The End Of IMF Credibility (Or Why Christine Lagarde Should Be Fired... But Won't Be)
ZeroHedge.com Aug 3, 2016 2:00 AM Submitted by Raul Ilargi Meijer via The Automatic Earth blog, The IMF’s Independent Evaluation Office (IEO) issued a report a few days ago entitled ‘The IMF and the Crises in Greece, Ireland, and Portugal’. It is so damning for managing director Christine Lagarde and her closest associates, that it’s hard to see, certainly at first blush, how they could all keep their jobs. But don’t be surprised if that is exactly what will happen. Because organizations like the IMF don’t care much, if at all, about accountability. Their leaders think they are close to untouchable, at least as long as they have the ‘blessing’ of those whose interests they serve. Which in case of the IMF means the world’s major banks and the governments of the richest nations (who also serve the same banks’ interests). And if these don’t like the course set out, a scandal with a chambermaid is easily staged. But the IEO doesn’t answer to Lagarde, it answers to the IMF’s board of executive directors. Still, despite multiple reports over the past few years out of the ‘inner layers’ of the Fund that were critical of, and showed far more comprehension of events than, Lagarde et al, the board never criticizes the former France finance minister in public. And maybe that should change; if the IMF is to hold on to the last shreds of its credibility, that is. But that brings us back to “Organizations like the IMF don’t care much, if at all, about accountability.” What the IEO report makes very clear is that the IMF should never have agreed, as part of the Troika, to assist the EU in forcing austerity upon Greece without insisting on significant debt relief, in the shape of a haircut, or (a) debt writedown(s). The IMF’s long established policy is that both MUST happen together. But its Troika companion, the EU, is bound by the Lisbon Treaty, which stipulates: “The Union shall not be liable for or assume the commitments of central governments”. Also, the ECB can not “finance member states”. If Lagarde and her minions had stayed true to their own ‘principles’, they should have refused to impose austerity on Greece if and when the EU refused debt relief (note: this has been playing out since at least 2010). They did not, however. * * * The IMF caved in (how willingly is hard to gauge), and the entire Troika agreed to waterboard Greece. The official excuse for bending the IMF’s own rules was the risk of ‘contagion’. But in a surefire sign that Lagarde et al were not acting with, let’s say, a “clear conscience”, they hid this decision from their own executive board. Moreover, the IEO now says it was unable to obtain key records or assess the activities of secretive “ad-hoc task forces”. “Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located; [the IEO] has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff..” One must wonder why the IMF has an executive board at all. Is it only to provide a facade of credibility and international coherence? When it becomes so clear, and -no less- through a report issued by one of its own offices, that its ‘boots on the ground’ care neither for its established policies nor for its board, isn’t it time for the board to interfere lest the Fund loses even more credibility? The IMF’s main problem, which many insiders may ironically see as its main asset, is the lack of transparency, combined with the overwhelming power exerted by the US and Europe. And Europe’s grip on the IMF is exactly what the report is about, in that it accuses Lagarde et al of bowing to EU pressure, to the extent that it abandons its own guiding ‘laws’. It acted like it was the European Monetary Fund, not the international one. So there’s no transparency, no accountability, and in the end that will lead to no credibility and no relevance. Well, that’s exactly how the EU lost Britain. And that shows where accountability and credibility are important even for non-democratic supra-national institutions, something these institutions are prone to neglect. No, there will not be a vote put to the people, no referendum on the IMF. Though that would sure be interesting. What can happen, though, is that countries, even large ones like China and Russia, threaten to leave, perhaps start their own alternative fund. These things have already been widely discussed. What is sure is that the US/Europe-centered character of the Fund will have to change. If Washington and Brussels try to appoint another European as managing director (an unwritten law thus far) they will face a rebellion. * * * That next appointment may come sooner than we think. Because Christine Lagarde is in trouble. It’s even a bit strange, and that’s putting it gently, that she’s still in her job. What’s hanging over her head is a 2008 case, in which she approved a payment of €403 million to businessman Bernard Tapie, for ‘losses’ he was to have suffered in 1993 when French bank Crédit Lyonnais supposedly undervalued his stake in Adidas. Lagarde is accused of negligence in the case, in