G20 Finance Ministers focus on private financing of infrastructure

Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

Last weekend, G20 Finance Ministers had their penultimate meeting before the G20 Leaders summit, scheduled for December in Turkey. Despite the current instability in stock markets and currencies in many countries, the focus of the communiqué is on the continued push, led by multilateral development banks and the OECD, to radically change the way infrastructure is financed by trying to draw in private finance, though this method has a weak recent track record. Discussion of ongoing efforts to combat tax evasion and reform the financial sector were slated for the next meeting in October, while the G20 continued to complain about the failure of IMF governance reform, but offered no hope that an IMF governance crisis can actually be avoided.

This was the Finance Ministers’ third meeting of the year, with one more slated to coincide with the World Bank/ IMF annual meetings in Lima in October. Detailed analysis of the outcomes of the meeting has been hampered by the fact that almost all of the large number of background papers were not put in the public domain until some days after the summit ended.

The stock market problems in China, and related currency problems of many other emerging markets were at the centre of the discussions, but monetary policy coordination has been a major area where the G20 has failed to have any impact in the past. The communiqué underscores this fact by noting that “monetary tightening is more likely in some advanced economies” – effectively endorsing anticipated raises in interest rates in the United States, which many expect will lead to a significant outflow of capital from developing countries.

Private infrastructure top of the agenda

Instead, as Eurodad predicted earlier in the year, the big focus this year is on “boosting investment,” which the ministers proclaim as “a top priority.” This is nothing new – infrastructure was a major theme of the Australian G20 presidency in 2014, though outcomes were limited – but the sheer scale of the preparatory work suggests the international institutions that act as the secretariat for the G20 have moved into overdrive, with multiple background papers from the OECD, the World Bank and others.

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New Food for the Vultures?

Lack of state insolvency regime undermines Ukraine debt deal

By Bodo Ellmers, Guest Blogger

Bodo Ellmers is Policy and Advocacy Manager at Eurodad, the European Network on Debt and Development.

Ukraine has reached a debt restructuring agreement with a creditor committee representing 50% of outstanding government bonds. Substantial debt reduction is essential to bring Ukraine’s debt down to sustainable levels. But the agreed deal falls short of what is needed. And the participation of the other 50% of bondholders is not secured, and cannot be secured in absence of a multilateral debt restructuring framework that can make binding and enforceable decisions. The Western powers’ reluctance to help build such a framework might have fed their ally to the vulture funds and their aggressive litigation strategies.

The Ukraine debt deal

According to information obtained by the Financial Times, Ukraine has reached a deal with a creditor committee led by the investment fund Franklin Templeton. The deal agrees a 20% haircut to Ukrainian government bonds worth US$18bn. It will also extend the repayment period by four years to ease Ukraine’s liquidity needs. As a sweetener, participating creditors receive a higher interest rate of 7.75% instead of 7.2%. In addition, reports the FT, “a GDP ­linked warrant will be provided from 2021 to 2040 that will pay out up to 40 per cent of the value of annual economic growth above 4 per cent.”

Too little, too late

The deal comes after Ukraine’s economy fell into a deep recession following the outbreak of the civil war and the annexation of the Crimean peninsula by neighboring Russia. Last year, Western powers used their influence in the IMF to unleash bailout loans of €9.6bn under the Extended Fund Facility. The programme came with brutal austerity and structural adjustment conditionality attached.

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Why it would be good for the IMF if Greece stopped repaying the IMF loans

Bodo Ellmers, Guest Blogger

The creditor community has another shock and awe moment this week, as more and more influential actors argue that Greece should stop repaying the International Monetary Fund (IMF) loans and instead use scarce public resources to tackle its economic and humanitarian crisis. While Prime Minister Tsipras still tries to ease the creditors, the idea is here to stay. And it is a good one: Greece should not just postpone loan repayments but default on them – stopping payments to the IMF for good. This would help to finally reform the IMF from the political puppet that it is now into a real and effective crisis response instrument.

Risk-free lending can quickly become irresponsible lending

Whoever loses in a debt crisis – and usually there are many losers – the IMF is always off the hook. It is common practice that borrowers grant preferred creditor status to the IMF, and pay off the IMF loans in full and in a timely manner. While it isn’t written down anywhere in international law that there’s such a thing as an IMF preferred creditor status – not even in the IMF’s own Articles of Agreements – all countries traditionally stick to this practice. This even goes for countries such as Argentina, which have been branded recalcitrant debtors by US judges and have no intention of maintaining good relations with the IMF.

Repaying the IMF often comes at high opportunity costs for borrower countries’ development, and for the other creditors who do have to take a haircut, and a larger one if the IMF does not participate in a debt restructuring. The fact that everyone’s repaying the IMF means that lending is essentially risk-free for them. And as in all other cases when lending is considered risk-free, the lender is encouraged to act irresponsibly, and to do really stupid things.

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IMF and World Bank Spring Meetings: Missing the Big Picture?

