Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

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Showing posts for "International Institutions"

The IMF Is Shocked, Shocked, at Greece’s Fiscal Failure. Should It Be?

by Benn Steil and Dinah Walker
fiscal performance relative to targets

The IMF last week told the Greek government to get with the program—specifically, the economic adjustment program that Greece agreed to as a condition for receiving loans from the Fund.  Greece is indeed way off target, but that’s apparently par for the course with such programs.  In 2003, the IMF’s own independent evaluation office looked at the difference between actual and projected changes in fiscal balances in countries receiving funds from its Extended Fund Facilities (EFF) and so-called Stand-By Arrangements (SBA).  As shown in the graphic above, nearly ¾ of market-based countries (that is, countries not in transition from central planning) receiving funds from the EFF or SBA underperformed their targets in the second year of their program.  By this standard, Greece looks like a normal ward of the IMF. However, Der Spiegel reported on Monday that the Troika of official Greek lenders (the European Commission, ECB, and IMF) was now pegging Greece’s budget deficit at €20 billion.  If accurate, that would put Greece on track to miss its IMF fiscal deficit target by €13 billion, or a whopping 6 percent of GDP – making it an extreme target-underperformer even by the standards of the many past underperformers. Read more »

More Evidence That LIBOR Is Hazardous to Economic Health

by the Center for Geoeconomic Studies
LIBOR OIS and Bank CDS

Central bankers necessarily spend a great deal of time studying economic and market data that they believe to be forward-looking indicators of the economy’s health.  One such is the so-called “LIBOR-OIS spread” – the spread between the London Interbank Offered Rate (the rate at which major banks can supposedly borrow from each other, unsecured by collateral, for three months) and the Overnight Indexed Swap rate Read more »

Is the ECB Draining its own Powers?

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Back in 2000, the European Central Bank’s first president, Wim Duisenberg, explained how he knew the Bank’s operational framework for implementing monetary policy was working well.  It was, he said, successfully “steering short-term market interest rates” where the Bank wanted them to go.  Prior to the financial crisis, that was indeed the case: the ECB’s policy rate was tightly connected to important short-term interest rates, such as the 3-month government borrowing rate.  In a growing swath of the eurozone, however, this is no longer the case.  As the figures above show, the correlation between the ECB’s policy rate and actual government borrowing rates in Spain, Greece, Italy, Ireland, and Portugal has plummeted since the ECB began its debt-buying program.  The market’s view of default risk on eurozone government debt has increasingly come to dominate these rates, which themselves strongly influence borrowing rates in the private sector.  By Duisenberg’s criterion, monetary policy in the eurozone is becoming less and less effective.  The only thing that will reverse this trend is a resolution of Europe’s growing bank and government debt crisis.  Yet by continually insisting that debt restructuring is out of the question, the ECB is only delaying such a resolution – and almost surely making it more costly.

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Greek Debt Crisis – Apocalypse Later

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The difference between Greek and German government bond yields can be used to estimate the market’s view of the likelihood of a Greek default. The chart above shows these probabilities over different time frames on three different dates. On April 30th, no European plan was yet in place to address the ballooning Greek debt, and default was considered a real possibility in the short term. On May 11th, just after the European Stabilization Mechanism (ESM) was announced, markets sharply cut their view on the odds of default across all time horizons. However, the market’s analysis of the ESM has become much more nuanced since then. On September 1st, the market’s view of the probability of default within two years was lower than before the ESM was announced, but higher over longer time frames. Read more »

Lender of Last Resort

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lenderoflastrestortagainsteuroarea

The U.S. and IMF bailout of Mexico in 1994 is often cited as a textbook example of a successful financial rescue. The economy stabilized allowing Mexico to pay back most of its loans in less than 2 years. In response to the current crisis the Fed took on the role of global dollar lender of last resort by lending to foreign, primarily European, central banks. These loans were paid back more quickly than Mexico’s. Read more »

Fixing Finance

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G20 leaders are meeting in Washington to discuss a possible overhaul of global finance. One topic on the agenda is whether to increase the resources of the IMF, which stood at $201 billion at the end of August. However, many underrepresented emerging market countries, such as China, would be wary of such a move without a shift in the power structure. The following articles tackle the agenda of the upcoming G20 meeting. Read more »

Can the G7 Stabilize the Yen?

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The G7 has expressed concern over the implications of excessive yen volatility for financial and economic stability, but fell short of promising coordinated action. The graph above illustrates the extreme nature of the yen’s rise. For example, the yen has appreciated 22% against the euro and 35% against the Aussie dollar in the last month alone. The G7 may have to intervene in foreign currency markets to restore stability. Read more »