particular because she ignored advice from her own ministry (yeah, that does smack like the IMF thing) and let the Tapie case go to a special arbitration committee instead of the courts. That Tapie was a supporter of the Sarkozy government Lagarde served as finance minister at the time makes it juicier. So does this: In 1993 Crédit Lyonnais was a private bank. But in 2008, it had been wound up and was run by a state-operated consortium. Therefore, the €403 million ‘awarded’ to Tapie out-of-court was all taxpayers money. Even juicier: in December 2015, a French appeal court overruled the compensation and ordered Tapie to repay the money, with interest. What’s peculiar about Lagarde staying on at the IMF is that she is not merely under investigation or even ‘only’ accused of committing a crime. Instead, she has been ordered to stand trial, something she’s spent 8 years trying to avoid. Still, apparently nobody sees any problem in her continuing to act as Managing Director of the IMF. That is quite something. And it directly affects the Fund’s credibility. If a president or prime minister of a country, any country, had been ordered to stand trial, the likely procedure would be to temporarily stand down and let someone else take care of government business pending the trial. As it stands, however, Lagarde is allowed to sit pretty. And then? Borrowing from the Guardian: “A charge of negligence in the use of public money carries a one-year jail sentence and a €15,000 fine. The CJR is made up of six members of the French Assemblée Nationale, six members of the upper house, the Senate and three magistrates. No date has been set for the hearing.” Ironically, negligence turns out to be a very light charge. Someone in Lagarde’s position could have given away or squandered trillions of euros and then be fined €15,000. But then, class justice is alive and well in France. What are the odds that she will be convicted? She’d have to be found with a chambermaid in Manhattan for that to happen… * * * That’s perhaps what the IMF board are thinking too. Whether that’s wise remains to be seen. Hubris rules all these institutions, sheltered as they are from the real world. But the real world is changing. Ironically, many people think these changes will reinforce the IMF. Since the Fund can issue a sort of ‘super money’ in the shape/guise of Special Drawing Rights (SDRs), and especially China would seem to like SDRs becoming the world’s reserve currency instead of the US dollar, the IMF in some people’s eyes holds a trump card. There may well be an effort to hide private and public debt throughout the planet even more than it is hidden now, through SDRs. We’ll likely see governments and perhaps large corporations issue bonds denominated in SDRs. China seems to think that this could potentially halt much of its capital flight. My trouble with this is that it’s either too unclear or too clear who would profit most from such schemes. Even if the next managing director of the IMF is not European, but Asian or African, the puppet masters of the Fund will still be the same western financial ‘cabal’. And I don’t see China or Russia signing up to that kind of control, and willingly expand it by making SDRs far more important. Then again, there’s a sh*tload of debt that needs to be hidden, and the whole world is running out of carpet to sweep it under. Then again, Russia is not that indebted. It’ll be hard to get a consensus. * * * But all that won’t help Greece. Let’s get back to that. We left off where Lagarde conspired with the EU, under the guise of preventing contagion, to abandon the IMF’s own rules in order to waterboard the country. Of course, we know, though nobody writing on the IEO report mentions it, that the contagion they were trying to prevent was not so much between nations but between banks. The bailout-related policies and actions that Lagarde hid from her own board (!) were designed to make French and German banks ‘whole’ at the cost of the Greek people. It became austerity, so severe as to make no sense whatsoever -certainly inside an alleged ‘Union’-, even if the IMF -not the world most charitable institution- has always banned this without being accompanied by strong debt relief. Schäuble and Dijsselbloem saved Germany and Holland at the expense of Greece. This will end up being the undoing of the EU, even if nobody’s willing to acknowledge it despite the glaring evidence of the Brexit. It will probably be the undoing of the IMF as well. And there I get back to what I’ve said 1000 times: centralization can only work in times of growth. There is no conceivable reason, other than dictatorship, why people would want to be part of a centralizing movement unless they get richer from it. In today’s shrinking global economy, we have passed a point of no return in this regard. Everyone will want out of these institutions, and get back to making their own decisions about their own lives, instead of having these decisions being taken by some far away board with no accountability. Let’s end with a few quotes about the IEO report. Ambrose