IMF stays cautious with bailouts until recovery clear

IMF stays cautious with bailouts until recovery clear
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First Published: Tue, Sep 22 2009. 03 47 PM IST
Updated: Tue, Sep 22 2009. 03 47 PM IST
Washington/Prague: The International Monetary Fund will wait for a clear global rebound before it demands more austerity from bailed-out countries, and when it does it will focus on medium-term plans rather than quick cuts.
Rather than demand too much and fuel public outrage as in the Asian crisis, the IMF is staying more moderate, and economists said markets will do part of the persuading as they punish competing countries that neglect structural reforms.
IMF emerged last year after a decade of diminishing relevance to snatch east European countries from the brink of disaster, pumping billions of euros into Latvia, Hungary, Romania, Serbia, Ukraine and other states.
Although it has pushed for eye-watering cuts in a few cases where it sees no alternative, it has learned from the public backlash it encountered in last decade’s Asia crisis and aims to nurture growth rather than just demand harsh belt-tightening.
Analysts say the strategy carries risks due to political wrangling ahead of a string of elections that could slow reforms the emerging states need to catch up with the richer West.
But with growth expected to plummet this year by at least 6% in most bailout recipients -- and as much as 18% in Latvia -- the IMF is waiting for clear signs of recovery.
“We are very cautious about trumpeting ‘this is the end of the slump, now the recovery is coming,’ ” Marek Belka, director of the IMF’s European department, told Reuters last week.
“Don’t expect us to announce: ‘Now is the time to turn around’. The decision is made by individual countries and conditions are so different.”
Market watchers say the approach will continue to support markets across emerging Europe but investors will punish governments that do not show willingness to rein in deficits.
Spiralling Deficits
Belka said IMF was keeping a close eye on the recovery in western Europe and also saw potential for Eastern Europe to recover at a faster rate once the crisis ends.
“We could then hope for more visible improvement of the fiscal position,” said the former Polish prime minister.
Until then, the IMF has allowed bailed out states to hike budget gaps from earlier targets after it became clear the crisis was much worse than expected.
Although it pushed Latvia to cut pensions by 10% and state wages by 20, it let it raise its public deficit this year to 10% of gross domestic product. That is double an original plan for 5% and more than triple the 3% Riga must achieve to complete its aim of joining the euro zone.
IMF let non-EU member Ukraine raise its deficit ceiling to 6%, from a previously targeted balanced budget. It has also allowed similar moves in Hungary, Romania and Serbia.
Recently the IMF has become more vocal about how governments should be thinking about exit strategies, making it clear that once the recovery was self-supportive they should start laying out medium-term fiscal plans that removed any concerns by markets about countries’ solvency.
Just last week, it welcomed Turkey’s medium-term economic framework but voiced concern that the plan did not include measures to tackle spending pressures.
“What the IMF and the EU will make clear is this is a temporary approach that will last 1, 2 or maybe 3 years,” said Simon Quijano Evans, CEE economist at Cheuvreux.
“But the message will crystallise that the next stage is one of consolidation that will require credible mid-term fiscal plans from all governments.”
The danger, economists said, is that some political parties have used the breathing room to jostle for position ahead of a series of elections over the next year.
Such manoeuvring was behind problems in Hungary, where reluctance to halt the spiralling deficit eventualy led to huge cuts in spending that choked growth in 2007.
Last week in Latvia, parliament struck down a law to raise taxes. Romania’s opposition has challenged the government to a confidence vote over IMF-prescribed wage reforms that have met rising social tension ahead of a 22 November presidential election.
And in Ukraine, president Viktor Yushchenko has accused the government of his rival Yulia Tymoshenko of uncontrollable spending ahead of a 17 January presidential election.
“The IMF is stuck between a rock and a hard place,” said Neil Shearing of Capital Economics. “It’s basically got to strike a balance between being accommodative, not being too draconian on the one hand, and not inducing moral hazard.”
Credibility, Risk
Belka said other factors influencing tightening would be countries’ ability to finance deficits and, for ex-communist EU members, an obligation to bring budgets in line with the EU’s Maastricht criteria, part of their obligation to adopt the euro.
Governments will also face harsher external factors like investor scrutiny, which should prompt bailed-out countries to issue mid-term fiscal frameworks to boost their standing when they eventually return to international markets.
“You’ll have different governments competing on capital markets,” said Quijano. “You’ll have the triple As crowding out the double As, in turn, the single As and then the corporates. That’s the next stage.”
Investor sentiment towards the region has risen since January. Credit default swaps, an instrument to insure against default on debt, had fallen for Ukraine by more than half to 1,200 basis points, from 3,000. Latvia’s were down to 549, from more than 800 in January, and Hungary’s were at 220, from 352.
Agata Urbanksa, senior economist at ING in London, said Latvia was the most likely to tackle belt-tightening. Dependent on the IMF’s help to pay state wages, it has no other choice.
Hungary also appears to have political support for fiscal reform, while Romania and Serbia -- not as dependent on aid now that global markets had stabilised -- were more uncertain.
“But my biggest doubts are about Ukraine,” Urbanksa said.
“Politicians there have proven for the last five years they have no interest in being logical in any way or doing much for the sake of the country.”
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First Published: Tue, Sep 22 2009. 03 47 PM IST