Infinite Unknown

Turkey is reported to be in negotiations with the International Monetary Fund for a $40 billion loan. Very shortly, the Baltic States and at least a dozen developing countries will be filing for IMF handouts. But how will the venerable lender of last resort fund itself?

According to a fact sheet posted on its website in October, the IMF had $200 million available for emergency loans to the third-world, and another $50 billion in “additional resources”. But the IMF’s liquidity is rapidly dwindling. Between the crisis facilities concluded with Ukraine, Hungary, Serbia, Iceland and Pakistan, and the expected spate of new loan requests, the IMF should be running out of money within the first quarter of next year. Quite simply, unless the rich nations (including American tax-payers) can add to the IMF’s funding capabilities, the global recession will cause unprecedented havoc, chaos, hunger and turmoil in the world’s poverty pockets.

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Tags: Derivatives, Derivatives market, Economy, financial crisis, Iceland, IMF, Pakistan, Politics, Recession, Serbia, Turkey, Ukraine

Residents stand on the rubble of shops and a house damaged in the fighting between Pakistan army and militants in Kanju, a troubled area of Pakistan’s Swat Valley, Tuesday, Nov. 18, 2008. Pakistani security forces are engaged in fierce fighting against militants and Talibans in various areas including Swat Valley, a northwest region that used to be beloved tourist destination. (AP Photo/Sherin Zada) (Sherin Zada - AP)

ISLAMABAD, Pakistan — The U.S. military apparently struck at Islamic militants outside Pakistan’s lawless tribal belt for the first time Wednesday, firing a missile that killed six suspected insurgents taking refuge away from the conflict zone along the Afghan border.

The government denounced the attack as yet another “grave provocation” amid a series of U.S. military operations in the country that have enflamed widespread anger among ordinary Pakistanis.

The harsh words were a sharp contrast to comments Tuesday by U.S. and NATO officials who reported increased cooperation from Pakistan in the fight against militant groups. Tens of thousands of U.S. and NATO troops are stationed in neighboring Afghanistan.

“It looks like the Americans are not listening, but this is such a great provocation that it will bring a strong response from the government of Pakistan that will dissuade them,” presidential spokesman Farhatullah Babar said of the latest missile strike.

He declined to say what the response would be.

The government, which relies heavily on U.S. financial aid, has not gone beyond criticizing raids. Some experts question whether the leadership secretly condones the attacks while speaking out publicly against them, but the government denies that.

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Tags: Afghanistan, Al-Qaeda, Al-Qaida, Government, IMF, Military, Missiles, NATO, Pakistan, Politics, Taliban, U.S., War

Nov. 15 (Bloomberg) — Pakistan agreed to a $7.6 billion loan package with the International Monetary Fund, to help the south Asian country avert defaulting on its debt with the first such program in four years.

The loan “will be used for the balance of payments and to build our foreign reserves,” Shaukat Tarin, the finance adviser to the prime minister, said today at a televised news conference in Karachi. The IMF will give the loan in installments over 23 months at interest rate of 3.5 percent to 4.5 percent, he said.

Pakistan has been forced to seek funds from the IMF after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion last week, the equivalent of one month’s imports, and a group of donor nations declined to provide funds.

“The IMF loan will help in stabilizing the economy only if the government shows the political will to implement the Fund’s program,” said Samiullah Tariq, head of research at InvestCapital & Securities Ltd. in Karachi. Pakistan’s civilian governments from 1988 to 1999 did not complete seven separate IMF loan programs because of “tough” IMF conditions, he said.

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Tags: debt, Economy, IMF, Inflation, Pakistan, Politics, Standard & Poor's

Nov. 10 (Bloomberg) — China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession.

The funds, equivalent to almost a fifth of China’s gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday on its Web site. Following a weekend meeting in Sao Paulo, finance ministers from the Group of 20 nations, of which China is a member, issued a joint statement saying they are ready to act “urgently” to tackle the economic slump.

“If the Chinese use this as a diplomatic initiative, it could be an important step toward a more coordinated response,” Simon Johnson, a senior fellow at the Peterson Institute for International Economics and former chief economist of the International Monetary Fund, said in Boston.

China is taking steps to bolster its economy, the biggest contributor to global expansion, less than a week before President Hu Jintao goes to Washington for talks with world leaders on ways to revive growth. U.S. President-elect Barack Obama vowed last week to push a package through Congress “immediately after” taking office in January if lawmakers and the Bush administration can’t agree on one before then.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession.

`Intensifying’ Crisis

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Tags: China, Economy, financial crisis, Government, IMF, Politics, Recession, Taiwan

The perilous state of the UK economy was exposed as the Bank of England’s Monetary Policy Committee made an unprecedented 1.5 percentage point cut in interest rates.

Winston Churchill meets the Queen in 1955. Photo: PA

The shock vote brought interest rates down to 3pc for the first time since January 1955, when Winston Churchill was prime minister. Economists forecast that the cut could pave the way for further reductions - with some claiming that rates could hit a historic low of 1pc.

Thursday’s move was interpreted as a desperate attempt to protect the UK economy from a severe recession.

“There has been a very marked deterioration in the outlook for economic activity at home and abroad,” said the MPC in an explanatory statement, adding that the threat of inflation was now receding.

It warned that after the most serious crisis in the global banking sector for almost a century, households and businesses were likely to find it difficult to obtain credit “for some time.” The MPC counted falling share prices, a sharp reduction in UK output, and a squeeze on household budgets among a nasty cocktail of circumstances that have combined to hit both businesses and consumers hard.

