Saturday, January 10, 2015

Does the IMF Become More or Less Influential in 2015?

2015 is shaping up to be a pivotal year for the IMF. There are several big issues on the plate at the IMF this year that will likely tell us if the IMF is going to become more or less influential going forward. IMF proponents will be looking to promote the IMF as a "global lender of last resort" for the future. 

In this Op/Ed article on Fox News, a former IMF Deputy Director actually suggests that Putin should allow the IMF to help Russia out of its current economic woes. A crazy idea? Let's look at it. Some quotes from the article and then a few comments.

"The last thing a beleaguered Vladimir Putin will want to hear is that Russia has now reached the stage where it desperately needs an IMF-supported economic adjustment program. Without such a program, it is difficult to see how Russia can regain domestic and international confidence in the management of its economy. Absent the IMF, it is also difficult to see how Russia will be able to avoid the imposition of damaging capital controls on its economy."

"There can be no denying that Russian policymakers were totally blindsided by the collapse in international oil prices from around $110 a barrel in midsummer to $50 a barrel at present. All too likely this will prove to have been a very costly lapse in economic policy judgment, particularly considering that energy accounts for around two-thirds of Russian exports and around half of its tax revenues."

. . . . . 

"With the government seemingly at sea, the Russian ruble, has lost almost half of its value since the start of the year. This is something that Russia can ill-afford, considering that inflation is already over 9 percent and that the Russian people are all too familiar with the pain associated with very high inflation rates."
"The public is already starting to hoard groceries before they get more expensive, and people are rushing to their ATMs while the going is still good. It would seem to be only a matter of time before they start running on their banks."
. . . . 
"For Vladimir Putin to successfully approach the IMF, he would have to back down on his Ukrainian adventure to win Western support."
"Considering that to be highly unlikely, Russians should brace themselves for a rough economic ride next year."   . . . . .
My added comments:
My first reaction to this article was that there is no way this writer could be serious. What on earth makes him think that Putin would suddenly just give in and allow the western based IMF to help Russia out. The public perception of such a thing would be a huge and embarrassing defeat for Russia. And the author himself admits that it is "highly unlikely" Putin would do this. So why write the article?
It may be part of an effort to project the IMF as the "go to" lender of last resort around the world. The IMF has seen its influence wane somewhat as the US has not been willing to approve the 2010 reform package that would boost funding to the IMF and also rebalance the voting power there more towards the BRICS nations. In addition, the IMF has its neck stuck out in the Ukraine. If things go south in the Ukraine and they have to default, it will look like the IMF badly misjudged the situation there and threw away several billion dollars trying to prop up a failing government there.
It seems likely that IMF advocates will be looking for ways to improve the image of the IMF and to lay the groundwork for the idea that if there is a big global financial crisis, the IMF will have be the entity to step forward to save the day. Keep in mind this is exactly what Jim Rickards has predicted will happen eventually. So, even if it is unlikely that Putin will reach out for IMF help in Russia right now, this article promotes the idea that the IMF is the only game in town now for countries around the world with economic problems. Even for major economies like Russia. It establishes the idea that the IMF is the global lender of last resort.
Here are the big IMF related issues we should watch in 2015:
-does the IMF come up with a plan to bypass the US Congress and get its reform package implemented? (greatly increasing the lending reserve capacity of the IMF)
-what happens in the Ukraine? Does it default and embarrass the IMF or does the west stand behind the IMF and come up with billions more in loans/aid to prop up the government there? George Soros just urgently called for this to happen.
-what happens later this year when the IMF reviews the composition of the SDR basket of currencies? We would assume that they will add in the Yuan to the SDR basket in an effort to appease China and the BRICS bloc of nations.
One other thing. Putin has made it clear that he is fine with working with the IMF so long as Russia gets what he thinks is fair treatment there. In recent meeting between Putin and IMF Managing Director Christine Lagarde, she said "Russia has always been a decent and much respected member of the IMF team".
So don't rule out the idea that the IMF might eventually be seen as the "mediator" to resolve the conflict now building up between the US and Russia. We could see a major ramp up in the conflict that gets the world's attention/concern; and then the IMF comes to the rescue to diffuse the situation. Pressure could be applied on the US Congress to go along with the IMF reforms in order to avoid a major military conflict (some might warn WWIII is imminent). 
For example, what if Putin agreed to back down in the Ukraine in exchange for the US passing the IMF reforms that give the BRICS more influence in the IMF? Impossible you say? Let's follow it and see what happens. Time will tell us if the conflict we see now is real or just setting the stage for change with the IMF in the lead as Jim Rickards predicts.
Regardless of what actually happens, it looks like the IMF will either become more influential or less influential in 2015 depending on how these big issues are resolved.

added note: Here is a pretty good article in the Boston Globe on the Russian situation. I note that it also throws out the idea of an IMF bailout for Russia. When we see this kind of thing appearing in various media it suggests that the US is wanting this message out into the US media for whatever reason. Again, we could be seeing the groundwork being laid to promote the IMF to the general public as the one to "save the day". We'll just follow it and see what happens.

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