volume), sort of like all that messy mortgage documentation paperwork that so many banks found they could eliminate with their robosigners.

    And yet the Reagan devotees continues to argue for less and less regulation. I only hope the GOP is in power for a little while when the system passes the point at which it might be saved with another bailout. It will be interesting to watch how the talking heads try to pin the tail of the collapse on the Democrat Donkey.

    However, with a gutted educational system, the average Joe D Plumber won’t be able to identify (correctly) the causal relationship. I expect that we’ll get soundbites reducing the complex cascade instead to simple appeals to the base emotions of hatred, lust, greed, xenophobia, and fear of word problems.

  14. @Jeff – I will accept your observation about Joe Plumber only if you know a *Joe* :-)

    The *shadowy transactions* are DELUSIONAL – you guys set up a matrix-movie hologram, or something equally NOT REAL – pop in the Star Trek episode where Picard gave Moriarty a world to live in – CONTAINED away from doing harm to REALITY. I’m all for being as merciful and putting you all in an *institution* where you can keep playing the math games…

    The REAL world will survive by using another *currency* – separating itself from *inwestor* banking….you know, back to *commercial* banking where the trust is put in a person to document that 1000 head of cattle really got loaded on the train – and here’s the *paper* to honor the value of that transaction and commodity and HONEST WORK.

    I don’t believe for a second that USA political screechers are going to get around We the People to stand up a *Stalin* or a *Hitler* in the wake of this current economic meltdown. PSYCHObabble works both ways – Joe Plumber may be stupid, but he’s really not into human sacrifice anymore, either, to appease an *ism* god…

    I’m all for watching them throw each other under the bus until 2012…enough time to establish the real currency – FIAT with a life-maintenance purpose – while they hate each other 24/7 on all media channels…

    Thanks, Carla, for the link. I think we can see that the educational system that was most gutted was not the Plumber’s union, but the Accountant’s union….

    You think any GenXers read it…? Based on comments being whipped out at this latest propaganda fest…?

  15. The IMF ruined more nations than WWII. And they did it for profit of the parasites that ruined the biggest economies on the plaent.

    So will they save the wrold?

    They will make huge profits, that much is assured. And they will save the profits of the parasites. The IMF acting for the good of the people will happen when hell freezes over. As to saving the world however the other 99.99% of the people would have to get something out of it all and that will happen ten years after the first incident.

  16. Mr, Alessio Rastani, a trader appearing on BBC MI-5, recently, said the only people that are going to be OK are the GOLD SACS GANG, and others astute at playing in a downward market.

    This gentlemen goes to sleep dreaming of another recession, which makes him a vulture in nice clothing. :)

    No offense to any vulture reading this blog.

    According to Mr. Rastani, the boys in the GS GANG, are more potent than the combined world governments, which, if true, is perfect proof of how deeply
    corrupted everything is.

    And who here will disagree with his pronouncement: we are dealing with a cancer, and its’ getting bigger, and will soon kill the patient?

    And the countless millions who “lose their entire life savings”, are going to be pissed, and that includes the police, and all the other guardians of the state.


    Here, research findings relating to the psychopathy of “traders”….hehehe


  17. @ Woop

    Sorry for the repeat, was in the process of leaving the comment (trying to figure out how to imbed for some time–still didn’t go right). This guy really makes the case for those that believe traders tend to be sociopathic. But hard to argue with his gloomy assessment and forecast.

  18. http://www.channel4.com/news/shares-rise-as-euro-rescue-deal-emerges?om_u=NsgcFQ&om_i=_BOgJ9BB8dqIy0M

    Monday 26 September 2011
    Share prices increase as a 3tr euro package is proposed to save the single currency from collapse. Channel 4 News Economics Editor Faisal Islam reports from Greece.

    The proposals are designed to allow Greece to default on its debts in an orderly way without dragging down other countries and commercial banks.

    They have reportedly emerged from discussions in Washington over the weekend, attended by officials from the International Monetary Fund (IMF) and World Bank and finance ministers from the G20 group of leading economies.
    International Monetary Fund managing director, Christine Lagarde, in Washington (Reuters)

    But Greek Finance Minister Evangelos Venizelos said he had not had talks about a debt default with Christine Lagarde, the head of the IMF, or European Central Bank head, Jean-Claude Trichet. “We have reached a point where there are reports about what has been said in a closed door meeting with the participation of only Mrs. Lagarde, Mr. Trichet and myself,” he said. “What is absolutely sure is that there hasn’t been and couldn’t have been any discussion about the so-called scenario of an orderly default.”

    German Chancellor Angela Merkel said on Sunday that allowing Greece to default would destroy investor confidence in the eurozone.
    There will be wobbles and uncertainty. Louise Cooper, BGC Partners

    Louise Cooper, markets analyst at BGC Partners, predicted further turbulence. She said: “A sufficiently credible plan to solve the eurozone crisis will necessitate changes to treaties, laws, and not least the German constitution. There will be wobbles and uncertainty at every vote and stage of political implementation.

