Live From New York: ECB's Trichet & Bob Rubin

♠ Posted by Emmanuel in at 4/30/2010 12:03:00 AM
I almost missed this speaking engagement that the ECB's chief had at the Council for Foreign Relations in New York. Welcoming him is none other than the rather famous Goldman Sachs alum and former Treasury Secretary Robert Rubin. Needless to say, it's important stuff touching on the goings-on in the European Monetary Union (EMU). If the length deters you, there's a highlight clip as well at the link above.

So, What Happens if Greece Can't Pay Up?

♠ Posted by Emmanuel in at 4/30/2010 12:01:00 AM
Here are three disaster scenarios I found from Reuters if Europeans cannot figure out how to stave off Greek capitulation. These are arranged in terms of increasing anarchy and improbability:


PROBABILITY: most likely in the medium to long term

Greece would negotiate a restructuring of its debt before missing a payment. This would require investors to take a significant discount on their debt holdings and could include extending maturities or possibly investors switching to longer maturities. Bondholders could, however, see haircuts of anything from 20 to 40 percent of the net asset value of their debt positions, according to some analysts' calculations.

According to Brown Brothers Harriman's calculations, the current two-year Greek/German bond yield spread is consistent with about a 25 percent chance of a 50 percent haircut or about a 33 percent chance of a 40 percent haircut. The two-year Greek/German bond yield spread has ballooned to more than 1,400 basis points as investors pummelled Greek debt.

MARKET IMPACT: Spreads on other highly-indebted countries in the euro zone would widen sharply while German benchmarks would benefit from flight to quality and the euro could fall to around $1.15, levels last seen in 2005.


PROBABILITY: highly unlikely

Greece could impose a debt restructuring on its creditors, for example extending maturities or forcing investors to take haircuts without prior agreement. Historically, non-negotiated restructuring are more likely to result in a haircut for creditors than are agreed restructurings.

An even more unlikely outcome under this scenario is that markets punish Greece so severely that, despite enormous legal and logistical obstacles, Athens would elect to leave the euro zone and European Union. However, market consensus is that leaving the currency union would make it even more costly for any fiscally weaker country to borrow because of the addition of an exchange risk premium to the sovereign risk premium.

MARKET IMPACT: The euro would be hit even harder as markets would as a knee-jerk reaction price in a greater risk of euro zone disintegration. Spreads of higher-yielding euro zone countries would blow out even further versus German benchmarks.


PROBABILITY: highly unlikely

About 70 percent of Greek debt is estimated to be held by foreigners, most of them within the euro zone, notably German and French financial institutions. European Union officials will try to avoid an outright default.

An outright default by Greece or any country facing a similar situation would mean exclusion from capital markets, as happened with Argentina when it defaulted in 2001. The South American country has not issued any euro or dollar-denominated debt since then as it has yet to come to an agreement with international creditors.

MARKET IMPACT: The euro would most likely fall below parity against the dollar, intra euro zone bond yield spreads would blow out, with the bond market for other countries facing fiscal challenges drying up, leaving only triple-A rated countries able to issue debt.


Other possibilities include the European Central Bank providing loans to help Greece meet its obligations, buying Greek bonds or relaxing its collateral rules yet further to accept any bonds as collateral irrespective of their ratings. However, such scenarios are seen as outliers as they would require political or policy decisions that analysts say would be very difficult to achieve.

Another complicating factor is that many investors have bet on a default through credit default swaps and thus have a vested interest in forcing such an outcome.

EU, Look to Hong Kong '98 for Staunching Panic

♠ Posted by Emmanuel in ,,, at 4/29/2010 12:08:00 AM
So it has come to this point. Regardless of what you think about alleged EU indecision and infighting, the barbarians are definitely at the gate. The stakes are high; indeed, some even believe that the fate of European monetary union hangs in the balance. Like in so many times past, it is certainly easy to blame faceless speculators in the hullabaloo. There are also those rating agencies who appear hellbent on downgrading Greece, Portugal, and Spain at a most inopportune time as the EU and IMF crews try to assemble a definitive rescue package for Hellas. Long after this episode is over, I suspect there will again be much debate about freedom of capital flows and excessive rating agency procyclicality. No matter; we are here now and being slow on the draw will do Europe no favours.

To be sure, there are big differences between the Asian financial crisis and the current one of PIIGS countries battling to reach financial health. For one thing, the PIIGS are not as exactly prone to balance-of-payments crises since their trading partners are mostly other European nations as well. So, having sufficient foreign exchange is not the main issue. Rather, it is controlling market sentiment that the fiscal difficulties these countries find themselves in will not run away into becoming a situation even the combined resources of--their willingness aside--Germany and the IMF cannot rein in. That is, what is the likelihood of any of the PIIGS defaulting, and another...and another?

One of the things that the Asian financial crisis and the European debt crisis share, however, is the imperative to contain runaway panic. The credit rating agencies are certainly not doing the EU any favours as yields on two-year Greek paper hover around an astonishing 30%. While Greece is certainly in no great shape, the first order of business is to corral the herd. There is little reason for Greek borrowing costs to be like this even after all the Enron-inspired accounting of its past administrations. Repeat: even if the euro is certainly underperforming, this is not a currency crisis but a funding crisis.

Now, something the whitebread commentariat seems to have forgotten despite its endless blathering is the example of Hong Kong in 1998 facing down those speculating on the devaluation of the Hong Kong dollar in the wake of the Asian financial crisis. As you know, the Hong Kong Monetary Authority (HKMA) operates a currency board that pegs the value of the HK$ to the US$. The proximate cause of the establishment of this board in 1983 was wrangling between the UK and China over the fate of the world-famous entrepot. Then, as now, uncertainty about a looming catastrophe--handing this bastion of free enterprise to the Communists--triggered the creation of something which has proven remarkably durable.

In 1998, Hong Kong too fell under severe pressure as speculators mounted heavy bets against the HK$ peg while contagion spread from Southeast Asia to parts beyond. Hong Kong had just been handed back to the Chinese, adding complications at the helm. However, the city's authorities knew that had it not defended the currency board, it would have fallen by the wayside like so many others before its turn came. In the same manner, the European authorities know their time has come for a stern test. Here is the introduction on how Hong Kong went "all in" to prevent a rout:
When the Asian financial crisis broke out in 1997, many countries’ currencies tumbled and their economies suffered. However, the Hong Kong Monetary Authority (HKMA) mounted a successful defense of the Hong Kong dollar under the currency board arrangement. In one of the most unusual episodes in recent exchange-rate history, the HKMA intervened simultaneously in the foreign exchange, stock, stock futures and interbank markets. In August 1998, at the height of the currency turmoil, it purchased $15 billion worth of local blue-chip stocks.

Since Hong Kong’s 1997–98 crisis, the financial markets have stabilized. The stock market has recovered. Although its economy underwent five quarters of contraction from 1998 to early 1999, Hong Kong survived the crisis with relatively light damage compared with many of its neighbors. By April 2001, the HKMA had not only recouped the initial cost of the intervention but had done so with significant gains from equity appreciation. The unprecedented intervention seems to have worked. Nevertheless, the intervention broke the Hong Kong government’s laissez-faire tradition and drew significant criticism. Now, with the benefit of hindsight, we may be able to better gauge the intervention’s effects and consequences.
The mechanisms of speculation were as follows according to the operating principles of the currency board:
Under the currency board, interest rates are automatically adjusted in response to changes in the monetary base. When there is depreciation pressure on the Hong Kong dollar, the HKMA is obliged to buy Hong Kong dollars at the official rate. This causes the monetary base to contract, pushing interest rates higher and attracting foreign capital inflows so as to maintain exchange-rate stability. If the exchange rate strengthens, banks may purchase Hong Kong dollars from the HKMA. This expands the monetary base, pulling interest rates down and, thus, discouraging further capital inflows.

During the Asian financial crisis, speculators exploited this interest rate predictability. They took short positions in the Hong Kong stock and stock futures markets. At the same time, they sold borrowed Hong Kong dollars against the U.S. dollar. Under the currency board, the HKMA stood ready to buy back Hong Kong dollars. And herein lies the dilemma under the currency board. On the one hand, continued buyback shrank the monetary base and drove the short-term interest rate up sharply, arresting the outflow of U.S. dollars in defending the currency board. On the other hand, overnight interest rate upsurges—300 percent at one point in October 1997—triggered precipitous drops in stock and stock futures prices, producing hefty profits for short-sellers. After every attack, market confidence plummeted...
And the actions taken were as follows. The two main options were controlling capital flows or heavy intervention given market movements unwarranted by fundamentals. Clearly, a financial centre could not have gotten away with the former option. So, Hong Kong did the latter:
Few options were available to reverse the trend of depleting foreign currency reserves and bleeding equity markets. Among them, two stood out—outright capital control and direct intervention. While during the crisis Malaysia adopted the former, Hong Kong chose the latter. When the speculative attack intensified again in August 1998, the HKMA intervened simultaneously in the money, stock and stock futures markets in addition to buying back Hong Kong dollars. During the last two weeks of August, it imposed penalty charges on targeted borrowers that served as settlement banks for the speculators and bought $15 billion worth of Hang Seng Index stocks (8 percent of the index’s capitalization). In addition, it took long positions that pushed the stock futures 20 percent higher. After the intervention, the exchange rate quickly stabilized, and currency futures and short-term interest rates returned to sustainable levels
Us Asians have long admired the financial savvy of the wizards of Hong Kong. Of course, the point men in Hong Kong's efforts to staunch speculation in virtually all markets was then-Financial Secretary Donald Tsang and the HKMA's then-Chief Executive Joseph Yam. While the name may not be familiar to Westerners, the visage of Sir Donald Tsang should be familiar wearing his signature, dapper bowtie. Eventually, Tsang of course became the Chief Executive of Hong Kong after succeeding the unpopular Tung Chee-Hwa. Meanwhile the similarly well-regarded Joseph Yam served for a couple of more years as head of the HKMA before retiring late last year.

