Preparing for developing countries the ‘Greek cure’

(C) International Monetary Fund Economic Counsellor and Director of the Research Department, Olivier Blanchard, (L) Division Chief, Research Department Thomas Helbling, and (R) Deputy Director of the Research Department, Jӧrg Decressin during a press briefing on the World Economic Outlook during the 2013 World Bank/IMF Annual Meetings, October 8, 2013 at the IMF Headquarters in Washington, DC. IMF Staff Photograph/ Michael Spilotro.

(C) International Monetary Fund Economic Counsellor and Director of the Research Department, Olivier Blanchard, (L) Division Chief, Research Department Thomas Helbling, and (R) Deputy Director of the Research Department, Jӧrg Decressin during a press briefing on the World Economic Outlook during the 2013 World Bank/IMF Annual Meetings, October 8, 2013 at the IMF Headquarters in Washington, DC. IMF Staff Photograph/ Michael Spilotro.

IMF economists, Kalpana Kochhar and Roberto Perrelli, in their study entitled “How Emerging Markets Can Get Their Groove Back”, posted yesterday by iMFdirect, give a rather frightening response to this question. They conclude that “we estimate that emerging market’s “potential” growth needs to be revised down”. IMF Economic counsellor and director of the Research Department, Olivier Blanchard, along the same lines of thinking, concluded, “emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions”. This quote appeared on the last issue of IMF’s World Economic Outlook, published ahead of the 2013 World Bank-IMF Annual Meetings, set to take place this weekend in Washington D.C.

Christine Lagarde, IMF’s managing director also contributed her own personal touch to the cloudy horizons. Last week she delivered a speech in Washington entitled “New Global Transitions Need New Global Agenda”. The conclusion was that, “The immediate priority for emerging markets is to ride out the turbulence as smoothly as possible”. Of course this is easier said than done.

IMF prepares the…crisis

The common denominator in all those statements is that the developing world faces grave threats. The truth is that the fragile social situation in many developing countries was based on strong growth rates. If the robust growth of the past ten years is reversed, the political equilibrium may be seriously disturbed in the streets and the squares of big and overcrowded cities. Brazil, Turkey and South Africa are presently facing serious risks of social and political unrest, just after their impressive growth rates were decimated. Social and political pressures which were under control during the good times may explode at any moment. Huge cities like Rio de Janeiro, Istanbul and Witwatersrand, near Johannesburg may explode even accidentally.

The problem is however that the West is obliged to face the aftermath of its own financial crisis, which in many respects is still simmering. The American central bank, the Fed, is obliged to start normalising its super relaxed monetary policy, by asking back the trillions it handed to New York bankers at zero interest rate. This prospect may threaten the entire world and more so the developing countries, which during the past five years supported their impressive growth rates with low interest loans from New York banks. Turkey and Brazil are already paying the price of the first capital outflows and the increasing tightening of credit conditions.

Greece was destroyed in a similar conjuncture within a few months, at the end of 2009. The country was offered by German and French banks a bonanza of cheap loans during the 2000s. At the end the country was driven to over-indebtedness and default. Then the troika of EU-ECB-IMF saved the banks and not the country. Probably this is what the American lenders are now planning for some developing countries. There is no other way for the New York banks to get their loans back, at least parts of them. Let alone the fact that it’s other people’s money they have lent.

Tensions are building

Blanchard, describes exactly these risks, using a peculiar language. He says, “The world economy has entered yet another transition. Advanced economies are gradually strengthening. At the same time, growth in emerging market economies has slowed. This confluence is leading to tensions, with emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions”.

The problem is though that the weak, probably non-existent, growth in the advanced economies cannot help the developing counties to continue growing. Only some days ago Mario Draghi, the President of the European Central Bank, termed Eurozone’s growth “weak, uneven and fragile”. On top of that the normalisation of the US monetary policy and the increase of interest rates, sooner or later will put new pressures to the developing world as mentioned above. Fed’s zero interest rates cannot stay that way for long. Even a simple comment last June by Fed’s Governor, Ben Bernanke that he had to change course tightening the monetary policy, send the world to its knees for one week. He was obliged to quieten the markets with an ambiguous statement.

This was not without cost though, because the world remained bewildered not knowing what to believe. In any case the developing world is largely hinging its remaining growth dynamic to cheap loans from New York. But now everybody agrees that this cannot stay that way. In reality the new crisis is now meeting the aftermath of the last one and the confluence will occur and flood the developing world. Let’s connect the two and see where we stand.

A new crisis to pay for the last one

During the last four years world growth was fuelled by the developing countries. Now however they are losing their dynamism. The problem is that they need growth to pay back their debts and this contradiction shapes the scenery of the new crisis. The question is who is going to pay the price. In the still on-going crisis, triggered by the bankruptcy of Lehman Brothers, the cost was charged to the American government, the US central bank (the Fed) and to a number of small EU countries. The Greek, Irish, Spanish, Portuguese and Italian People paid the price for their over-indebted governments and banks.

Today both the American government and the Fed have to change course and start applying prudent policies, taking back the trillions they handed to New York banks for free, at zero interest rates. Apart from the economic logic there are now strong political pressures also, towards this direction. President Barack Obama and Fed governor Bernanke are now pressed by the Republicans of the House of Representatives towards fiscal and financial prudency. It’s not by chance that all the New York financial heavyweights and Bernanke are accusing the GOP of driving the US to a default. Whatever the motives of the Republicans in reality they threaten the entire world with a new major financial crisis, which is already visible in the horizon. Of course nobody believes that the GOP will drive the US to bankruptcy on 17 October. New York banks however got the message. Prudency policies will follow for sure.

As for Eurozone after three years of recession, with growth prospects being “weak, uneven and fragile”, the world can’t expect any help in the difficult times that lie ahead. The Germans even deny to give back to Greece the money their banks have stolen from the country. As it is now commonly known the ECB bought the Greek loans from the German banks at almost nominal values, at a time when they didn’t worth the paper they were printed on. As the IMF now discloses the initial aid packaged to Greece was actually aid to German and French banks, at the expenses of the Greek people.

In any case the West on both sides of North Atlantic will do whatever it takes to safeguard its interests in view of the coming new crisis. If the developing world is ready to endure what Greece has been through, then the American banks will be saved once again and the crisis will be used as a pressure tool against the developing nations, to accept the terms of the lenders.

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