IMF Involvement Likely to Expand, Create Larger Debt Problem, as Social Unrest Goes Global

October 15, 2011


Germans and the French, backed by foreign French Prime Minister and current IMF head Christine Lagarde, have stepped up pressure on the rest of the world to pay for the fiscal disaster they enabled.  There have been mixed signals since. There was this headline yesterday “U.S. rejects plan to strengthen IMF in euro zone crisis,” by Reuters. However, Geithner  came out in support of the idea today, according to ZeroHedge, saying if there’s a “compelling case” to contribute more US funds to the IMF, “then we will be supportive of that.”

A study by Recorded Future showed positive chatter tipped off earlier Greek and Irish IMF bailouts. Politicians across the world have  demonstrated credibility at rolling over short term problems into larger, long term problems through increased spending. Unlike the EFSF, the structure of the IMF means it can bypass having to go to individual governments to get approval. If the IMF agrees internally, funds are automatically sent under current law. Thus, an enlarged IMF pool appears to be a foregone conclusion.

There will be opposition from the Republicans, as there was in May 2010, the last time the IMF agreed to transfer US and foreign money to Greece. Republican leadership threatened to intervene by changing the law, but failed. “Barack Obama asserted in a signing statement he doesn’t recognize Congress’ ability to tell the administration how to vote at the IMF. The restriction “would interfere with my constitutional authority to conduct foreign relations.” Expect the rhetoric to be even louder, and Obama’s poll numbers to weaken further on this news.

There are at least four problems with this plan :

  1. This “solution” has already failed before.
  2. The countries contributing, particularly the US, have their own debt problems.
  3. It creates a moral hazard by reducing incentives for countries like Italy and Spain to reduce spending, since they know they can always tap the IMF for more funds.
  4. Models show bailouts are directly related to increased social unrest, as the #OWS movement confirms, particularly when the people of those countries are struggling

To understand the thinking behind these ideas, one must realize they do not think there is a government spending problem and they do not see the moral hazards they create. From the WSJ,

“The head of the IMF’s Europe department, Antonio Borges, who announced the idea in Brussels, said it could prevent the crisis from worsening in countries such as Spain and Italy. These countries, Mr. Borges said, had a problem of market confidence rather than of solvency. IMF bond-buying interventions could help solve that problem, he said. The IMF’s involvement in euro-zone secondary bond-market purchases would give an "additional element of credibility because of the conditionality the IMF requires," he added.

Borges has a blind spot in his memory. Last year, the IMF gave $39 billion of $145 to Greece. Whatever “conditionality” has been ignored, as Greece has managed to extort hundreds of billions more while their deficit has ballooned exponentially larger. Government payrolls have said to increase since the bailouts started, according to Kyle Bass.

Furthermore, Occupy Wall Street may not feel so great about the US funding Greek government employees to retire at age 55 and sit on the beach for the rest of their life. Whether they are aware of the current events, is another question.

Even when this debt is eventually swept under the rug and printed away, violence against governments will still increase because studies show social unrest doubles with each 10% rise in food prices. Ironically, this is according to the IMF’s own study.

You cannot solve a debt problem with more debt. You cannot divorce accountability from actions without causing resentment from those whose rights are being infringed. Until real solutions are enacted that solve the underlying problems, expect global political and economic turmoil to escalate.


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