Of the three Western central bank chiefs, I generally hold Jean-Claude Trichet in higher regard than the loathsome Ben Bernanke and the more favourable Mervyn King. As the latter taught at the LSE for quite some time, I probably better keep my trap shut on the latter! Nevertheless, there is indeed a stern test at hand. My best advice to Trichet is to consult those who have been here before and have coped with these pressures well. Given my druthers, I'd hire Joseph Yam as a consultant to the EU straight away. Sir Donald would certainly be willing to give a few words of advice, too.

To recap, this comparison may not be perfect, but there are congruities on the points that need to be addressed:
  1. the mechanisms by which speculation undermines the health of the entire monetary system need to be understood;
  2. once these mechanisms are better understood, the financial Powell Doctrine must be put into motion--just as Hong Kong's authorities had done before;
  3. Hong Kong managed all this without putting the brakes on capital flows--something Greece obviously cannot do as part of the Eurozone;
  4. ECB appraisals need to understand the interrelationship among debt, equity, foreign exchange, and futures markets for coordinative purposes. So far, ECB action has considered mostly capital or debt markets.
There are also those that complicate the task of the EU:
  1. the Eurozone is much larger in every dimension than Hong Kong;
  2. the cadre of European leadership is larger and more diverse than that of Hong Kong;
  3. the EU (again) faces primarily fiscal pressure, not monetary pressure even if it is the latter that must be prevented from giving way;
  4. wayward EU nations experiencing funding problems are nowhere near as healthy as Hong Kong circa-1998, but they aren't as problematic as markets indicate, either.
Blood flows on the trading floors and fear has long since overtaken greed in Euroland. Meanwhile, the doomsayers are riding pillion. But, when the going gets tough, the tough get going. For Trichet and company, I certainly hope they can emulate the efforts of the few, proud men who saved Hong Kong from a grisly fate. In 1983, it took you around 7.78 Hong Kong dollars to buy a US dollar. In 2010, it remains so despite the passage of nearly 27 years. It is now up to Europe's leadership to see the project of monetary integration through its toughest phase alike Hong Kong did all those years ago with its currency board. Undoubtedly it's a stern test, but it's comforting to know that others have made it through with colours flying high by showing pluck and mettle. Establish what ground you wish to stand on and fight. Let Sir Donald Tsang and Joseph Yam show the Eurocrats the way.

'Actually, the IMF Isn't Mandated to Help Greece'

♠ Posted by Emmanuel in ,, at 4/29/2010 12:04:00 AM
This point has been gnawing at me for quite some time and I do believe it should be aired even if I'm not entirely certain about its validity. The basic point made here is that Greece is suffering from a fiscal crisis, whereas the IMF was meant to confront balance-of-payments troubles. That is, not being able to finance one's budget at reasonable terms is different from not having sufficient foreign exchange to facilitate international transactions. While the whitebread commentariat has seemingly neglected this crucial question, it's certainly one which should bother IPE scholars in general and those who make finer distinctions in particular.

Indeed, us folks from the third world can rightfully question if poor countries who've contributed to the IMF are funding crisis-fighting efforts in rich countries when the IMF's mandate doesn't extend past balance-of-payments woes. In what follows, Swaminathan Aiyar makes precisely these points. Aiyar contributes to the Economic Times, a fine Indian business publication that perhaps apes the Financial Times too slavishly (see for yourselves). I will go through the IMF's documents more closely, but for now, see what you make of his op-ed:
The proposed International Monetary Fund loan of $15 billion to Greece is wrong on two grounds. First, it violates the IMF's charter. Second, it is an unwarranted favor to Europe that developing countries will perceive as being at their expense. The IMF suffers from mission creep. Although created for balance of payments rescues, it now wants to stage fiscal rescues too--that means bigger budgets and more staff, the two unwritten goals of any bureaucracy.

The articles of association of the IMF state clearly its aim to provide loans for balance of payments support. Greece has a huge fiscal need but no balance of payments need. Greek importers can get all the euros they wants from Greek banks, which get euros from the European Central Bank. The IMF is by definition a monetary authority, and Greece has no monetary issues--it surrendered its monetary powers to the ECB Bank on joining the eurozone. Some eurozone countries have fiscal crises, but these are Europe's problem, not the IMF's.

The IMF's funds proved wholly inadequate to meet balance of payments needs during the Great Recession of 2007-09. So member countries tripled its lending resources to meet future balance of payments crises, which presumably did not include fiscal crises. If Greece gets an IMF lifeline, bond speculators will logically attack the other eurozone countries with large deficits--Portugal, Spain and maybe Italy. Rescuing them would empty the coffers of the IMF. Yet it would be politically difficult to say no to Spain or Italy after saying yes to Greece.

Historically, there was a clear division of work between the World Bank and IMF. The Bank provided fiscal support for development, so its loans entered the budgets of borrowers. The IMF provided hard currency for balance of payments support. This hard currency was purchased by the central bank of the borrower, and went into the borrower's foreign exchange reserves, not its budget. Indeed, loans from the IMF were technically called "purchases" of hard currency, and repayments were called "repurchases."

This Bank-IMF division of labor has blurred since 1991. Ex-communist countries needed massive support, and it was politically expedient to use the full resources of the Bank and IMF. The blurring was rationalized by arguing that the IMF always sought fiscal stringency when lending. Further, even when such loans went to central banks, they enabled central banks to give more budget support to their governments. This blurring also facilitated emergency loans during the Asian Financial crisis. IMF loans to Russia and Argentina were formally allowed to enter the budgets of the borrowers.

By the same logic, say Europeans, the IMF should give fiscal support to Greece. They are wrong. Argentina, Russia and all the other IMF borrowers had serious balance of payments problems. The IMF gave loans to tackle these balance of payments problems--in accordance with its charter--and the fiscal support was just a supplementary benefit. Greece, however, has no balance of payments problem. Any IMF rescue would be straightforward fiscal support, violating the IMF's charter. Why would it do this? To bestow a special favor on Europeans, its dominant shareholders.
OK, I've taken a quick look at the IMF's Articles of Agreement. Again, it's a matter of interpretation. If we consider the fifth clause under the first article, then Aiyar is correct:
To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
So far, so good for the op-ed. However, the preceding second clause might give us pause if defined loosely. After all, major disruptions in the use of the world's second most widely used currency cannot fail to have ripple effects on the world economy as we're noticing right about now:
To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
And here's the part for those wishing to kick Greece out and solve its problems prior to re-entering the Eurozone at some time in the future. Read clause 3:
To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
Yes, the latter clause reflects a pre-1971 order, but still. It would certainly make matters more interesting if developing countries make disbursal of funds to Greece an issue, but I tend to think most aren't as militant on this point as Swaminathan Aiyar. The threshold for a veto on the IMF's decision to lend to Greece is 15% not going along. Is anyone up for campaigning against IMF Greek lending?

Deja Vu Time: G-20 as Bretton Woods Rehash

♠ Posted by Emmanuel in ,, at 4/27/2010 11:35:00 PM
To its credit, the G-20 process seems to be making meaningful progress on fronts I thought would be sacrosanct only a few months ago: cracking down on tax havens; increasing transparency of hedge fund positions; regulating "systemically important" banks; and even a then-unheard one of charging these banks for the public service of bailouts going forward. We now know that the current IMF head has proclaimed the death of the Washington Consensus, while its quest for ever-freer capital flows has been abandoned (for now).

Now, Eric Helleiner should be a very familiar name to IPE readers. As his edited volume The Future of the Dollar demonstrates, there is a wide range of opinions on where it is headed. Nevertheless, in a recent UN Conference on Trade and Development (UNCTAD) discussion paper, he makes an number of salient points, First, the Bretton Woods conference was itself a UN-sponsored event. Second, as we often forget, the World Bank and IMF are nominally under the umbrella of the UN system. Thus, UN bodies alike UNCTAD should have a way in how these institutions function. Third, many of the issues we face today--regulating capital flows, accommodating heterodox (read: contra Washington Consensus) policies, and what else have you were also the points of debate at Bretton Woods.

As he is writing for UNCTAD, Helleiner is unsurprisingly friendly to causes dear to developing countries. Yes. it's a slant I'm partial to obviously, but he makes several points that require meaningful consideration in any discussion of the subject matter of The Contemporary Reform of Global Financial Governance: Implications of and Lessons from the Past. Here is the conclusion, though the rest is well worth reading:
The G20 leaders’ summit in November 2008 invariably invited comparisons with Bretton Woods. At both meetings there was a shared desire to assert public authority more centrally into the international financial system in the wake of a devastating international financial crisis. But the G20 leaders have so far been much more cautious than their Bretton Woods predecessors in laying out an agenda to achieve this goal. This paper has suggested that the three broad innovations in global financial governance outlined at Bretton Woods may serve as useful road map if policymakers want to set their sights higher: the regulation of international financial markets, the management of global imbalances, and the promotion of international development.

