After depleting its lending resources at the height of last year’s meltdown, the IMF has managed to conclude an impressive $750 billion worth of borrowing deals with Group of Twenty members. And, given the line-up for IMF assistance, there is every reason to believe that a good portion of the money will be put to use in 2010. Where that money takes the global economy however, is open to debate.
Ukraine, the beneficiary of a $16.4 billion IMF emergency facility in late 2008, is already in default, despite receiving overly generous terms. “If it were not for geopolitical concerns pertaining to Russia, Ukraine would not be demanding, and getting, its loan installments under the facility,” said an IMF official on the sidelines of this week’s IMF-World Bank summit in Istanbul. “On sheer economic grounds, Ukraine is a Latin American-style basket case.” Five--year Ukraine credit default swap rates are being quoted at 1,200 basis points; Argentina, which is hoping to restructure $20 billion of defaulted bonds shortly, is the second most risky sovereign with CDS prices around 1,100 bps and a default probability of 52%.
News wires streaming into the summit pressrooms should have forced IMF and World Bank policy makers to reconsider the conditions attached to their financial aid packages. Ukraine was not the only country confirming non-compliance; Latvia too had failed to achieve the spending cuts promised when signing off on a $10 billion loan from the IMF and the EU. (Five-year Latvian CDS prices are in the 480-500 bps range). Pakistan, which received aid in excess of $11 billion last November, admitted that another round of sovereign restructuring is necessary if it is to retain its momentum in the war on terror. And Romania’s $27 billion loan facility may also be in trouble as the government is finding it extremely difficult to reach the IMF-prescribed deficit reductions.
When looking through the windows of their meeting rooms, delegates to the Istanbul summit saw Turkish demonstrators calling for a halt to the $20 billion loan negotiations between the IMF and Turkey. “Youth unemployment is at 25% and the IMF loan terms will raise that figure to 40%,” said a student leader holding a placard with the image of Che Guevara. In fact, Che’s ghost haunted the summit right from the very outset.
During the 1961 Summit of the America’s in Punta del Este (Uruguay), Che Guevara warned Latin American nations not to accept financial aid accompanied by a laundry list of austerity and privatization schemes. And, as the passage of time would show, foreign loans only served to worsen living conditions for the vast majority of populations throughout the continent. Will history repeat itself insofar as the debt defaults of the 1980s and 1990s are repeated in at least 30 of the 40-odd countries with whom the IMF has ongoing loan agreements?
Neil Watkins, executive director of Jubilee USA, asked perhaps the most critical of questions: “Why is the IMF delivering assistance in the form of loans when poor nations need debt relief and grants?”
In fact, the empirical evidence suggests that none of the recipients of IMF credits can realistically conform to debt service provisions in the foreseeable future. So is the IMF’s call to developing countries to increase interest rates and cut public spending (exactly the opposite of what the IMF is telling wealthy nations) laying the foundations for the next global meltdown?
In this writer’s opinion, yes. The IMF continues to impose inappropriate and onerous conditions on borrowers who will agree to almost anything which results in short-term cash inflow. In the absence of robust global growth, such conditions are bound to exacerbate economic downturns in a number of countries.
Short the “frontier” markets and “emerging” Europe (FRN, PMNA, GUR) for now; we will get to the broader emerging markets matrix when third-world corporations and banks figure out how to refinance $400 billion in foreign currency debt coming due in another 12-16 weeks.
Disclosure: Short GUR