Evans-Pritchard was in fine form: IMF Admits Disastrous Love Affair With The Euro and Apologises For The Immolation Of Greece The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. [..] In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed. The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli. [..] The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognized in the report. “If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said. * * * That would seem to leave the IMF just one option: to apologize profoundly to Greece, to demand from the EU that all unjust measures be reversed and annulled, and to set up a very large fund (how about €1 trillion) specifically to support the Greek people, including retribution of lost funds, repair of the health care system, reinstatement of a pension system that can actually keep people alive and so on and so forth. And to top it off of course: debt writedowns as far as the eye can see. You f**k up, you pay the price. This makes me think of a remark by Angela Merkel a few weeks ago, she said ‘we have found the right mix when it comes to Greece’. Well, Angela, that is so completely bonkers it’s insulting, and the IMF’s own evaluation office says so. I like this one from Bill Black as well: It was only after forcing the Greek people into a pointless purgatory of a decade of disaster that the troika would consider providing debt relief…The only ‘debt relief’ they offer to discuss is a ‘long rescheduling of debt payments at low interest rates.’ This, under their own dogmas, will lock Greece into a long-term debt trap that will materially lower Greece’s growth rate for decades and leave it constantly vulnerable to recurrent financial crises. That is a recipe for disaster for Greece, Italy, and Spain (collectively, 100 million citizens) and for the EU. It is financial madness – and that ignores the political instability it will cause to force an EU member nation to twist slowly in the wind for 50 years.” Got that one off of Yanis Varoufakis’ site, and he must be feeling very vindicated, even if not nearly enough people express it, by the IMF report. Because he’s said all along what they themselves are now admitting. But it ain’t much good if nothing changes, is it? Or, as Varoufakis put it: [..] to complete this week’s drubbing of the troika, the report by the IMF’s Independent Evaluation Office (IEO) saw the light of day. It is a brutal assessment, leaving no room for doubt about the vulgar economics and the gunboat diplomacy employed by the troika. It puts the IMF, the ECB and the Commission in a tight spot: Either restore a modicum of legitimacy by owning up and firing the officials most responsible or do nothing, thus turbocharging the discontent that European citizens feel toward the EU, accelerating the EU’s deconstruction. [..] The question now is: What next? What good is it to receive a mea culpa if the policies imposed on the Greek government are the same ones that the mea culpa was issued for? What good is it to have a mea culpa if those officials who imposed such disastrous, inhuman policies remain on board and are, in fact, promoted for their gross incompetence? In sum, an urgent apology is due to the Greek people, not just by the IMF but also by the ECB and the Commission whose officials were egging the IMF on with the fiscal waterboarding of Greece. But an apology and a collective mea culpa from the troika is woefully inadequate. It needs to be followed up by the immediate dismissal of at least three functionaries. First on the list is Mr Poul Thomsen – the original IMF Greek Mission Chief whose great failure (according to the IMF’s own reports never before had a mission chief presided over a greater macroeconomic disaster) led to his promotion to the IMF’s European Chief status. A close second spot in this list is Mr Thomas Wieser, the chair of the EuroWorkingGroup who has been part of every policy and every coup that resulted in Greece’s immolation and Europe’s ignominy, hopefully to be joined into retirement by Mr Declan Costello, whose fingerprints are all over the instruments of fiscal waterboarding. And, lastly, a gentleman that my Irish friends know only too well, Mr Klaus Masuch of the ECB. You probably guessed by now that I would certainly and urgently add Christine Lagarde to that list of people to be fired. And not appoint another French citizen as managing director. Too risky. They do crazy things. The IMF must be reorganized, and thoroughly, or it no longer has a ‘raison d’être’. I see no reason to doubt that those who call the shots are too blinded by hubris to execute such measures, so I’ll list these things one more time: transparency, accountability, credibility and if you don’t have those you will lose your relevance. But it’s probably a bad idea to begin with to let an economy, if not a world, in decline, be governed by the same people who owe their positions to its rise. It would seem to take another kind of mindframe. Puerto Rico is the next Detroit
