How the US Has Perfected the Use of Economic Imperialism

How the US Has Perfected the Use of Economic Imperialism Through the European Union!

Courtesy of Reggie Middleton

The IMF, like many other international institutions, asserts that it has a “preferred creditor status”, and this has been a practiced convention in the past. Thus, IMF has de facto seniority rights over private creditors despite the fact that there is no legal or treaty-based foundation to support this claim and this seniority of rights for IMF will continue under the recent EU rescue plan announced as well as it has not been noted otherwise implicitly nor explicitly. This is the reason why Sarkozy said it is a said day when the EU has to accept a bailout from the IMF (aka, the US). The EU now, and truly, contains a significant parcel of debtor nations.

To add fuel to this global macro tabloidal fire, the Euro members’ loan will be pari passu with existing sovereign debt i.e. it will not be considered senior. Although there is no written, hard evidence to support this claim, it is our view that otherwise there will be no incentive for investors to hold the debt of troubled countries like Greece, which will ultimately defeat the whole purpose of the rescue package. Moreover, there are indications that support this idea. As per Dutch Finance Minister Jan Kees de Jager, “We are not talking about a special preference for the eurogroup loans, that’s not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html). Of course, if more investors did their homework and ran the numbers, that same disincentive can be said to exist with the IMF’s super senior preference given the event of a default and recoverable collateral after the IMF has fed at the trough.

The ramifications:

IMF’s preferred creditor status coupled with the expensive Euro members’ loans which are part of the rescue package can create a public debt snowball effect that could push the troubled countries towards insolvency when the IMF debt becomes repayable in three years time. This could be seen particularly in case of Greece (subscribers, please reference Greece Public Finances Projections). Even if all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak to 149.1% of the GDP in 2013. Please keep in mind that these numbers are based on what we perceived (as does simple math) to be pie in the sky optimism. I urge all readers to reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic.

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad…

Many of my readers have inquired as to why the IMF has been so inaccurate in their estimates throughout the crisis. I doubt very seriously that it is a case of ineptitude. If one were to be a skeptic, and realize that the IMF charges stringent rates and can (and does) usurp the hierarchy of the claims upon assets upon its entrance, then one can clearly see a motivation in undershooting certain estimates. I am not saying that this is the case, but I would be remiss in failing to broach the topic. Remember, this is not your typical mainstream media publication. Nothing is off limits.

The year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time when Greece will have to refinance the debt to pay the IMF (remember the charts above that show how optimistic the IMF has been historically). However, since the current debt raised by Greece is at fairly high rates, new debt will only be available at much higher rates (as markets should price-in the risk of high debt rollover) unless there is some saving grace of a drastic plunge in world wide interest rates and a concomitant plunge in the risk profile of Greece. At a 150% debt ratio, historically low artificially suppressed global interest rates that have nowhere to go but higher and prospective junk ratings from the US rating agencies, we don’ t see this happening. Thus, the cost of borrowing for in 2013 is likely to be much higher in the market than the nearly five percent for the existing debt. Greece will either be unable to fund itself in the markets at all, and will have to convince the Euro Members and the IMF to extend the three-year lending facility just announced (reference What We Know About the Pan European Bailout Thus Far) or, it will get the debt refinanced at very high rates. In both cases the total debt as a percentage of GDP will continue to rise, and this is not a sustainable scenario over the longer-term. In addition, if it accepts the EU/IMF package and there is an event of default or restructuring, the IMF will force a haircut upon the private and public debtors beyond what would have normally been the case. This essentially devalues the debt upon the involvement of the IMF, a scenario that we believe many sovereign bondholders (particularly Greek, Spanish and Irish) may not have taken into consideration. This also leaves the possibility of a significant need for many banks to revalue their sovereign debt – particularly Greek sovereign debt – holdings.

As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.

Members’ quotas and voting power, and Board of Governors

Major decisions require an 85% supermajority.^[19] The United States has always been the only country able to block a supermajority on its own.^[20]

Table showing the top 20 member countries in terms of voting power (2,220,817 votes in total):^[21]

IMF member country	Quota: millions of SDRs	Quota: percentage of total	Governor	Alternate Governor	Votes: number	Votes: percentage of total
United States	37149.3	17.09	Timothy F. Geithner	Ben Bernanke	371743	16.74
Japan	13312.8	6.12	Naoto Kan	Masaaki Shirakawa	133378	6.01
Germany	13008.2	5.98	Axel A. Weber	Wolfgang Schäuble	130332	5.87
United Kingdom	10738.5	4.94	Alistair Darling	Mervyn King	107635	4.85
France	10738.5	4.94	Christine Lagarde	Christian Noyer	107635	4.85
China	8090.1	3.72	Zhou Xiaochuan	Hu Xiaolian	81151	3.66
Italy	7055.5	3.24	Giulio Tremonti	Mario Draghi	70805	3.19
Saudi Arabia	6985.5	3.21	Ibrahim A. Al-Assaf	Hamad Al-Sayari	70105	3.16
Canada	6369.2	2.93	Jim Flaherty	Mark Carney	63942	2.88
Russia	5945.4	2.73	Aleksei Kudrin	Sergey Ignatyev	59704	2.69
Netherlands	5162.4	2.37	Nout Wellink	L.B.J. van Geest	51874	2.34
Belgium	4605.2	2.12	Guy Quaden	Jean-Pierre Arnoldi	46302	2.08
India	4158.2	1.91	Pranab Mukherjee	Duvvuri Subbarao	41832	1.88
Switzerland	3458.5	1.59	Jean-Pierre Roth	Hans-Rudolf Merz	34835	1.57
Australia	3236.4	1.49	Wayne Swan	Ken Henry	32614	1.47
Mexico	3152.8	1.45	Agustín Carstens	Guillermo Ortiz	31778	1.43
Spain	3048.9	1.40	Elena Salgado	Miguel Fernández Ordóñez	30739	1.38
Brazil	3036.1	1.40	Guido Mantega	Henrique Meirelles	30611	1.38
South Korea	2927.3	1.35	Okyu Kwon	Seong Tae Lee	29523	1.33
Venezuela	2659.1	1.22	Gastón Parra Luzardo	Rodrigo Cabeza Morales	26841	1.21
remaining 166 countries	62593.8	28.79	respective	respective	667438	30.05

source: Wikipedia

And the economic trench warfare continues on as nationalistic pride gets in the way of practicality and progresss, politics as usual…

Britain must fend for itself in event of crisis, French official warns: Britain should not rely on EU help in the event of a renewed financial crisis after refusing to sign up to the bulk of a €500bn (£429bn) rescue package for the eurozone, the head of the French financial markets watchdog said.