Some of the specific long-forgotten proposals that were discussed during the Bretton Woods negotiations in each of these three categories also deserve reconsideration today, such as those relating to debt restructuring, heterodox fnancial advice for developing countries, and the role of international cooperation in efforts to control capital movements. This is not to suggest that history should simply repeat itself. If the Bretton Woods objectives are to be met in the contemporary context, a number of the proposals they discussed would need to be adjusted to the new economic and political circumstances. Efforts to regulate international financial markets today must go far beyond the border control issues addressed at Bretton Woods to strengthen international prudential rules. For those wanting to curtail speculative international financial flows, the Tobin tax provides a new approach not considered at Bretton Woods. With respect to the management of global imbalances, the Bretton Woods principle that both surplus and deficit countries have shared responsibilities needs to be reinforced via new mechanisms such as an international substitution account, support for domestic currency borrowing in developing countries [instead of in reserve currencies], and new kinds of reserve pooling arrangements at the global and regional levels. The promotion of international development must also be extended to cover the new international prudential regulations being developed.

Important to all these areas is also the need for governance reform to adjust international financial institutions to today’s more decentralized international political environment. At the Bretton Woods conference, United States leadership within the multilateral Bretton Woods institutions was simply assumed. Today, the world is changing in ways that make governance questions a much more important part of the agenda of global financial reform. It is not just a question of giving developing countries more say in the Bretton Woods institutions as well as in the FSF and other standard-setting bodies. Also significant is the need to consider decentralizing international financial governance by assigning more tasks to the regional level. At the same time, greater resort to a principle of subsidiarity via regional arrangements in international financial governance must be grounded within the broad multilateral framework set not just by the Bretton Woods institutions, but also the United Nations system more generally.

This last point deserves special emphasis for those seeking to build a new Bretton Woods. As we have seen, from the very start, United States policymakers in the early 1940s intended the planning for the post-war international financial order to be situated within the larger process of creating the United Nations system. It is no coincidence that the formal title of the Bretton Woods meeting was the “United Nations Monetary and Financial Conference”. In the lead-up to the conference, British policymakers had pressed at various moments for bilateral negotiations, but United States policymakers insisted on a more inclusive multilateral meeting which included not just smaller industrialized countries, but also countries from the non-industrialized world. In the contemporary period, the United States decision to create a summit of the G20 leaders for the first time in November 2008 marked an important effort to be more inclusive of emerging powers in discussions of global fnancial reform. If the goal is to build a new Bretton Woods order, however, the process will need to be embedded within a more representative, inclusive and universal political framework.

Pay Us In Yuan, Not Dollars (Pretty Please)

♠ Posted by Emmanuel in , at 4/27/2010 10:18:00 PM
An interesting piece in the FT by StanChart's chief economist Gerard Lyons makes the case that, in spite of its continued willingness to buy dollar-denominated reserve assets, China is nonetheless undermining the dollar by facilitating the use of renminbi swaps with its trading partners for invoicing and settling transactions. For sure, there is still some way to go before the yuan becomes more freely traded, but this is a step in the right direction.

I cannot possibly hide my antipathy towards the wretched greenback, so I wish these small-scale experiments China is conducting with various LDCs--especially those in Southeast Asia--pick up speed. What impresses me with Lyons is that, unlike many other commentators who've been living in their whitebread world (as Billy Joel once sang), he understands that these efforts are currently being coursed through the Hong Kong Monetary Authority (HKMA) and not the People's Bank of China (PBoC). The reason is simple: the former simply has more accumulated experience facilitating these types of transactions. The currency is the yuan, but the overseer is a former British colony's legacy central bank:
There is a ticking time bomb under the dollar. When it explodes depends not just on the US economy but also on policy actions in Beijing and Washington. Over the last year the Chinese have undermined the dollar by the back-door, questioning it as a store of value and medium-of-exchange.

Although the Chinese are not advocating the renminbi as the alternative to the dollar this may be only a matter of time. One needs to focus on what the Chinese do, as well as listen to what they say. A key development is China’s encouragement of international use of the renminbi, although they prefer to call it invoicing.

This may be from a low starting point but one Chinese saying may be worth bearing in mind: “A march of 10,000 miles begins with one small step”. Early signs are promising. China is encouraging exporters to invoice in the renminbi and is setting up systems to allow trade payments in renminbi. This make sense. China’s trade is soaring. New trade corridors may soon require new means of payment. When the Chinese and Brazilian Presidents met last year they agreed to use their own currencies to settle more of their bilateral trade, rather than invoicing in dollars. Although viewed as symbolic, it is a sign of things to come.

The crisis also saw China sign a host of bilateral currency swap agreements with countries ranging from Indonesia to Belarus and Argentina. China’s growing trade and financial links with the rest of the world will make the renminbi more acceptable. Gradualism dictates the Chinese approach to most policy measures. The process is logical. Look at the theory, examine the pros and cons, debate the issue, implement slowly and observe. If the project works, roll it out. On that basis, there is more to come.

Since a pilot programme started in July 2009 the volume of international trade settled in the Chinese currency has totalled Rmb11.6bn ($1.7bn). Although only 0.1 per cent of Chinese trade in that time, it has gathered momentum. This has encouraged the authorities to expand the programme.

Renminbi invoicing has been restricted to 400 mainland companies in five cities: Shanghai, Shenzhen, Guangzhou, Dongguan and Zhuhai. It will soon widen to cover thousands of mainland companies and more provinces, including Heilongjiang in northeast China which has sought approval to settle trade with Russia in renminbi. These are still early days and China will need to clear a few technical hurdles to make the renminbi widely acceptable. For instance, guidelines for invoicing and settling trade in renminbi need to be harmonised.

Hong Kong is the main beneficiary as the renminbi gains acceptance abroad. It has the natural advantage of a renminbi deposit base, well-established trade links with China and a head-start in developing renminbi financial products. The city’s regulators are ensuring it retains its edge.

Since February, the Hong Kong Monetary Authority has made it easier for its banks to process trade transactions in renminbi, to develop renminbi based financial products such as bonds, and to extend loans to and take deposits from local companies in renminbi. In January, China implemented a free-trade agreement with ASEAN, the Southeast Asian grouping of 10 countries. Rising Chinese trade with the rest of Asia will boost renminbi settlement in Hong Kong.

There will be future tipping points. Convertibility of the renminbi on both trade and capital accounts would be the ultimate hurdle to cross for China to make its currency globally acceptable. This will eventually happen. China also needs to develop its capital markets and financial infrastructure.

As international reserves soar I detect among reserve managers a desire to shift away from the dollar. Yet they do not want to actively sell the dollar, lest it triggers the crisis they fear. Instead fewer net new reserves are being placed in the dollar. I call this passive diversification but until the renminbi becomes convertible it is unlikely to take its rightful place in reserve holdings.

International use of the renminbi will also rise as Chinese firms invest overseas and its government increases support to other countries. This is already happening. For instance, China recently signed a $20bn financing deal with Venezuela, half to be paid in renminbi.

Furthermore, renminbi use has increased despite the currency’s peg to the dollar. Once the renminbi starts to appreciate it may receive an additional boost as a store of value. This de-pegging of the renminbi to the dollar could occur soon, but it is more likely to be a gradual and ongoing shift than a big one-off move. It would signal a trend appreciation of the renminbi. “Made in China”, the three most common words of the last decade, may soon be joined by “Paid in renminbi”.
It gives a whole new meaning to one country, two systems, eh? Weaning the world off "dollar hegemony" is long overdue. Given its history of economic gradualism, these are heady times for China. The dollar is the currency of the past slowly sinking in the quicksand of subprime globalization and not the future. Let China show us the way.

Minor German Party: Remove Greece from EMU

♠ Posted by Emmanuel in , at 4/27/2010 04:33:00 PM
There has been much commentary about this Reuters article reporting that the junior partner in the ruling coalition of the Christian Democratic Party (CDP) and Free Democratic Party (FDP) alliance suggests Greece should take a time out on the euro:
Greece might have to quit the euro zone for a time if the country failed to tighten its belt sufficiently to qualify for emergency aid, a budget expert with Germany's junior coalition party said on Tuesday. A temporary exit from the single currency might benefit Athens if accompanied by a devaluation, the Free Democrats' (FDP) Juergen Koppelin told Deutschlandfunk radio.

The EU treaty makes no provision for a euro zone member to quit the single currency, and top regional policymakers including ECB president Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker have dismissed the possibility of Greece doing so...

"One may have to say no (to aid) if Greece does not meet conditions and the country just comes along to get money under more favourable terms from the euro zone than from banks," Koppelin said. Asked whether a German "no" meant that Greece would no longer get any money, Koppelin said: "That can't be ruled out, right up to the point where Greece would have to leave the euro zone for a time...This is not (monetary union) breaking up. The Greek currency could be depreciated. That could even help them with exports." Koppelin gave no further details of how a Greek exit from the euro or a devaluation might be structured...

Polls show an overwhelming majority of Germans oppose providing Greece aid, a view that has been reinforced by powerful sections of the media. Tuesday's edition of mass-selling daily Bild ran a headline: "Why are we paying for the Greeks' luxury pensions?"
This suggestion is both impractical and unrealistic IMHO:
  1. Being in the eurozone insulated Greece from balance-of-payments problems if not fiscal ones. Witness the still-long line of prospective entrants to join the eurozone. There is no incentive for Greece to make itself vulnerable on both fronts just so it can devalue willy-nilly;
  2. It reminds me of the old chestnut about no country being able to devalue itself to prosperity;
  3. Koppelin doesn't seem to understand that German and other EU lending will be at rates higher (~5%) than IMF lending (~3%) so there is no "free ride" here.
The least pain for all parties concerned is to just grin and bear it.

0.7% of GDP Aid Target: Where Did It Come From?