    “So what have we to look forward to? Continued financial uncertainty, high volatility and nervousness.”

    ‘Dangerous phase’

    Chancellor George Osborne warned over the weekend that the world economy had reached a “dangerous phase” and credible action was needed within six weeks.

    The head of the IMF, Christine Lagarde, said after talks in Washington that there had been “a common diagnosis and a shared sense of common purpose”.


    Later this week, the European Central Bank, European Commission and IMF will return to Athens to discuss the next tranche of a loan to Greece.

    Greece has been beset by protests as it it tries to push through its austerity programme of tax increases and public sector cuts. The government is putting 30,000 public sector workers on notice, cutting their pay by 60 per cent and giving them a year to find new work in the state sector or face the sack. The two biggest unions in the country, representing about half of Greece’s workforce, are planning two 24-hour strikes in October.

    ‘The rescue package’

    According to reports, the package could look like this:

    A 50 per cent writedown of Greek debt.

    The EU’s bailout fund – the European Financial Stability Facility – would see its limit of 440bn euros (£384bn) raised to about 2tr euros (£1.7tn). It would take on the role of lending to eurozone governments that are finding it difficult to borrow from commercial banks.

    Eurozone banks would be recapitalised/given financial support so they could cope with the Greek debt writedown and losses from loans to other struggling eurozone countries.

  19. http://www.commondreams.org/headline/2011/09/23-1

    Published on Friday, September 23, 2011 by Inter Press Service
    Bill Gates to Support “Robin Hood” Tax
    by Jim Lobe


    “Microsoft co-founder and billionaire philanthropist Bill Gates appears poised to endorse the adoption of a controversial financial transactions tax (FTT) to be used as a new source of development aid for poor countries. (photo: REUTERS/Paul Hackett) Such an endorsement, to be included in a report to the Group of 20 (G20) summit in Cannes in November, will likely boost efforts by summit’s host, French President Nicolas Sarkozy, to persuade other countries, particularly in the European Union (EU), to impose such a tax, said activists who have long advocated what some of them call a “Robin Hood tax”.”

  20. @ Anonymous, not a problem, I took it as co-incidence all the way.

    And, yes, hard not to see the validity and likelihood of prediction of this fellow, based on the entire conglomeration of “facts and circumstances” = gloomy denouement.

    There has to be a universal application of the following: no credit default swap will be honored, and these are now made illegal and prohibited, as was the case in USA from 1936 to 1982. Second, total DEBT moratorium for all sovereigns, for the duration of this depression.

    Third, USA President Obama calls Helicopter Ben, and instructs him to have available a first tranche of $1 Trillion, to be used by states in infrastructure development programs.

    Absent a creative approach, we are left with riots, blood in the streets, and the chance some madmen decide to set off nuclear bombs in pursuit of their narcissistic psychopathy.

  21. People say funny things when the jig is up.
    Simon says those Euro policymakers must do the right thing, and they must do it very quickly, or they may bring about a true global calamity in the monetary sense – but he does not say what needs doing.
    So, while there’s an emphasis on the fact that the IMF would need to be as crafty as Bernanke to do anything of partial significance, and that there is this time-space problem between the policy makers at the sovereigns and the risk marketeers, there’s little direction, therefore little hope, for resolution.
    I just hope that there’s a small committee working on the exit strategy.
    Not of Greece from the EMU.
    Not of the EU from the EMU.
    But of the global monetary systems from the real cause of this crisis – the debt-based system of money-creation.
    It’s replacement is heralded in many places.
    Hopefully, here.


    And hopefully Simon Johnson will get it.
    It’s the money system that’s insolvent.

  22. @ Joebhed, really powerful ideas at your link, Bravo. So-called “leaders” around the globe need to study the recommendations set forth there, and then, most importantly, but these practical solutions into effect….the world really can’t take much more of this debt-based money system.

  23. I totally agree with Mr. Kahn! In order to establish the true free market price of gold, every government central bank in the world should simultaneously sell their entire holdings! All of it all at once! Government hoarding of gold must end!

  24. http://www.commondreams.org/headline/2011/09/27-4

    Published on Tuesday, September 27, 2011 by The Guardian/UK
    The Human Cost of a Global Crisis
    Grim warning from global agencies as ILO fears 40m jobs could be lost by 2012. Undernourished total at 1bn, says Red Cross
    by Guardian reporters and agencies

    “The full humanitarian impact of the world economic crisis became clearer this week, as UN and global agencies warned of huge job losses, a rise in the number of people afflicted by chronic undernourishment, and the “extraordinary price” being paid by children and other vulnerable groups as mass austerity programs constrict the developing world.”


  25. “Step Aside BBC “Trader”: Head Of UniCredit Securities Predicts Imminent End Of The Eurozone And A Global Financial Apocalypse”

    “The euro is beyond rescue”… “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits….”

    “In other words: welcome to the Apocalypse…”

    “And now, for our European readers (first) and everyone else (next), it is really time to panic.”


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