Interesting article form former IMF chief economist

Sam the Sham

http://www.theatlantic.com/doc/200905/imf-advice

It's nominally about how the US currently resembles some of the emerging economies the IMF usually deals with in that its financial sector has a stranglehold on the government. But it would seem to have quite a bit of relevance to Ireland today, especially insofar as the threat of IMF intervention is always being held over our heads.

For example, does this ring any bells?:

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Wonder why the public sector trade unions are being 'uncooperative'? There's your answer.

The whole article is well worth reading.

Fluffybums

Scarily familiar, I think it will be even more familiar after the 'budget'.

serfboard

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks ... They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

The 15 people who owe the now-nationalised Anglo-Irish more than half a billion each would recognise this scenario.

Flamed Diving

You know what is familiar about those crises in the 90's? The IMF was at the centre of them all, fanning the pouring petrol on the flames of the problem. Typical IMF response.

'It's everybody's fault, except ours...'

silverharp

Flamed Diving wrote: »

You know what is familiar about those crises in the 90's? The IMF was at the centre of them all, fanning the pouring petrol on the flames of the problem. Typical IMF response.

'It's everybody's fault, except ours...'

Geithner was wrapped up in that mess as well

http://www.nakedcapitalism.com/2009/03/former-australian-prime-minister.html

Flamed Diving

the "savings glut" that Bernanke and other economists like to portray as a cause, if not the cause, of our current financial crisis, was in response to the misguided Asian crisis program.

Interesting.

genericgoon

NVM