“Those bilateral loans which are to be drafted and signed from now on do not form a special pot of funds or coffers that would have an EU label on it,” said Ms Lagarde. “It is for all members of the IMF.”
The fact that Ms Lagarde (head of the IMF) had to say that is interesting – if it isn’t for Europe who is it for?
This could just be a rhetorical question – but there is a serious side, because if another large country were to experience a crisis and draw on those resources, what would be left for Europe?
A recent article in the Economic Times of India asked whether India was at risk of a current account crisis. Its current account deficit is about 4% of GDP, growth is slowing (down to 6% per year from around 9% per year) and the government is struggling to keep the deficit below 9% of India’s GDP. And India is fairly large (in dollar terms about the same size as Spain). If India is getting a bit risky, are there others and which ones pose the biggest threat to IMF resources. TH reckons that there are quite a few that could knock at the Fund’s door should certain risks materialise.
Before answering the question, a disclaimer. This analysis is biased because it doesn’t consider private debt levels. And private sector defaults are one key driver of balance of payments crises. The reason is I just didn’t have access to that data from my laptop – all the data are forecasts for 2012 and come from the IMF. You can download it from this web page.
So to the first chart. This chart shows that governments that have accumulated lots of debt tend to have current account deficits. It implies that governments that have borrowed heavily in the past are still contributing to national borrowing needs today.
Here is a subset of the first Chart – just the countries with modest to large current account deficits and modest to large debt. The size of the bubble tells you how fast the country is growing (solid bubbles) or contracting (hollow bubbles). The ones that are furthest from the origin and have slowest (or negative growth) are probably the most at risk of a crisis. Greece is a good illustration – and it is already got there and is in the middle of an incredibly severe crisis. There are a few other countries on the frontier also – Italy (not yet in crisis) Portugal (already in crisis), the Sudan (excuse my lack of knowledge about the African economies – but it must be in crisis), Cyprus (yet another Euro area member). Then there are some other countries Jordan through to Panama, whose governments are somewhat indebted and running quite large current account deficits, but are growing.
Most of the aforementioned countries don’t pose a threat to IMF resources – except Italy of course, which is a real worry. So here is the last Chart. It is the same as the above, except the size of the dots is the size of the economy, measured in US dollars. This is what the IMF needs to consider when it does risk management.
Once again, you can see that Italy is a real concern. The US is also worrying (a hollow dot because it could probably get itself out of trouble if it had another crisis just because it could print US dollars to – but TH worries when explanations about how riskless a country is depend on the response – “just because” – why can the US do this, but not the UK (which before Greece was the last advanced economy to draw on IMF resources) – “well … just because”). Spain doesn’t look so risky, but as I said, this analysis ignores the extreme level of private debt that the Spanish are holding.
But as a really smart guy mentioned to TH, generally it’s not rich countries that draw on the Fund, it’s the poorer ones, because they simply can’t afford to make the spending cuts necessary to make the fiscal space to get out of a crisis. When Italy cuts public servants, they become unemployed, but they won’t starve, as might be the case if India were to lay off its gangs of road workers. This brings us back to the EMEs – Egypt, India, and Brazil. Poor countries, without fiscal space, but dependent on foreign borrowing and the type of country that does from time to time need to go to the Fund, “just because” emerging markets often do.
So the main risk seems to be a European one (Italy in this simple framework) – its debt level and borrowing requirements are high enough, its growth weak enough and it is big enough to cause real problems. But lingering in the background are the usual suspects – large countries like Egypt, Brazil and India. These are risks which we shouldn’t ignore.