Even though that wrenching period happened almost a decade ago, it will live in our memories for years to come. I can recall much of the pain but also other aspects of the moment. Some people were desperate for the relief that came their way; others were using it as cover to game the system. We're about to see the same thing happen again — but this time on a much larger scale. And the sucker on the other end of the line won't be a bank or faceless mortgage company; it will be individual investors, and once again they'll have government "help" to blame. During the housing disaster, the government took a series of steps to ease the pain, including mortgage modification and relief from taxes on forgiven debt. At the time, government officials were looking for any tool that would stop the financial bleeding, and almost forcing the banks to write down loans seemed like a good way to do it. Struggling homeowners able to modify their loans and stay in their homes were thrilled. Those who just wanted out of the trap went the short-sale route and were also glad for a way forward. But another homeowner category rose to prominence: those looking to accrue ill-gotten gains. These people simply stopped paying their mortgages, daring their lenders to foreclose and become stuck with the property. At one point, foreclosure courts in Florida were running 600 days behind. Homeowners who chose not to pay knew that their lender couldn't move on the property for almost two years. I know of people who stayed in their homes without paying for over four years, pocketing the cash that would have gone to the lender. This wasn't what the government had in mind, of course. Officials had a nice, happy plan in which everyone plays by the amended rules and things come out well in the end. It never happens that way, as we're seeing today. Puerto Rico is out of money. The commonwealth begged Washington for debt relief, since the territorial laws of the US and the island's own constitution don't allow for paying creditors less than they are owed. The day before Puerto Rico owed $2 billion in principal and interest, Congress and the president approved a restructuring plan, called Promesa, that allows the commonwealth to pay back less than it owes as long as it agrees to a federal financial oversight board and follows certain rules. The move was hailed as a great step forward for the struggling nation, and it showed that the federal government wasn't deaf to the fiscal woes of Puerto Ricans. Bondholders were furious. The Puerto Rican constitution demands that bond principal and interest be paid first. Protesters in San Juan, Puerto Rico, in 2015. University students and employees took to the streets to protest against government plans to implement cuts to public university budgets, according to local media. Reuters/Alvin Baez First, as in before any other expenses. Instead, the federal government is allowing Puerto Rican officials to keep the lights on, pay civil salaries, and meet other essential obligations, even though they aren't making good on their debts. But it didn't stop there. Before the ink was dry on Promesa, Gov. Alejandro García Padilla unveiled his budget for fiscal 2017, which runs from this past July 1 through June 30. The document is a vivid example of putting politics ahead of contracts. The governor approved the payment of half the debt service due in July but not on the most senior, secured bonds. Instead, he authorized payment of junior bonds issued for the convention center and local roads that are more widely held by Puerto Ricans. Beyond that, he authorized almost no debt service whatsoever for the entire year. He also approved moving $800 million to the public employee pension fund, which is $170 million more than would have been required during the year. Beyond the big-ticket items, the budget allocates $2.5 million for the Office of the First Lady to spend on incidentals and money for the development of professional Puerto Rican athletes. Investors went crazy when the governor presented the budget, and they eventually filed a lawsuit to stop the Puerto Rican government from sucking all the money out of the system before any restructuring could happen. Puerto Rican supporters say investor fears aren't justified. If the oversight board deems the payments unnecessary, they can just claw them back. Really? How do you claw back money paid out as principal and interest on junior bonds? How do you unwind payments by the Office of the First Lady for daily expenses? What sort of legal fight would start if the Puerto Rican government tried to reclaim cash from its woefully underfunded pension system? Those dollars are gone forever, and the investors know it. Take this as an example of things to come. When states in dire financial straits, like Illinois, Kentucky, and Connecticut, start scraping the bottom of their financial barrels, they will look for someone to sacrifice. They will eventually identify bondholders, claiming they couldn't possibly cut expenses in their own state, even if that's what the law requires. Eventually, the federal government will devise a plan for restructuring debt, but like Puerto Rico there won't be any good-faith effort to send bondholders everything they are due. Instead, state politicians will gobble up any lingering grace period, and any leeway they can find, shoveling money to the most expediential political places – like underfunded pensions. Municipal bond investors should view this as a wake-up call. No one wants to wake up owning bonds issued by the next Detroit or Puerto Rico. Now is the time to review your portfolio and identify the potential investment land mines, then dump them in an orderly fashion. If you don't, it's possible that the government will have a hand in deciding how much of your money you get back, and it's a good bet you won't be happy. The Looming Financial Crisis Nobody Is Talking About, But Should Be