♠ Posted by Emmanuel in , at 4/27/2010 12:09:00 AM
I serendipitously came across this fascinating paper by Michael Clemens and Todd Moss of the Center for Global Development (CGD) while looking for the history of the much-vaunted aid target. As someone interested in all matters dealing with development, I've been curious about the somewhat obscure origins of the target that official development aid (ODA) constitute, at a minimum, 0.7% of the GDPs of developed nations' respective outputs. Even today, the UN Millennium Project harps on the 0.7% target:
The UN Millennium Project's analysis indicates that 0.7% of rich world GNI can provide enough resources to meet Millennium Development Goals, but developed countries must follow through on commitments and begin increasing ODA volumes today. If every developed country set and followed through on a timetable to reach 0.7% by 2015, the world could make dramatic progress in the fight against poverty and start on a path to achieve the Millennium Development Goals and end extreme poverty within a generation.
While several Nordic and Benelux countries approach or exceed this target of 0.7%--see a review from not so long ago--many others fall short. Here is the abstract from the Clemens and Moss contribution:
The international goal for rich countries to devote 0.7% of their national income to development assistance has become a cause célèbre for aid activists and has been accepted in many official quarters as the legitimate target for aid budgets. The origins of the target, however, raise serious questions about its relevance. First, the 0.7% target was calculated using a series of assumptions that are no longer true, and justified by a model that is no longer considered credible. When we use essentially the same method used to arrive at 0.7% in the early 1960s and apply today’s conditions, it yields an aid goal of just 0.01% of rich-country GDP for the poorest countries and negative aid flows to the developing world as a whole. We do not claim in any way that this is the ‘right’ amount of aid, but only that this exercise lays bare the folly of the initial method and the subsequent unreflective commitment to the 0.7% aid goal. Second, we document the fact that, despite frequent misinterpretation of UN documents, no government ever agreed in a UN forum to actually reach 0.7%—though many pledged to move toward it. Third, we argue that aid as a fraction of rich country income does not constitute a meaningful metric for the adequacy of aid flows. It would be far better to estimate aid needs by starting on the recipient side with a meaningful model of how aid affects development. Although aid certainly has positive impacts in many circumstances, our quantitative understanding of this relationship is too poor to accurately conduct such a tally. The 0.7% target began life as a lobbying tool, and stretching it to become a functional target for real aid budgets across all donors is to exalt it beyond reason. That no longer makes any sense, if it ever did.
And here are the key parts of the paper to me. While most of us know that it had something to do with the UN--particularly the UN Conference on Trade and Development (UNCTAD) formed by more activist developing countries--there is more to the story. First, there is the involvement of the World Council of Churches that had indirect clout at the United Nations. American officialdom circa the mid-Sixties also figures into the preliminary argument for 1% of rich-country GDP being devoted to ODA:
The World Council of Churches is a Geneva-based organization that has promoted cooperation between different Christian sects since 1948, and claims to represent 400 million people in 100 countries. From its inception the Council was a conduit for cash donations from parishes in rich countries to those in poor countries. At its 1955 Central Committee meeting in Davos, the Council asked Dutch agricultural economist Egbert de Vries, a senior World Bank official and devout Christian, to advise it on its aid efforts. De Vries made the case that no amount of church donations could reasonably do the job and that “a great amount of capital would be needed from the rich nations in order to achieve only a modest increase in the standard of living of the poorer.”

In 1955, total public and private capital flows to poor countries were about 0.5 percent of rich countries’ GNI. The Council’s Central Committee, meeting in Denmark in 1958, adopted a statement that “[o]nly with substantial outside aid from the economically more developed countries … can countries with soundly based development plans hope to carry them through and avert the human disasters that follow from their failure. … Far more grants and generous loans are essential. … If at least one per cent of the national income of countries were devoted to these purposes, the picture would become much more hopeful.”

Though the Council provided no record of how it arrived at the one percent figure, it is unlikely that it was settled on for any other reason than that it was a round number representing roughly a doubling of capital flows from the levels of the mid-1950s. The Council’s request was transmitted to several developed countries’ missions to the United Nations.

Throughout the late 1950s public and private capital flows all developing countries increased, and by 1960 had reached 0.83% of rich countries’ GNI. In that year, the United Nations General Assembly called that level “inadequate” and adopted without vote the resolution that it “[e]xpresses the hope that the flow of international assistance and capital should be increased substantially so as to reach as soon as possible approximately 1 per cent of the combined national incomes of the economically advanced countries.”

The 1% figure got more than just this hopeful nod from the UN. It was supported directly and explicitly—though not publicly—by rich-country governments. US State Department internal memos from early 1961 reveal that the Undersecretary of State for Economic and Agricultural Affairs “thought the Germans might agree to one per cent of gross national production. This seemed satisfactory to Mr. [Secretary of State Dean] Rusk”, and that the State Department told all its European missions that “we can perhaps set as a collective target a sum of one per cent of our aggregate income”.
We now need to complete the story by explaining how the 1% figure above came to be the 0.7% standard of today that we all know and at least some people love. What's remarkable here is the involvement of Robert S. McNamara in arriving at this figure during his term as World Bank president. Often a target for activists' ire for his role in the Vietnam conflict as US Secretary of Defence, perhaps it's time the aid activists cut him some slack in pushing for the time-tested standard:
A final step remained for this “1%” goal for aggregate capital flows to become the modern “0.7%” goal for aid. The first meeting of the United Nations Conference on Trade and Development (UNCTAD) in 1964 noted that capital flows to developing countries had reached 0.8% of rich-country income in 1961, approximately three quarters of which were official bilateral aid. The meeting thus hinted at, but did not adopt, an aid goal. The Conference’s final act stated that it “recommends” that “[e]ach economically advanced country should endeavor to supply … financial resources to the developing countries of a minimum net amount approaching as nearly as possible to 1 per cent of its national income …” An aid goal was not only absent but notably and explicitly ruled out: “This is not intended to represent either a ceiling or a suitable method for comparing the appropriate quantitative or qualitative development assistance efforts between economically advanced countries.”

The second meeting of UNCTAD, in New Delhi in 1968, went one step further but stopped just short of a formal aid target. Background studies by the UNCTAD secretariat noted that combined public and private capital flows had slipped from 0.87% of rich-country GNI to 0.62% over 1961–1966. These background studies—which were not endorsed by the delegates—suggested that to meet the General Assembly’s one percent goal for total capital flows, “it would be desirable to have a target for official development assistance as a measure of the commitment of governments to international development” and “consistent with the 1 per cent target, … [c]ountries whose net official assistance is currently below 0.75 per cent of their GNP might undertake to raise it to this level by, say, 1971.” To arrive at this number, the study explicitly assumes that official flows would continue to represent roughly two thirds to three quarters of total capital flows through the mid 1970s.

Though the Conference reiterated support for the 1% goal of total capital flows, it did not adopt the secretariat’s suggestion of an aid goal. The Conference’s “decision” on an “aid volume target” reads: “A number of developed countries stated that within the 1 per cent target defined above, they were prepared to attempt to provide a minimum of 0.75 per cent of their GNP by way of net official financial resource transfers. One developed country expressed the view that this proportion should be at least half of the 1 per cent target. The other developed countries, even though they are not prepared to accept any precise ratio, believe that endeavors should be made to ensure that official bilateral and multilateral flows represent a substantial part of the totality of financial resources provided.” The anonymity of these references suggests deep and sensitive divisions at the meeting.

The aid community wanted more. World Bank President Robert McNamara together with British Minister of Overseas Development Lord Reginald Prentice conceived the Commission on International Development—more commonly known as the “Pearson Commission” after its chair, former Canadian prime minister and Nobel laureate Lester Pearson. The main purpose of the group was to use the commissioners’ political clout to draw attention to the UNCTAD target in legislatures, especially the United States. From its inception, the Pearson Commission was conceived in order to “rejuvenate the commitment to the UNCTAD target… The Commissioners were largely ‘political influentials’ and well-known economists to help persuade legislatures, with the US as a prime target,” explains Ernest Stern, who was Deputy Staff Director for the Commission.

Arrival at the 0.7% figure was also the result of an arbitrary compromise based on what was thought politically feasible at the time. Former Pearson Commission staffer Sartaj Aziz recalls:

By the time the Pearson Commission met, there was a virtual consensus on the 1% target. From there, the rationale for reaching the 0.70% target for ODA was straightforward. ODA had already reached 0.54% in 1961. An increase to 0.6% would have been considered too modest since countries like France had reached 0.72% by 1968. I remember one staff discussion in which we debated whether the ODA target should be 0.70% or 0.75%. Consensus reached was in favor of 0.70%, as a ‘simple, attainable and adequate’ target.

The final report, delivered to McNamara in September 1969, read: “We therefore
recommend that each aid-giver increase commitments of official development assistance for net disbursements to reach 0.70 per cent of its gross national product by 1975 or shortly thereafter, but in no case later than 1980.”

The UN took on the 0.7% figure, but agreed that governments would exert “efforts” to reach it rather than agreeing to actually reach it. On November 19, 1970, the General Assembly adopted without vote the declaration of the Second Development Decade, calling for six percent GNI growth in developing countries and stating, “Each economically advanced country will progressively increase its official development assistance to the developing countries and will exert its best efforts to reach a minimum net amount of 0.7 per cent of its gross national product … by the middle of the Decade.” What constituted sufficient effort was not defined.
The text of the General Assembly resolution is here. It's good investigative work by Clemens and Moss and makes for a compelling story in its own right. Like with so many other things, standards often come about by happenstance and accident than any conscious effort to make them so.

