IMF Lowers Boom On International Economies
Christine Lagarde of the IMF is not one to mince words. Known to be critical of the US Treasury’s handling of the Lehman Brothers collapse, the tenacious tigress let her feelings be known just before the IMF’s semi-annual meeting in Japan.
Calling the euro zone debt crisis progress “critically incomplete,” Lagarde used some staggering numbers to support her assessment. Citing the euro zone’s unwillingness to construct a politically and financially coordinated effort to address the debt problem, Lagarde correctly identified the crisis as the biggest economic obstacle to market stability.
Lagarde projected that euro zone banks will be offloading $2.8 trillion over the next two years and unless some permanent resolution is reached the figure could balloon to $4.5 trillion. The $2.8 trillion in losses is an increase of Lagarde’s assessment of $2.6 trillion made in the IMF’s last meeting six months ago. The immediate effect of these losses will shrink credit markets by about 9 percent by the close of 2013..
Lagarde also admonished the US and Japan, recommending that both governments get their financial houses in order. The IMF says that the euro zone crisis is the core issue but that staggering debt in the US and Japan is causing a general lack of consumer and commercial confidence.
The Director of the IMF’s monetary fund, Jose Vinals, stressed the urgency for the euro zone to engage a comprehensive program with a centrally controlled bank, a role the ECB is playing in a limited capacity. In its newsletter, the IMF said, “Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline.”
ECB President, Mario Draghi, is expected to inform the IMF that the central bank’s bond buying spree, which has yet to begin, will bring stability to the region. Draghi’s challenge is to convince the IMF that the tools are in place and working. Given the dysfunctional composition of the euro zone, that will be a difficult sale.
Lagarde indicated that the debris from the euro zone fallout was already surfacing in emerging markets. Growth has slowed in all emerging economies, including China. Lagarde’s assessment identified both Japan and the US as sources for safe-haven investors. The problem is that Lagarde does not feel these economies are stable and may lose their favored status.
The US “fiscal cliff” and the pending tax increases and budget cuts pose an intimidating milestone for the US consumer. The political rhetoric has heightened global anxiety as to exactly how the US will trim its substantial debt burden.
Japan now holds the largest debt to GDP ratio of all industrialized nations. Debt is twice the size of the $5 trillion GDP. Japan is still reeling from national disasters and also is caught short with an ever-increasing life expectancy rate which in turn pressures the government further.
The political and financial stress in the euro zone was in full display yesterday when German Chancellor Angela Merkel visited Greece. Anti-Germany protests dominated the media coverage but these demonstrators do not represent the majority of the populace.
What has become clear is that the euro zone is a failed unit. It is hard to imagine that Germany will approve future funding for Greece and this in turn calls into question the fate of Portugal, Spain and Italy and the structure of the 17-member alliance.
Greece has no room to move. Real unemployment is estimated to be around 50 percent. Analysts are beginning to think that Greece is out of options and will most likely default and return to its own currency. This will send shock waves through the southern tier and other casualties may follow.