ZeroHedge.com Aug 2, 2016 2:00 AM Submitted by Shaun Bradley via TheAntiMedia.org, The world has been captivated by a continuous stream of disturbing and shocking headlines. Seemingly every other day, different terrorist attacks, police assassinations or political stunts ignite the public into an emotional frenzy. But as fear shuts down critical thinking, banks that control Europe’s financial system are entering a death spiral. Despite what establishment media narratives push, the most dangerous threat to our way of life isn’t a religious ideology or political divide. The real risk is a contagion that is undermining the core of the financial system, and the interconnectedness of the globalized economy we live in makes containing the problem nearly impossible. Concerns that used to be isolated to the failing state of Greece have now engulfed the rest of the PIIGS nations. If these dominos continue to fall in Europe, the momentum could carry the destruction to every corner of the globe. Italian banks are the latest on the chopping block in the wake of Brexit. For years, they have been acknowledged as a weak link in the economic chain, but they now face stress tests that could expose the scope of their internal problems. The oldest bank in the world, Monte Dei Paschi, is at the center of the controversy, with an expected shortfall of over 3 billion euros. Other big names, like UniCredit, are in equally bad shape. Wells Fargo recently found that nearly 15% of all loans held by Italian banks could be at risk of default, a staggering figure to attempt to unwind. Further, England’s departure from the E.U. has sparked questions over the future of the euro — and Italy could be the catalyst for an all out breakdown of confidence. If panic begins to grip the Italian people, things could escalate quickly, potentially triggering bank runs. Mihir Kapadia of Sun Global Investments explained the current situation in a recent article: “A perfect storm of slow or zero Italian economic growth, low interest rates and politically connected, often corrupt, lending have combined to create a situation where the Italian financial system is in need of a large rescue.“ The head of the European Central Bank, Mario Draghi, wasted no time reassuring the markets and downplaying the significance of the hurdles ahead. Draghi is a former governor to the Bank of Italy, and he recently came out in full support of a ‘public backstop’ for the toxic loans. The public backstop suggested is the political term for shafting the taxpayer. Governments and banks alike have no problem shifting the responsibility of the debt onto the citizens, all while chastising them about how excessive their entitlement programs are and framing the greed of everyday people as the root of the issue. For the elites, it is much easier to use austerity measures, inflation, and shaming of the public to deflect blame from themselves than it is to take ownership for their own corrupt actions. New regulations passed by the E.U. prevent bailout-style action similar to what the U.S. implemented during the 2008 crisis, meaning the only other option on the table is to use customer accounts to re-capitalize, otherwise known as a bail-ins. We saw a test run of this a few years ago in Cyprus, which led to the confiscation of all personal funds exceeding 100,000 euros. In this trial, the seizures only affected the very wealthy, so there was little major outrage; most accounts over the threshold were also held by foreigners, particularly from Russia. But in such a future scenario, private savings accounts, retirement funds, and IRAs of average citizens could be stolen by the banks — without compensation — to cover their bad investments. Although it would be devastating for Italy to have to implement these tactics to save their failing institutions, the real fireworks would be the effects such a move could have on other key banks and foreign nations. As time passes, red flags continue to emerge that point to a terminal diagnosis for the system as a whole. Deutsche bank is by far the most crucial in the E.U., as it supports the union’s powerhouse economy of Germany. In the last year alone, however, their stock price has plummeted more than 60%, bringing the total decline to 90% since its peak in 2007. The bank also just announced its plan to close over 188 branches and