Deutschland uber alles: EU's Surveillance Dilemma

♠ Posted by Emmanuel in at 4/26/2010 12:07:00 AM
I'm a little lamb who's lost in the wood
I know I could always be good
To one who'll watch over me...

As we know, the somewhat harrowing experience Germany is now experiencing of imposing discipline on wayward EMU members has compelled it to create additional surveillance mechanisms to (hopefully) prevent future repeats. However, doing so is easier said than done. While some left-of-centre commentators welcome the establishment of a European Monetary Fund (EMF) as a way to ward off globalization's pantomime villains--"the speculators"--the reality is more complex and involves some rather unpalatable considerations. As Pogo said, we've met the enemy and it is us [Europeans].

First, the Bundesbank is already the template for ECB; establishment of an EMF would further emphasize Deutschland uber alles (Germany above all) in the European project's economic sphere. That is, Germany would be acting as "the big affair I cannot forget" to get its long-desired wish for tighter watch over happy-go-lucky states.

Second, and this is the big political question, is that creating economic and fiscal discipline enforcement mechanisms at German insistence will likely require more treaty revisions and, consequently, more referenda. By now, Europeans are rather tired of having to decide on another treaty after Maastricht (1993), Amsterdam (1999), Nice (2003), and Lisbon (2009). And, don't forget the ill-fated European constitution that necessitated Lisbon: the French (45/55) and Dutch (39/61) rejected the European Constitution during referenda held in 2005. Moreover, the Lisbon Treaty required making Irish re-vote for approval.

The Financial Times recently had an article speaking about these challenges as Germany aims to persuade the others to tack on a surveillance mechanism to the EU. So far, the Finns are indicating support:
Finland is sympathetic to controversial German proposals for a fresh European Union treaty if necessary to enforce fiscal and economic discipline in the eurozone after the Greek debt crisis. Matti Vanhanen, prime minister, acknowledged that treaty changes would be “very sensitive” so soon after the EU’s latest rule book came into force last year after nearly a decade of gruelling debate. But he said Finland was “ready” to back proposals by Angela Merkel, German chancellor, to strengthen economic co-operation within the eurozone and impose sanctions against countries that threaten its stability.

The prospect of another round of treaty negotiations has caused alarm in many European capitals after the difficulty of forcing through the Lisbon treaty but Mr Vanhanen’s remarks indicate that Germany is starting to win allies. He said the priority should be to look for ways to tighten rules within the existing treaty, including the withdrawal of EU structural funds from countries that ignore official warnings from Brussels over excessive budget deficits.

Such a measure could be introduced “very quickly” using the present framework, he said, while treaty changes were likely to take “several years”. “We need an instrument that will guarantee that, after a warning, member states really change their fiscal policies,” he said. “I think we can do it without changing treaties but we are also ready for treaty changes if it would produce something better.”

Mr Vanhanen said the eurozone must restore its credibility as a “rules-based” union by tackling soaring deficits that have left almost every member, including Finland, in breach of the stability and growth pact, which was supposed to limit deficits to 3 per cent of gross domestic product.

His comments came amid the most serious crisis in the euro’s 11-year history, with Greece on the brink of a bail-out from the International Monetary Fund and fellow eurozone countries. “Greek debt is not so big but there is a domino threat so we need to isolate the problem as early as possible,” said Mr Vanhanen.
So, can stability and growth pact (SGP) provisions concerning the sanctioning of repeat offenders--which Germany itself has been one of at various points in time--be made more forceful? More importantly, do member countries have the appetite for yet another round of treaty revisions? Venhanen makes the very valid point that many EMU aspirants have striven to meet membership criteria amid a global recession. Implicitly, those already in the project should not shirk their responsibilities as many are very keen on joining this club:
He insisted the crisis must not be allowed to disrupt plans by Estonia to join the euro next January and said the eurozone must keep its doors open to aspirant members. The European Commission and European Central Bank are expected to consider Estonia’s readiness to join next month with a final decision from the European Council due in summer.

The Baltic country, a near neighbour of Finland, appears to have met all the criteria for membership. It battled to reduce its deficit below 3 per cent of GDP amid one of the deepest recessions in the EU last year.

Some analysts have questioned whether the eurozone has the appetite for further expansion after the Greek crisis but Mr Vanhanen said Estonia’s application seemed to be moving ahead “on timetable”. He warned that any delay would “send totally the wrong message” to other aspirant members, such as Latvia and Lithuania, which are making tough budget cuts and other reforms to keep alive hopes of euro entry.
The show must go on even if the script may need modification to the consternation of the actors. Tell me, where is the shepherd for this lost lamb?

Although he may not be the man
Some girls think of as handsome
To my heart he carries the key...

Who'll Kick Greece Harder, EU or IMF?

♠ Posted by Emmanuel in , at 4/24/2010 08:07:00 PM
I just wanted to put this up quickly. As we all know by now, the Greeks have finally cried uncle over their massive fiscal hole. Not wanting to say "I told you so," please visit my previous post on how the above countries have availed of or are in the process of availing of EU/IMF bailout packages. Greece now shares this fate as predicted. Included in that previous post are links back to the relevant EU/IMF pages which detail their rescue operations.

What will be of note here is how much conditionality and monitoring will be handled by the EU and IMF. This distribution of labour will be interesting since the IMF is already claiming that it should do the bulk of the work in these respects even if the EU has already prodded Greece into accepting measures to boost revenue and reduce expenditures. That is, there may be a duplication of roles. Which, of course, may not entirely be unwelcome given how Greece has used Enron-inspired accounting in the past. Certainly, there is concern that the EU is not up to sniffing out shenanigans as Greece managed to evade meaningful criticism of its accounting practices for so long. The more people watch over it intently, the more likely it is to finally toe the line. First, here is the FT quoting a former IMF board member on the administration of conditionality:
“You keep hearing in Europe that the ECB and the eurozone will set up the conditionality, and then in Washington you hear from the IMF[’s] MD that the fund will set conditionality,” Mr Lombardi said. “We are working in uncharted waters here.”
The graphic above and the relevant write-up below speculating on what sort of hair shirt Greece will be made to worn by the IMF are from the Wall Street Journal:
But hurdles remain before any checks are cut. Amadeu Altafaj, a spokesman for the European Commission, the EU's executive arm, said officials of the EC and the European Central Bank would begin preparing an opinion on whether the aid is needed. Those officials are also working with the IMF to coordinate how the loans would work. "It is not a question of 24 hours and handing over the money," Mr. Altafaj said, though he stressed the EU, not known for alacrity, would move quickly.

Greece's negotiations with the IMF, too, may not be so simple. The fund typically asks its borrowers to commit to major financial overhauls, and then doles out money over time as the country meets milestones. If the country slips, the IMF can withhold payments. The EU, as part of the euro-zone's requirements, has already put Greece on a tough three-year fiscal diet, requiring progressively narrower annual budget deficits by 2012. But the EU has little practical enforcement power, and the IMF is likely to insist that it be able to perform its traditional enforcer's role.

In other cases where European countries have gone to the fund—Latvia and Hungary, for instance—the IMF hasn't asked them to restructure their debt. But with Greece's problems deepening, the IMF may feel that a €45 billion loan isn't enough. "The IMF could decide the numbers don't hang together," says Susan Schadler, a former senior fund official for Europe. "The IMF could say it can't go for a program that won't add up—that it either requires restructuring or massive amounts of more money."

Greece is in a particular bind. Its debt last year amounted to 115% of its gross domestic product, a ratio that is growing rapidly as Athens continues to spend more than it brings in. The ratio is also growing because Greece's anemic growth rate is outstripped by the interest rates it pays on borrowings...

That means the IMF is likely to push for deeper deficit cuts, further squeezes on public salaries or pensions and tax changes that get more people contributing to government coffers. If Greece can't get a handle on its deficit, there are few options besides pleading with creditors to accept less than they are owed, analysts say.
Enough bingeing; it's knuckle-down time.

China, Japan, and US Contest the Heart of Asia

♠ Posted by Emmanuel in ,, at 4/23/2010 12:36:00 AM
If the current century is indeed "The Pacific Century" as many commentators make it out to be, then we need to understand how major powers are jockeying for leadership in the region. Geography is often subject to political contestation, and nowhere is this truer than in defining what exactly the "Asia Pacific" is. As China, Japan, and the US jockey for position, they all define the region differently--including some, neglecting others--as suits their interests. I have prepared the following situation analysis as part of a package introducing our sister programme here at LSE IDEAS. I work in the Southeast Asia programme, but we will soon formally launch another programme focused on East Asia. This coming Tuesday, Professor Barry Buzan presents on, ahem, "The East Asian Century"--close but no cigar, perhaps? Although he's said my contribution is fine, I look forward to listening to his own ideas on how claims of stronger self-reliance (that is, moving away from America as a pillar of security and economic activity for the region) will affect regional dynamics

Recently, I've caught some flak for not mentioning Japan as a contender alongside China and the United States for the heart of Asia. I honestly didn't see that one coming as I was talking more about how China and the US are affecting dynamics in Southeast Asia. In any event, the following contribution should help demonstrate that I haven't been asleep on the job with regard to Japan and the region. As always, I take great pride in doing my homework, and I hope the following will help convince you, dear readers, that I am not and will never be asleep at the wheel. Enjoy!