Jesse Griffiths and Tiago Stichelmans, Guest Bloggers

The IMF and World Bank spring meetings, which used to be a major forum for global economic decision making, end today with few concrete outcomes, the Bank under fire for its human rights and environmental record, and the IMF still unable to make any progress on reforming its creaking governance structure.

Finance ministers and central bankers from all over the world met in Washington DC this week for the IMF and World Bank spring meetings. The concerns caused by slowing growth in emerging market economies, collapsing commodity prices, and uncertainties over the future of monetary policies in the developed world were very real. Action to deal with them was not. Instead, all the IMFC – the ministerial committee that oversees the IMF – could promise was “vigilance” when dealing with “large shifts in exchange rates and asset prices, protracted below-target inflation in some economies, financial stability concerns, high public debt, and geopolitical tensions”.

The centrepiece of discussions for this year’s meetings was supposed to be the critical upcoming United Nations summit on Financing for Development (FfD), slated for July in Addis Ababa. However, the background document prepared by the World Bank and five regional development banks did not tackle the breadth of structural issues that are on the FfD agenda. It reads more like a prospectus for increasing use of the banks that authored it.
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Winds of change in Asia

Martin Khor

In the last month, the international media has been carrying articles on the fight between the United States and China over the formation of the Asian Infrastructure Investment Bank (AIIB).

Influential Western economic commentators have supported China in its move to establish the new bank and judged that President Barack Obama made a big mistake in pressurising US allies to shun the bank.

The United States is seen to be scoring an “own goal” since its close allies the United Kingdom, Australia and South Korea decided to be founding members, as well as other European countries, including Germany and France, and most of Asia.

The United States also rebuked the United Kingdom for policies “appeasing China,” but the latter did not budge.

The United States did not give any credible reason why countries should not join the AIIB.

Treasury Secretary Jack Lew said the new bank would not live up to the “highest global standards” for governance or lending.

But that sounded like the pot calling the kettle black, since it is the lack of fair governance in the International Monetary Fund (IMF) and World Bank that prompted China to initiate the formation of the AIIB, and the BRICS countries (Brazil, Russia, India, China and South Africa) to similarly establish the New Development Bank.

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The Reregulation of Cross-Border Finance

Kevin Gallagher

Regular Triple Crisis contributor Kevin Gallagher, of Boston University and the Global Economic Governance Initiative (GEGI) summarizes the key arguments in his new book Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance. He focuses on the re-emergence of capital controls since the 2008 financial crisis—with developing-country governments reining in cross-border capital flows from “flying into their country, flying out”—and how the “policy space” emerged for such measures.

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How Much has the IMF Changed in Response to the Global Crisis?

Matías Vernengo

Following the 2008 Global Crisis the notion that the International Monetary Fund (IMF) has moved away from orthodox views on a range of issues, but particularly regarding the need for austerity, has been pervasive. For example, Paul Krugman has argued, in his influential blog, that Olivier Blanchard, IMF’s director of research (or economic counselor) is “helping make at least one international institution less austerity-mad than the others.”

So what is this new view, exposed by Blanchard? For example, in the preface to the last World Economic Outlook, Blanchard tells us that:

Potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of labor market institutions, to increasing competition and productivity in a number of nontradables sectors, to rethinking the size of the government, to examining the role of public investment.

Note that in neoclassical (or mainstream) economics speak, potential growth is supply-side determined. That’s why the reforms would be less regulation of labor markets (to allow firms to hire workers for a lower wage), reduced regulation (to generate incentives for firm entry to increase competition), and reduced size of the public sector (that’s what “rethinking” means; nudge, nudge, wink, wink). These policies are needed to boost the supply capacity of the economy, its “potential” or “natural” output. Demand expansion, in the form of more spending and fiscal deficits cannot be pursued, since the growth of potential output is “very low.”

These are, in fact, the same neoliberal reforms that the IMF has always supported, and that since the 1990s have been referred to as the Washington Consensus.

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Ask Mark Blyth: "Austerity Doesn’t Work, Period"

Kevin Gallagher

“Austerity doesn’t work. Period.” This quote is the punch line of Mark Blyth’s Austerity: The History of a Dangerous Idea, second edition just out. If that quote was made into bumper stickers and t-shirts it would have been icing on the cake for what was an amazingly well placed and marketed book. As just about every review in the popular press has noted, Blyth’s book is well researched, accessible to a broad array of readers, and right.

For academics and critical thinkers however, there is more to it than that. This is not only a book where an established academic engages with a broader audience and “gives” that audience the tools to understand a contemporary problem. Blyth should be praised for that in and of itself. During this crisis and many others most academics have not been bold enough or too dis-incentivized to enter the fray beyond the water cooler. But Blyth also makes key contributions to the academic literature in international political economy as well. Blyth shows how and why the idea of austerity keeps on living in our politics.

The book starts with an accessible discussion of how the crises in the U.S. and EU were banking crises, not the sovereign debt crises (especially in the European case) that they and their aftermath have been described of in the financial press and media. In two crisp chapters, he shows how banks created the messes in the United States and in Europe—and how government debt became a big issue only after governments bailed out and propped up banks.

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