cut 3,000 jobs in the coming months. The rebound in the American financial sector over the last seven years never manifested in Europe; instead, the value of their banks continued to grind lower, perpetuated by political ineptitude and central bank manipulation. Germany is the last strong economy left to prop up the crumbling trade bloc in Europe, and without its stability, this grand experiment is doomed to fall apart at the seams. If those signs aren’t bad enough, Deutsche has also become the poster child for the ominous derivatives bubble. It, alone, has amassed an exposure of over $75 trillion dollars in these risky devices, which is almost equal to theannual GDP of the world. This problem is by no means isolated to the European markets; the U.S. banks also drank the kool-aid, and believe it or not, helped create a quadrillion dollar mess. The empty promises made by financial managers are only as good as the public’s confidence in them. Before the subprime mortgage crisis, it seemed like there wasn’t a care in the world — until everyone got spooked and headed for the exits at once. If a similar stampede occurred today, the implications would be far worse. The amount of money needed to pay out on the outstanding derivative contracts doesn’t even exist, and the CIA’s factbook states that broad money, including all paper currency, coins, checking, savings, and money market accounts, equals just over 80 trillion dollars — a mere fraction of the what it would take to cover the exposure of the banks. Warren Buffet famously referred to these instruments as “financial weapons of mass destruction.” He reiterated his perspective in a more recent interview: “I regard very large derivative positions as dangerous. We inherited a modest sized position at [Berkshire’s reinsurance vehicle] Gen Re in a benign market and we lost about $400m just trying to unwind it with no pressure on us whatsoever. So I think it does continue to be a danger to the system.” The derivative market is one of the most obscure in all of finance. Instead of buying a share of a company, or a commodity like oil or corn at a future price, a derivative has no value on its own. Its entire worth is derived from the performance of other parts of the market. It is essentially a side bet on the price movements of real assets. If the major banks, like Deutsche, were to go under, all of those derivatives would be wiped out and could light the fuse on this economic time bomb. Even George Soros has commented on the ongoing crisis in the E.U., saying: “Europe’s leaders must recognize that the EU is on the verge of collapse. Instead of blaming one another, they should pull together and adopt exceptional measures.” The Italian banking crisis and the ballooning derivative market may seem like a trivial issue that is out of sight and out of mind, but the black hole it could open up would destroy our way of life. Thinking about these possibilities can be terrifying, but there are steps that can be taken to ensure individuals at least have an insurance plan in place. Becoming educated on the financial system we’re living in is paramount to having the foresight needed to take action. Developing technologies like Bitcoin and other cryptocurrencies have created an entirely new monetary system that isn’t subject to the corruption of the broken centralized model. These peer-to-peer networks can secure wealth while allowing unprecedented mobility and anonymity. Other forms of stable money, like gold or silver, also play a key role in financial independence. There are few assets with zero counter-party risks, and precious metals allow each individual to become their own central bank. Being self-reliant is also a powerful tool; not being dependent on someone else in a worst-case scenario is crucial to thinking clearly when financial panic breaks out. There is no antidote for the potential chaos bearing down on us, but building strong relationships, obtaining basic skills, and stockpiling the necessities of daily lifecan provide peace of mind and preparedness. A chain of events has been set in motion that will expose the massive fraud world banks and governments have perpetuated on their citizens. When fear porn is being promoted on the major networks, keep in mind the real threats to freedom and security will not be openly announced. The focus on the lone nutjob that kills 20 or the spread of deadly pandemics, for example, is nothing but propaganda aimed at shifting attention to things that are uncontrollable. Ensuring the masses feel helpless and in need of the government’s protection is priority number one for the ruling class. Talking heads and hedge fund managers will be eternally optimistic on the outlook for the future, even as the collapse becomes undeniably obvious. Problems for the European Union will continue to build, and the risk of the disease spreading to other economies increases by the day. Unfortunately, this Ponzi scheme system we built our societies on has left us vulnerable to any well-timed black swan event. |
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