The Gerrymandered Asia-Pacific: China, Japan, and US Envision Regional Integration

The truism that political geography is often manufactured is much in evidence in the Asia-Pacific. With the economic balance of power shifting eastward, the vaunted “Pacific Century” inevitably begs the question: who comprises this region? The demise of the Cold War and the United States’ focus on more pressing matters at home due to the subprime crisis and other regions due to the global war on terror has left a lacuna for Asian countries to fill. In particular, the region’s economic infrastructure for trade, aid, and investment is now up for grabs in an undeclared contest for the heart of this pivotal region. Here, I focus on how the three main protagonists offer contrasting views of regional economic integration—while gerrymandering its geography in the process.

Chinese and Japanese variations on an “ASEAN plus” theme have made the Association of Southeast Asian Nations—nominally a grouping of secondary states in the region—a clear political-economic beneficiary in the process of Asian regionalism. On the other hand, the United States has long championed the oxymoronic principle of “open regionalism” that extends the geographical remit of the Asia-Pacific to virtually all countries sharing shores with the Pacific Ocean. Simply put, America’s anxieties centre on regional exclusion.

I. China is keenest on maintaining emphasis on ASEAN+3 processes including the ten Southeast Asian members plus China, Japan, and South Korea. Initially forged during the sidelines of the Asia-Europe Meeting (ASEM) as these countries discovered their common interests, ASEAN+3 is arguably the most organic grouping in terms of shared culture and economic concerns. Indeed, China’s active diplomacy in proposing an ASEAN-China Free Trade Area to ASEAN in 2001 (which came into effect this year) reflects its increasingly sophisticated economic diplomacy. Again demonstrating that economic regionalism frequently overlaps security concerns, China set the template for those wanting to follow in its footsteps for signing a free trade with ASEAN—the emerging centre of a hub-and-spoke regional arrangement. Having joined the ASEAN Regional Forum (ARF) for discussing security issues, China was the second country outside the region to sign on to the Treaty of Amity and Cooperation (TAC) after TAC was opened to non-ASEAN states. As we shall see, it is important to note that Australia and New Zealand, South Korea, and India have followed suit using the ARF -> TAC -> FTA progression China established with ASEAN.

Meanwhile, the Asian financial crisis of 1997/98 and the subprime contagion of 2008 have raised awareness of ASEAN+3’s shared regional concerns. The Asian financial crisis reminded that regional production chains of “Factory Asia” could be disrupted if a constituent part or region was severely affected by balance of payments problems. Thus, subsequent ASEAN+3 efforts have aimed to reduce such vulnerabilities: First, the $120 billion Chiang Mai Initiative Multilateralization (CMIM) pools East Asian countries’ considerable foreign exchange reserves so they may be used to help crisis-hit states in the future. The recent establishment of an ASEAN+3 Macroeconomic Research Office (AMRO) in Singapore will help reduce reliance on external bodies like the International Monetary Fund (IMF) for performing surveillance on member countries to head off incipient trouble. Second, the Asian Bond Market Initiative (ABMI) aims to help channel regional savings to regional investment instead of relying on external markets for intermediation. During the Asian crisis, excessive reliance of Western markets engendered difficulties for many Southeast Asian firms since they borrowed in foreign currencies as their local ones declined in value. Making regional savings more readily available should again help this cause, and recent increases in Asian bond issuance indicate rising demand.

Comparatively speaking, ASEAN+3 is arguable the most logical grouping under consideration here. China’s comfort in negotiating via the “ASEAN Way” of non-interference and consensus-building is evident. Moreover, China has the least historical baggage amongst Japan and America. It has used the voyages of the venerated Muslim Admiral Zheng He between 1405 and 1433 to highlight how China has no real history of colonialism unlike Japan and America despite having a preponderance of political-economic might now as then. Meanwhile, ASEAN countries are accommodative enough to airbrush Taiwan despite the ROC’s significant trade and investment in Southeast Asia. Lastly, a definitional trump card China alone can play is that of continuing sympathy for Third World causes.

II. Japan occupies the middle range between China and the US in terms of accommodating now-important ASEAN voices and the plausibility of its regional vision. It also bears repeating that Japan remains ASEAN’s largest trade partner. Its vision of an East Asia Summit proposes extending ASEAN+3 into ASEAN+6 via the inclusion of Australia, New Zealand, and India. (As previously noted, these three countries already have extant FTAs with ASEAN.) Conventional wisdom suggests Japan’s expansive notion of East Asia to include what are usually regarded as South Pacific and South Asian nations is meant to dilute China’s influence within ASEAN+3, especially given ASEAN’s willingness to accommodate PRC idiosyncrasies. Like Japan and unlike most of ASEAN+3, these are democracies. In contrast to its near neighbours, Japan has long had good relations with Australia—being Australia’s largest trading partner for thirty-six years until being surpassed by China in 2007, and India—still a major recipient of Japanese foreign aid and a mooted party to an economic partnership agreement (EPA) despite their minor bilateral trade. In contrast to China, Japan prefers bilateral deals to “minilateral” ones and has EPAs with several ASEAN members.

Inevitably, discussion of Japanese regional initiatives brings up US-Japan postwar ties. Japanese diplomacy has had to factor in the response of Washington for quite some time. As a case in point, Japan’s proposal to create an Asian Monetary Fund during the outbreak of financial crisis in 1997 was scuttled at American unhappiness over removing the influence of Washington-based lender the IMF. Still, American distractions on the home front and in the Middle East have enabled Japan to pursue a more independent economic policy by shepherding the CMIM and ABMI which are designed to lessen Asian reliance on US-based emergency funding and financial markets, respectively. Moreover, Prime Minister Yukio Hatoyama’s occasionally strident rhetoric concerning American economic orthodoxy and the US-Japan security alliance reflect a long-dormant sentiment that, perhaps not coincidentally, is surfacing just as China is set to overtake Japan as the world’s second largest economy.

Despite being the largest regional benefactor as war reparations turned to foreign aid in East Asia, Japan still elicits mixed reactions from its neighbours. By their own admission, Japanese authorities acknowledge that aid is primarily for achieving strategic objectives before promoting development. Crucially, the euphemistically titled Greater East Asia Co-Prosperity Sphere which Japan branded its World War II occupation of several other ASEAN+3 countries has never been erased from regional memory by generous aid. From prime minister’s visits to the Yasukuni Shrine enshrining war criminals to unresolved discomfort over “comfort women,” Japan has not yet developed a systematic mea culpa for its WWII activities. While its renewed efforts to support ASEAN+3 initiatives alike CMIM and ABMI do signal continued and welcome interest in its own backyard, its attempts to include Australia, New Zealand, and India in an East Asia Summit raise suspicion that, alike with its foreign aid policy, Japan still views its interests as paramount even if it significantly undermines those of others.

III. The United States brings up the rear in the regional sweepstakes, beset as it is by homegrown woes that result in an incoherent policy in East Asia. Not only does it carry the heaviest baggage, but it also has the most ambitious yet questionable vision of the Asia-Pacific. Despite styling himself as “America’s first Pacific President,” Barack Obama has repeatedly delayed trips to Indonesia—where ASEAN in headquartered—to handle domestic issues alike the passage of a health care bill.

Stirrings of American regional consciousness in Asia can be traced to then-Malaysian Prime Minister Mahathir’s proposal to form an “exclusively Asian” East Asian Economic Group (EAEG) in 1991 composed of today’s ASEAN+3. In his autobiography, then-US Secretary of State James Baker admits, “I took a moderate line on [Mahathir’s] idea in public...In private, I did my best to kill it.” Then, as now, US regional ambitions to combat exclusion have been channelled via the Asia-Pacific Economic Cooperation (APEC). Originally conceived as a consultative intergovernmental body, the US has since tried to reinvent APEC as a vehicle for trade liberalization. However, these attempts have repeatedly failed. From other APEC members’ initial reluctance to turn APEC into a preferential trade arrangement to shelved initiatives alike the Early Voluntary Sectoral Liberalization (EVSL) and the stillborn Free Trade Area of the Asia-Pacific (FTAAP), ill-fated US-led initiatives are thick on the ground.

Still, the United States persists with its quest to advance an inclusive liberalization agenda. Its latest effort involves expanding the Trans-Pacific Partnership (TPP) FTA comprising APEC member economies Brunei, Chile, New Zealand, and Singapore. America aside, Australia, Peru and Vietnam have also participated in talks exploring membership in the Trans-Pacific Partnership. Just as promoting trade liberalization in APEC was meant to outflank Mahathir’s EAEG proposal by expanding the remit of the “Asia-Pacific,” America’s interest in “open regionalism” envisions other APEC economies joining the Trans-Pacific Partnership to pre-empt East Asian closure, as unnatural a regional grouping TPP’s four founding members constitute. Still, this initiative’s prospects are limited for a number of reasons. First, there already is a congressional logjam of unsigned FTAs with Colombia, Peru, and South Korea given sour public sentiment over the trade agenda. Second, while trade liberalization along traditional lines may fit American interests, they alone do not hold interest for many Asian countries. In APEC, many economies have been keen on the economic and technical assistance (ECOTECH) agenda for the commonsense reason that building the capacity to facilitate liberalization should precede liberalization itself. Third, America’s selective interpretation of trade liberalization via its unwillingness to enable so-called “Mode IV” WTO clauses concerning temporary migration of service providers to appease domestic labour constituencies dismays labour exporters alike the Philippines and Indonesia.

Finally, the United States has not acquitted itself well in the transition from the Asian financial crisis to the subprime debacle. In the former event, it prescribed a formula of fiscal prudence, deregulation, and privatization to cure Southeast Asia’s woes via harsh conditionalities from the IMF involving belt tightening and fiscal austerity. With the shoe on the other foot during the latter event, however, America has spent unprecedented sums accompanied by reregulation, and nationalization. By not acknowledging its double standards, the United States further underlines the conviction of many Asian countries that the US does not devote meaningful attention to their interests. In effect, America has established itself as the “other” in a manner inimical to spurring regional cooperation.

