IMF Meeting

Many people forget that the IMF was nearly bankrupt in 2007. Prior to the 2008 banking collapse, they only had outstanding loans to only a handful of countries (see http://www.nzherald.co.nz/guest-columnists/news/article.cfm?a_id=146&objectid=10396025). There was a move in the late nineties for countries to pay off IMF loans early to escape crippling interest payments and draconian structural adjustment programs. Many Asian countries, badly burned in 1997, when the IMF and global currency traders virtually destroyed their economies, followed China’s example and built substantial currency reserves to protect themselves against future IMF intervention. In fact, IMF revenues fell so steeply that there were forced to liquidate reserves to cover their bills.

The European debt crisis, generate mainly by massive banking bailouts and unwillingness to raise income taxes, has breathed new life into the IMF – which has used their new-found wealth to undertake a major refurbish of their headquarters in Washington D.C. (see http://www.guardian.co.uk/business/2010/dec/19/imf-refurbish-us-headquarters).

Refusing the Offer You Can’t Refuse

Unlike Ireland, Hungary refused to accept the loan the IMF tried to force on them in July 2010 (see http://www.reuters.com/article/idUSTRE66M15620100723). In December Moody downgraded them from Baa1 to Baa3 and Fitch downgraded them from BBB+ to BBB-. As this is one notch above junk bond status, Hungary will either have to slash public services, raise taxes, or pay such punitive rates on the treasury bonds (loans from investment banks like Goldman Sachs) that finance their debt they will go bankrupt.

Ireland, in contrast had $20 billion in cash reserves, which means they didn’t really need the EU and IMF to bail them out. Nevertheless they have far more experience with capitalism and protection rackets than eastern Europeans do. Now, as Wall Street analyst Max Keiser points out, most of the $20 billion reserves will wind up in IMF pockets as interest payments (see http://maxkeiser.com/2010/11/28/a-bankrupt-imf-close-to-seizing-irelands-20-billion-cash-horde/). While the Irish public is forced to accept austerity cuts totaling $20 billion over the next four years. This includes a 10 percent cut in pensions, pay cuts for public employees, a reduction in the minimum wage, as well as cuts in child welfare and public health.

This major scam has led to riots in the streets and ultimately the collapse of the Irish government. The Irish people are fully aware that two-thirds of Ireland’s current debt stems from bank bail-outs. And that the bail-out isn’t for their benefit, but to protect Ireland’s 100 billion pound loans from German and British banks.

The New Zealand Response

Given New Zealand’s low debt to GDP ratio (currently 20%, in contrast to a US debt to GDP ratio of 86%), many Kiwi economists were surprised by the IMF “warning” we received last year (see last blog “The IMF Protection Racket”). Prior to the global economic collapse, New Zealand had both a budget surplus a debt to GDP ratio of 6%. A second world country in many respects, New Zealand was one of the few industrialized countries that didn’t implement economic bail-outs for banks or a rescue package for jobless workers or families losing their homes. Moreover at the time the IMF issued their warning, our government had already laid off 1500 public service workers.

At the same time, the ominous implications of the warning were clear – if we failed to implement more spending cuts, the international credit ratings agencies would downgrade our AA+ credit rating to BBB- (like Iceland and Greece) and private lenders would jack up our interest rates and either bankrupt us or force us to borrow from the IMF (like Greece and Ireland) and agree to draconian “austerity” cuts in health care, education and other public services.

In the end, New Zealand declined to end subsidized GP visits and student loan rebates, as the IMF demanded. The response of our National-led (conservative) government was to (predictably) lower income taxes for the wealthy, increase the sales tax (which covers everything) from 12 to 15% and to continue to fire public sector workers. They have also signaled their intention to make substantial cuts (which will seriously cripple education and health care) in the July 2011. Moreover if they win the election later this year, they also plan to raise money by selling off (privatizing) state-owned utilities and possibly the post office and our government-owned Kiwi-bank.

Meanwhile, because we thumbed our nose at IMF demands, in November 2010, Standard and Poor lowered our credit rating from AA+ (stable) to AA (negative). (See http://thestandard.org.nz/sp-downgrades-our-defenceless-exposed-economy/). Moody, on the other hand, likes us and gives us a AAA (stable) credit rating. Fitch had already downgraded us to AA in July 2009. Despite the downgrade, the interest rate we pay on our treasury bonds (issued to finance our government debt) has actually decreased since the Standard and Poor downgrade:

from http://www.tradingeconomics.com/Economics/Government-Bond-Yield.aspx?Symbol=NZD

This may relate to disastrous floods in our nearest competitor Australia. Over the last month, New Zealand dairy products, beef, lamb and wool are fetching record prices on the world market. For the first time in years, we’re also exporting mutton (old ewes). Kiwis have a knack for global commerce and will flog anything that isn’t nailed down.