The MPC’s decision came amid a raft of gloomy news and data emerged. Figures from Halifax, the UK’s biggest mortgage lender, showed that house prices have fallen by 15pc over the past 12 months.

It was the sharpest drop since the survey began in 1983 and brought the average house price down to £168,176 in October, compared with almost £200,000 in the same month last year.

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Tags: Bank of England, Credit Crisis, credit crunch, ECB, Economy, financial crisis, housing market, IMF, Politics, Rate Cut, Recession, U.K.

The International Monetary Fund has slashed its forecast for the world economy next year, predicting outright contraction for the rich economies of North America, Europe, and Japan for the first time since the Second World War.

Taxi driving through Tokyo at night. Photo: GETTY

“Prospects for global growth have deteriorated over the past month. The financial crisis remains virulent. Markets have entered a vicious cycle of asset deleveraging,” said the fund yesterday.

Britain’s economy will suffer and will see the steepest decline in G7 club of leading powers, shrinking 1.3pc as the crunch in the City of London leads to more job losses. Germany will decline by 0.8pc, The US and Spain by 0.7pc.

Sending shivers through stockmarkets everwhere, the Fund cut its world outlook next year to just 2.2pc, down from 3pc just a month ago. This is a global recession under the IMF’s 3pc rule-of-thumb.

“Financial stress is likely to be deeper and more protracted than envisaged in October. Markets are pricing in expectations of much higher corporate default rates, as well as higher losses on securities and loans,” it said.

“Activity is increasingly being held back by slumping confidence. As the financial crisis has become more entrenched, households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits. As a result, they are cutting back.”

Olivier Blanchard, the IMF’s chief economist, called on authorities around the world to respond rapidly with combined monetary and fiscal stimulus, saying risk on an inflationary surge had subsided as commodities prices slump.

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Tags: Economy, EU, financial crisis, G7, Germany, IMF, Japan, Politics, Recession, Spain, U.K., U.S.

The French state has threatened to seize control of the country’s banks and fire top staff unless they do their part to stabilise the economy by stepping up lending to companies in need.

“The banks have got to open up credit to business: they have the means to do it,” said prime minister Francois Fillon, accusing lenders of hoarding cash. “We don’t think the banks are stepping up to task as necessary. We can withdraw the credit that we have extended to them under the state’s contract with the banks, and that will put them in difficulty. At that moment the question arises whether we should take an equity stake, change their managers, and assume control over their strategy.”

Speaking on French television, he warned: “Broadly speaking, we’ll be able to judge over the next 10 days whether they are playing the game as they should, or not.”

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Tags: Banks, Commerzbank, Credit Crisis, credit crunch, Economy, France, Government, Hypo Real Estate, IMF, mortgage crisis, Mortgages, Politics

The Hungarian National Bank stands in Budapest, Hungary, on Oct. 16, 2008. Photographer: Balint Porneczi/Bloomberg News

Oct. 31 (Bloomberg) — Imre Apostagi says the hospital upgrade he’s overseeing has stalled because his employer in Budapest can’t get a foreign-currency loan.

The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe’s developing markets and local currencies plunge.

“There’s no money out there,” said Apostagi, a project manager who asked that the medical-equipment seller he works for not be identified to avoid alarming international backers. “We won’t collapse, but everything’s slowing to a crawl. The whole world is scared and everyone’s going a bit mad.”

Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe’s fastest-growing economies.

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Tags: Banks, Credit Crisis, credit crunch, Economy, emerging markets, Hungary, IMF, Meltdown, Poland, Romania, Ukraine

The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.

IMF’s work in countries such as Turkey is only just beginning

The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Neil Schering, emerging market strategist at Capital Economics, said the IMF’s work in the great arc of countries from the Baltic states to Turkey is only just beginning.

“When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water. The Fund may soon have to start calling on the West for additional funds,” he said.

Brad Setser, an expert on capital flows at the Council for Foreign Relations, said Russia, Mexico, Brazil and India have together spent $75bn of their reserves defending their currencies this month, and South Korea is grappling with a serious banking crisis.

“Right now the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies. We’re in a dangerous situation and there is the risk of extreme moves in the markets, as we have seen with the Brazilian real. I hope policy-makers understand how serious this is,” he said.

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA’ bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world’s central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

“The IMF can in theory create liquidity like a central bank,” said an informed source. “There are a lot of ideas kicking around.”

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Tags: Bank for International Settlements, bankruptcy, Belarus, bonds, central bank, debt, Dominique Strauss-Kahn, Economy, financial crisis, GDP, Government, Hungary, Iceland, IMF, Liquidity, Pakistan, Politics, Romania, Russia, Serbia, taxpayers, Turkey, Ukraine

Pedestrians leave the Central Bank of Iceland in Reykjavik, Iceland, on Oct. 7, 2008. Photographer: Arnaldur Halldorsson/Bloomberg News

Oct. 28 (Bloomberg) — Iceland’s central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached a loan agreement with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement today, taking the rate to the highest since the bank began targeting inflation in 2001.

“I don’t think 6 percentage points will make the krona any more attractive,” said Henrik Gullberg, a strategist at Deutsche Bank AG in London. “Basically what we’re seeing is a complete liquidation of everything in emerging markets, and Iceland, even in the emerging-market universe, is very vulnerable. Six percent isn’t worth a lot if the currency drops another 15 percent.”

The central bank is raising rates as Iceland, the first western nation to seek financial help from the IMF since the U.K. in 1976, faces an economic contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion from the Washington-based fund, according to a deal struck on Oct. 24.

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Tags: central bank, ECB, Economy, Fed, Federal Reserve, financial crisis, Government, hyperinflation, Iceland, IMF, Inflation, Politics