Will Murdoch's News Corp Pay for Backing Tories?

♠ Posted by Emmanuel in at 4/23/2010 12:12:00 AM
As British viewers will know, one of the believed sources of New Labour's resilience has been its odd alliance with Rupert Murdoch's News Corporation. Aside from the obvious past benefit of backing a winner, New Labour has also put some distance between itself and the European project. Rupert Murdoch has always feared Brussels' encroachment on his media empire's expanse here in Britain on the grounds of competition law. Perhaps sniffing that New Labour's time was up, Murdoch famously shifted allegiances to David Cameron prior to the upcoming election.

In perceived retaliation for shifting allegiances, Labour revoked the Murdoch-invested Sky Sports' rights to air the Ashes--an important event for cricket watchers--late last year:
Labour will exact revenge over the Sun's criticism of Gordon Brown by axing Sky Sports' exclusive rights to live TV coverage of The Ashes, it emerged today. In a major blow to the Rupert Murdoch-owned channel, a government review of so-called “crown jewels” sports events will recommend tomorrow that the England-Australia cricket series must be restored to free-to-air channels.

The protected list of events includes the Olympics, football's World Cup, the FA Cup, Wimbledon and other contests considered to have “national resonance”. The Ashes series was cut from the list in recent years and this summer millions of fans missed out on live TV coverage of England's victory because they did not subscribe to the Sky channel.

The move comes within hours of the Prime Minister phoning Mr Murdoch to complain about attacks on him by the Sun, which recently switched its backing to the Tories. Downing Street insisted today that Mr Brown had “enormous personal regard for Rupert Murdoch”. But one Cabinet minister made clear that he was delighted at the decision. A senior Labour MP said: “The political context of this has definitely changed over the last three or four months.”
With the looming prospect of a hung parliament and a Labour-Liberal Democrat alliance, the Murdoch media empire is now in a quandary it didn't forecast as the Tories aren't doing well enough to win a parliamentary majority at the moment. Essentially, did they back the wrong horse? Michael Wolff writes on this possibility:
Several years ago, Rebekah Wade (now Rebekah Brooks), then the editor of Sun, Rupert Murdoch’s British tabloid, started trying to convince Murdoch that his newspapers should support David Cameron, the Conservative party candidate for prime minister.

This took some doing because Murdoch had become a good friend and pretty loyal supporter of Prime Minister Gordon Brown. What’s more, Murdoch’s wife, Wendi, is a great buddy of Brown’s wife, Sarah. But Wade/Brooks is persistent and, in Murdoch’s words, “knows how to work my family.” She convinced Murdoch’s son, James, that Cameron was the certain future. James then went to work on his father, and a reluctant Murdoch—telling everyone who would listen that Cameron was too slick by half—sourly went along.

Now, Murdoch likes winners, even more than he likes Conservatives. One of the most famous headlines of his career appeared in the Sun after the Conservative victory in Britain 1992: “It's The Sun Wot Won It.” Murdoch is still stewing over an ill-timed and inept endorsement of John McCain over Barack Obama (again, against his better judgment—Murdoch likes Obama and was convinced to back McCain by Roger Ailes and New York Post editor Col Allen).

And now, David Cameron’s not-that-long-ago-all-but-certain-looking bid for prime minister is faltering. In fact, after Murdoch’s endorsement, the Financial Times began running a graph charting Cameron’s downward movement under the headline “It’s The Sun Wot Lost it” [see here] Last week, the Lib-Dem candidate Nick Clegg—the third party candidate in the race—did so well in a television debate that he began to emerge as the logical alternative to Labor. This has caused the Murdoch papers to unleash a full-scale attack on Clegg—with hardly any pretense other than to help Cameron—now known as the “Kill Klegg” campaign.
Hit fast-forward and we now have the pretty incredible spectacle of one of the Murdoch sons accosting the editor of rival newspaper The Independent for having the temerity to suggest something logical. If The Sun had won in for the Conservatives in 1992, then the Murdoch machine acknowledges its widely-read tabloid affects voting decisions in Britain. In recent advertisements, The Independent makes a play on this by suggesting that reading it was a way to allow voters to decide for themselves and not The Sun. Unhappiness in the Murdoch camp triggered a brouhaha in which Rebekkah Brooks, chief executive of News International, and James Murdoch went to the headquarters of The Independent to cuss out its editor:
After a lifetime at the helm of the world's most powerful media organisation and in the crosshairs of the left, Rupert Murdoch has, of necessity, developed a reasonably thick skin. The Dirty Digger is how he is disrespectfully referred to by Private Eye. Spitting Image always portrayed him as a shouty figure, irredeemably uncouth. But his son James seems less ready to turn the other cheek, as it were. And this would seem to be the most plausible explanation for why Murdoch the younger, the chairman and chief executive News Corporation Europe and Asia, caused a media sensation on Wednesday by striding across the editorial floor at the Independent newspaper to berate its editor-in-chief, Simon Kelner.

In common with so many of the unpleasant episodes involving angry young men in modern London, it was a squall about reputation and respect. The newly relaunched Independent had produced a series of relatively innocuous promotional ads assuring readers: "Rupert Murdoch won't decide this election. You will."

There is no evidence that Murdoch senior has even seen the ads, but witnesses report that directly upon seeing Kelner, who was supervising the final production stages of that night's paper, Murdoch the younger began angry remonstrations. "What are you f**king playing at?" was his opening gambit.

A bewildered Kelner quickly ushered his visitors into his office, where they remained for what have been described as "frank and full discussions" for another 20 minutes. All were grim-faced as Murdoch, carrying a promotional copy of the Independent, accused the rival editor of breaking the unwritten code that proprietors do not attack each other and of besmirching his father's reputation. With his piece said and with the matter unresolved, the aggrieved media mogul left.

The episode left experienced journalists shocked. "They strode in like a scene out of Dodge City," said one. "Murdoch scanned the room, you could almost hear him saying 'Where is he?'" Another likened the arrival in the newsroom of Murdoch and Rebekah Brooks, the chief executive of News International, to a mafia visit. "It was so bizarre. He came in all menace. You know the sort of thing: 'The boss has heard what you have been saying about him. He doesn't like it...'"

Earlier that day, Brooks had telephoned Kelner to raise concerns about the personalised ad. It appears to have been a relatively cordial conversation. The two have in the past socialised as part of a high-powered media set centred in Oxfordshire. Blenheim is the Murdoch family retreat and it is said that Kelner has spent time "chatting to Rupert" while staying in the area as Brooks's guest...

There are, of course, reasons why Murdoch junior might be particularly cranky right now...there is unease that despite the full blooded, war-footing support of the Sun, David Cameron's Conservatives are failing to establish the sort of lead that was expected of them. Blogging today, Murdoch's biographer Michael Woolf said jitters among the two lieutenants are inevitable because Brooks persuaded James Murdoch to throw the company's weight behind Cameron's Conservatives and the young Murdoch persuaded his father. The magnate does not like bad advice, says Woolf. "Murdoch likes winners, even more than he likes Conservatives."
Game on, then. Already, broadcast regulator Ofcom is forcing Sky's hand to offer its programmes at lower fees to other cable TV providers. In the event that Tories don't figure in the next government or government coalition, expect more bashing of News Corporation to come.

Mighty Money: Russian Ruble & Indonesian Rupiah

♠ Posted by Emmanuel in , at 4/22/2010 11:05:00 AM
We tend to think the dollar is strong when the euro is weak since it is usually the anti-dollar. However, the unique woes being heaped on the common currency by Greece obscure the observation that there are many other currencies that are quite strong against the US dollar at the moment. Commodity currencies like the Canadian (CDN) and Australian (AUD) dollars are naming names and taking no prisoners, with the former above parity against the greenback once again. (That is, it will take more than one US dollar to buy a Canadian dollar.) The Aussie is no slouch, either. Once more, this is being attributed to a "growing risk appetite" as investors seek better yields than those on offer from the usual suspects--United States, Britain, the Eurozone, and Japan.

To be sure, the seeming resumption of global growth heralded in the just-released April 2010 IMF World Economic Outlook is mirrored in increasing demand for commodities--hence the performance of CDN and AUD. Somewhat less obvious, though, has been the performance of the Russian ruble and the Indonesian rupiah. By now, I'm sure you've heard of how Indonesia suffered tremendous turmoil during the 1997/98 Asian financial crisis that saw its GDP shrink by double-digit figures as capital flight mounted. In turn, the Asian contagion affected global demand for energy; Russia was particularly hard-hit as the price for a barrel of oil hurtled below the $10/bbl mark. With such headwinds, both had to borrow from the IMF. (As an aside, I remember taking a trip to Putin's St. Petersburg in 1996 and being told not to convert money into rubles as locals preferred dollars. Little did I know that things would get even worse.)

In 2010, however, we see both a resilient Russia and Indonesia. Not only are both experiencing renewed bouts of currency strength due to the rebound in commodity prices, but both are also plays on faster growth in developing nations as risk appetite improves. Still, not all is well as fears of both speculative inflows and assorted bubbles ensue. From the FT:
Vladimir Putin, Russia's prime minister, declared on Tuesday that the country’s one-year recession was over. But the optimistic overview failed to mention the country’s main economic worry: the rapidly appreciating rouble.

