“It no longer makes sense for global economic policy to be the concern of just a small group of countries” Dominique Strauss-Kahn in Istanbul

Coming off of a largely incident-free and positive G20 meeting recently concluded in Pittsburgh and with a blazing US stock market rally as the backdrop, the mood at the Annual IMF/IBRD confab should have been more upbeat than it was. The reality that participants from the 186 countries in attendance were for the most part eager to proclaim was that the Postwar system of international financial machinery had broken down, was no longer up to the task and needed to be urgently re-structured.

The United States was clearly not among those cheering for change.

This is because the sub-text of this year’s meetings was that the days of the US as a financial hegemon and shot-caller were clearly numbered in a world where it’s banks are broken, its economy still languishes, and where it is beholden to foreign sources of capital and therefore can no longer credibly anchor a global financial system with the US dollar as the currency of account.

Moreover, a number of prominent delegates and invitees renewed calls for even more comprehensive changes to the IMF and its sister institution the IBRD (World Bank) than had been agreed between G20 participants only a short time ago. The proposals that were put on the table were significant: an end to the US veto at the Fund, more frequent adjustment of member voting powers to reflect changing output shares and, a reduction in the number of European directors on the board from eight to no more than four.

Criticisms that were leveled at the IBRD included misguided lending policies, discrimination against HIPC’s (Heavily Indebted Poor Countries) and shortfalls in its governance practices. It was noted that the actual amount pledged and disbursed to low income countries since the onset of the crisis is three hundred and sixty times less than the $18 trillion that richer governments have found to bail out or guarantee their private financial institutions. According to the IBRD itself, the crisis is causing a financial shortfall for developing countries of between $350 and $635 billion in this year alone. Furthermore it projects that most developing country economies will recover more slowly than those of richer countries.

The Financial Times’ coverage of the meetings points out that the IBRD’s business model fails in a fundamental way in that its two main sources of revenue, interest payments on loans from borrowing governments and contributions from wealthy member governments, both stand in conflict with its anti-poverty mission because they encourage large individual loans to borrowers most able to pay while ignoring the smallest and poorest nations.

What the Financial Times did not say, and what most officials are loath to acknowledge, is that the IBRD and the IMF are in serious danger of losing relevance in a world where China and certain other states can write billion dollar checks without the conditionality and other red tape demanded by the Washington twins.

Also relevant here is the fact that China again easily rebuffed renewed calls from senior IBRD and IMF  bureaucrats to revalue its currency…….Who’s in charge now?

Snippets from the Banking Arena

We read recently that analysts at Goldman have upgraded their ratings on Large US banks to “attractive “ from “neutral”. We haven’t had a close look at this report but note in this connection that while the latest disclosures by the FDIC place 417 institutions on its watchlist, the picture may in fact be far, far worse. Chris Whalen analyses the US banking universe  which consists of  8133 banks. He assesses them on a ratings scale of A+ (3518 banks) through A,B,C,D and F.. Recently Chris calculated that around 2300 banks in the US are at risk of bankruptcy and are rated F (28% of the total). His expectation is that the FDIC will need between $400B and $800B by the end of 2010 to backstop the banks, and that is after healthy banks have absorbed some the “best of the worst”. 

Our analysis of the TARP program last fall expressed serious misgivings as did our analysis of the Stress Tests that were conducted this spring. Earlier this week and following an investigation, Neil Barofsky, the Treasury Special Inspector General for the Troubled Asset Relief Program reported that, “By stating expressly that the ‘healthy’ institutions would be able to increase overall lending the Treasury may have created unrealistic expectations about the institutions’ condition and their ability to increase lending”.  We will not comment further.

This entry was posted on Wednesday, October 7th, 2009 at 1:50 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.