With economic recovery, a higher oil price and speculative capital inflows driving Russian equities up 130 per cent last year, the rouble has appreciated from 33.5 to the dollar a year ago to around 29 to the dollar today. The situation is a welcome change for the government from the first half of 2009, when the central bank sold billions of dollars to save the plummeting currency.

But while the strong rouble may be a positive signal for investors, it has created its own problems: economists are worried about export competitiveness and, worse, the possibility of a new asset bubble. Both could threaten the meagre growth that has been achieved since January, following an 8 per cent fall in economic output in 2009. Mr Putin, speaking in parliament, predicted growth would be a modest 4 per cent in 2010.

Kingsmill Bond, chief strategist at Troika Dialog, a Moscow investment bank, said the rouble’s rise was entirely in line with oil prices. “An oil price of around $80 implies a rouble-to-dollar rate of say 28-30.”

Since the central bank is targeting inflation it has to run a flexible foreign exchange policy. “A flexible exchange rate is an integral element of a formal inflation targeting system, as you cannot target both the exchange rate and inflation at the same time” said Odd Per Brekk, the International Monetary Fund’s Moscow representative. “From this perspective, the increased flexibility of the rouble that we have seen recently is a welcome move.”

But Mr Bond said there were risks in allowing the currency to appreciate too much. “The risk is that large inflows of hot money would make the rouble too strong and reignite inflationary pressures.” Russia’s central bank has tempered investor interest by lowering interest rates, cutting the benchmark refinancing rate by a total of 475 basis points in the past year to a record low of 8.25 per cent.
And then there's Indonesia:
The Indonesian rupiah has been one of the strongest performing currencies in Asia over the past 12 months, rising more than 25 per cent, due largely to foreign capital inflows driving gains on the stock and bond markets.

Some exporters have complained that a further increase in the rupiah-dollar rate could erode demand for Indonesia’s cheap manufactured goods, but there are few signs yet of any serious impact on industry. A small group of exporters is concerned about the rapid increase but most analysts say the strong rupiah attests to solid economic fundamentals, reduces interest rates and spurs growth.

Loans would become cheaper and domestic consumer demand, which contributes around 70 per cent to Indonesian gross domestic product, would rise, said Fauzi Ichsan, chief economist at Standard Chartered Bank’s Indonesian unit. “For manufacturers of exported goods, the stronger rupiah can be neutral because they often import raw materials, which get cheaper,” he said. “Those at the greatest risk to lose are manufacturers with rupiah costs.”

Commodities, such as crude palm oil and coal, Indonesia’s main export products, that have risen sharply as oil prices recovered over the same period, are facing similar challenges. But, as Mr Ichsan said: “Commodities prices have been rising too, so they can’t complain.”

However, Ade Sudrajat, head of the Indonesia Textile Association, is still worried. The sector has felt a “mild impact” and he hopes the currency will weaken again soon after a 30-month high of 9,038 to the dollar last week. “We’re hoping the government will control the fast appreciation of the rupiah against the dollar,” he said. The central bank would intervene to prevent sudden fluctuations, said Budi Mulia, Bank Indonesia deputy governor, but was “not going to fight the regional strengthening of currencies”.
It's a whole new world; a dazzling place I never knew.

Tory Scare Story: Vote for Us or UK is IMF-Bound

♠ Posted by Emmanuel in ,, at 4/22/2010 12:01:00 AM
As things stand, the upcoming British general elections scheduled for the sixth of May are going to result in a hung parliament or having no party with a clear majority. In that event, a coalition government will need to be formed, with the Liberal Democrats and Labour being more natural allies than the Lib Dems and the Conservatives or even a grand coalition of Labour and the Conservaties. Matters are complicated by the Liberal Democrats stating they would rather play for an outright majority than signal which other party they'd rather go into a coalition with. Now, I've expressed my strong support for the Liberal Democrats (obviously), but the chain of arguments that the Conservatives or "Tories" are putting forward now goes something like this:
  1. A hung parliament causes political uncertainty that unnerves markets;
  2. The last time Britain had a hung parliament, a Lib-Lab (Liberal Democrat/Labour coalition) government resulted;
  3. This Lib-Lab coalition was in place when Britain had to take a £2.3 billion loan from the IMF in 1976;
  4. So, if you don't want a rehash, you better vote Conservative.
The ball started rolling on this fearmongering when Shadow Business Secretary Ken Clarke tried to arrest the Lib Dems' momentum by bringing up this analogy yet again:
"Bond markets won't wait," the shadow business secretary said of the likely City reaction to post-election backroom deals at Westminster. "Sterling will wobble. We have seen even minor flickers in the opinion polls causing problems with interest rates in the recent past...If the British don't decide to put in a government with a working majority, and the markets think that we can't tackle our debt and deficit problems, then the IMF will have to do it for us..."

Back in London Clarke livened up the election as he recalled the Lib-Lab pact that helped prop up Jim Callaghan's government from 1977, when Labour lost its majority. Clarke, who was first elected to parliament in 1970, said: "It was a farce, it was a fiasco, it didn't save us from disaster. And I would be very, very alarmed if any prospect of that occurred on this occasion."

Clarke said that the state of Britain's public finances – the fiscal deficit of £167bn is nearly double the borrowing requirement in 1976 when the IMF was called in – was so serious it needed decisive action. "This is worse than the Conservatives took over in 1970, worse than Labour took over in 1974, worse than when we took over in 1979, and it really is going to require strong, purposeful government confident of its majority to put things into place."

George Osborne, the shadow chancellor, did not go quite as far as Clarke, but he warned of the dangers of a hung parliament. "It is a statement of fact that the last time the IMF came in was when the governing party did not have a workable majority in parliament. "I don't think people should underestimate the economic consequences of political instability in this country at a time when we are running one of the largest budget deficits in the developed world, when people have questioned our credit rating and people can see there is a very serous problem with employment and business confidence. That is a very serious economic challenge. Political instability and a hung parliament – people need to be aware of the consequences of that."
And so this Clarke-borne brouhaha went into the second debate among prospective finance ministers or chancellors in British-speak (see footage here). Once more, the Tory Osborne reiterated this nightmare scenario while being rebutted by both the Liberal Democrats' Vince Cable and current Chancellor Alistair Darling, he of the famous eyebrows:
If financial markets lose confidence in the U.K. government's ability to repay its debt, the International Monetary Fund would have to be called in to offer aid, opposition Conservative spokesman George Osborne said Wednesday. In a three-way debate with Chancellor of the Exchequer Alistair Darling and Liberal Democrat Treasury spokesman Vince Cable on BBC Television, Osborne said: "If markets don't feel confident that we could pay down our debt we'd have to call the IMF in, that's a statement of fact."

The opposition spokesman also warned that if the U.K. election results in a hung parliament, it would raise the chances of Britain needing IMF financing. "The only time we had the IMF was when we had a hung parliament," Osborne said.

Darling said Osborne's comments were scaremongering and accused the Conservatives of making unfunded promises in their budget plan. "Its pretty desperate stuff--what really does destabilise markets is where you make promises you can't pay for," the Chancellor said. "That is what makes markets roll their eyes...this really is a ridiculous approach."
Vince Cable makes essentially the same point, and for once, I do agree with Darling. What the Conservatives fail to disclose, though, is that Britain's fiscal woes were in evidence well before the UK headed to the well. Indeed, it was a Tory leader who already had an IMF rescue on the drawing boards in 1974:
Edward Heath’s Conservative Government was preparing to take “unpleasant measures” and apply for an International Monetary Fund loan in 1974, documents unearthed from the National Archive show. The disclosure will help to blunt one of the Tories’ sharpest and most enduring political barbs of the past generation: a bankrupt Labour government being forced to go “cap in hand” to the IMF in 1976.

One document — stamped “secret” and never previously published — shows how Heath met Jeremy Thorpe, the Liberal Party leader, on March 2, 1974, to discuss terms for a coalition government after the general election three days earlier that had resulted in a hung Parliament. The two men discussed a range of issues, including the Liberals’ long-standing demands for electoral reform, before turning to the “measures required to deal with the economic crisis — which would be unpleasant but must be fair as well as effective — and to command confidence overseas...”

The minutes, drawn up by Robert Armstrong, Heath’s principal private secretary, state: “On a Privy Councillor basis the Prime Minister told Mr Thorpe that preparations had been made for a drawing on the International Monetary Fund.” While Mr Thorpe suggested that there would be all-party support for an immediate loan, Heath was less certain, saying: “The Labour Party might be critical of the terms of such a drawing.”

Discussions on a Privy Councillor basis are not normally released, even under the 30-year rule, and this document appears to have been put in the public domain by accident. Although IMF borrowing by Britain was not unprecedented and the scale proposed by Heath is unclear, the reference to Labour being wary of conditions attached suggests that the IMF would have required significant spending cuts.

The power-sharing talks with Mr Thorpe failed and Heath resigned two days after the meeting, allowing Harold Wilson to return to Downing Street with a minority Government. Seven months later Labour won an overall majority when a second general election was held in October. It was, however, an era of burgeoning economic crisis around the world, as well as industrial strife in Britain. Only days before the February 1974 election, monthly trade figures had shown a record £383 million deficit. In 1976 the Labour Government was plunged even deeper into that economic mire. Denis Healey, the Chancellor, was forced to turn back at Heathrow — where he had been due to catch a flight to Manila for talks with the IMF — to quell panic in the markets with a speech to the Labour conference.

The £2.3 billion IMF loan that he negotiated was offered in return for spending reductions imposed by German and American shareholders that foreshadowed the monetarist policies of Margaret Thatcher’s Government.
It is a psychological fact that persons tend to have selective memories.