20 - IMF

CAPITALIZING ON THE CRISIS
RETURN OF THE IMF Laurence Neville http://www.gfmag.com/index.php?idPage=1073

Having avoided the headlines for years, the International Monetary Fund found itself squarely in the spotlight in October as it made a series of emergency loans to Hungary, Iceland and Ukraine.

In addition to flexibility on conditionality, there are other signs of new thinking by the IMF. At the end of October it announced a new Short-Term Liquidity Facility that will deliver funds to countries deemed to be responsibly managed almost immediatel and, crucially, with no conditions梚f they are hit by financial turbulence. 揟he IMF has had a long discussion about contingent credit lines and how to make them available without creating a stigma and risking that country抯 stability as well as ensuring some minimum degree of conditionality so that countries do not stray from responsible macro policies,?explains Barcap抯 Keller. 揟he Short-Term Liquidity Facility announced recently appears to meet these needs: Countries are pre-qualified so that help is immediate, and it is a confidential process, so there should be no market fallout.?br />
Countries will be able to borrow up to 500% of their quota through the Short-Term Liquidity Facility梒ountries?quotas are related to their size in the global economy梞eaning that Brazil, for example, could borrow up to $22.5 billion. Loans are for three months at regular IMF interest rates and can be renewed twice within a 12-month period.
Role of the saviors
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up. - Dow Will Equal Gold in 2009 Peter Cooper Dec 4 seekingalpha

The International Monetary Fund (IMF) came into official existence on December 27, 1945, when 29 countries signed its Articles of Agreement at a conference held in Bretton Woods, New Hampshire, USA, from July 1-22, 1944. The IMF began financial operations on March 1, 1947.
Source of funds:
Capacity:
IMF Global Financial Stability Report, October 2008 (GFSR):
RGE monitor: The IMF faces two big problems. First, its capital base is small relative to the size of global capital flows... A lending capacity of $250bn doesn’t amount to much in a world of $700bn bailouts and cross-border capital flows amounting to trillions of dollars. It is not easy for the IMF to raise capital — the begging bowl has to be taken around to all its member countries. One recalcitrant member such as the US can block the whole plan.
Second, the IMF has a huge credibility problem. It is seen as mostly taking orders from the US. The voting structure gives the US, which has a 17 per cent share, a veto over important decisions that require an 85 per cent super-majority. Meanwhile, even large emerging economies such as China and India have modest shares of 3.5 and 2 per cent respectively. But “governance” reforms to set right such imbalances have been fraught and painfully slow as redistribution of voting rights is a zero sum game.
By BOB DAVIS, MARCUS WALKER and JOHN LYONS – WSJ 30 Oct
The International Monetary Fund will offer as much as $100 billion in a new kind of loan to countries that are battered by the financial crisis, making available new cash to help ease the world credit crisis.
The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, wouldn't require countries to make the often severe changes in their policies that the IMF has demanded for decades.
That makes it potentially easier for crisis-hammered countries such as Mexico, Brazil and Korea to shore up cash reserves, their currency, and their ability to help ailing companies as shaken foreign investors withdraw.
Those countries have shunned the IMF because of the strings attached to the loans, which often force sharp budget cuts or interest-rate increases. The conditions are designed to help governments save money and pay for necessary imports, but they also often deepen an economic downturn, making the IMF deeply unpopular around the world.
Now it essentially is dividing developing countries into an A-list of nations that qualify for loans without strings, and a B-list of everyone else.

Late Tuesday, the IMF unveiled a $25 billion package of loans organized for Hungary. That package and a $16.5 billion loan for Ukraine require painful belt-tightening in exchange for help. Hungary must cut its budget deficit further, plans to cut bonus payments to retirees and public-sector workers, and predicted on Tuesday that the economy would shrink by as much as 1% next year.
The new program, which will use up to about half the IMF's resources, represents a big break
The Fed also took new steps to flood dollars into markets outside the U.S., where banks' unwillingness to lend has left foreign firms without dollars they need. In recent weeks, the Fed has created arrangements with central banks in Europe, Australia, Canada and other developed economies to make dollars available overseas. On Wednesday, it extended those lines, for up to $30 billion each, to Brazil, Mexico, Korea and Singapore.
The two moves underscore deepening problems in developing nations, which have sent currencies plunging and blown holes in the balance sheets of healthy companies. In recent days, Brazil's financial capital of São Paulo has been awash in speculation that the plunging currency and lack of dollar financing could spur a wave of corporate defaults that might even bring down key parts of the financial system.
The IMF said it won't disclose the names of countries that it rejects for condition-free loans to try to make sure its decision doesn't worsen the applicant's problems. But Mr. Strauss-Kahn said in a news conference that Argentina wouldn't qualify because it hasn't had an IMF review of its finances for more than a year. Argentina is also on the outs with many lenders because it defaulted on its loans in 2001 and offered only partial repayment, which many borrowers considered inadequate.
The program would offer three-month loans of as much as five times a country's so-called quota, meaning its financial stake in the IMF. Mexico, for instance, has a quota of $4.75 billion, so it could borrow as much as $23.6 billion. Borrowers can renew their loans twice during a year.
The IMF is funded by contributions from its members and its large holdings of gold, among other sources. By itself, IMF money might be enough for the needs of Mexico or other countries. IMF funding also can often unlock other lending. The World Bank, for instance, chipped in $1.3 billion for the Hungary package. The World Bank has said it may double its lending to countries that might be affected by the financial crisis to $27 billion from $13.5 billion in 2007.
In many ways, the new plan is a reprise of a proposal by President Bill Clinton in late 1998 to have the IMF lend to pre-approved countries. That was in response to criticism of the IMF by countries caught up in the Asia financial crisis in 1997 and 1998 in which IMF pushed them to make deep economic changes. Tough IMF requirements in Indonesia, for instance, played a role in violent riots that led to President Suharto's resignation. Korea, however, still may have little interest in the new arrangements. Koreans view the fact they needed IMF help a decade ago as a national humiliation.
Mr. Strauss-Kahn said the IMF is trying to learn the lessons from the Asia crisis and is limiting its demands for change even for its traditional loans. IMF economists should pick policy changes necessary "to make a program a success," he said, not to remake the economy
IMF's new liquidity facility in which countries can borrow up to 5 times their quota, with a three month duration, comes without specific conditions and is front-loaded rather than delivered in tranches. But other countries will receive packages to encourage a more significant policy adjustment given that past policies contributed to their vulnerabilities.
Strauss-Kahn: "We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position"
IMF: Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens (public and private sector) may qualify. Policies should have been assessed very positively by the IMF's most recent country assessment. with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period
FDIC – RGE Can FDIC handling the banking bust?
Nov 22: Seizure and sale of Downey Financial Corp. and two smaller lenders may cost the FDIC more than $2 billion--> federal deposit insurance fund declines from $45bn to $43bn.
On October 7, FDIC proposes to more than double premiums that banks pay to fund the deposit insurance fund: Starting January 1, 2009, banks would have to start paying from 12 cents to 50 cents per $100 of deposits. They now pay from 5 cents to 43 cents. Agency also expects bank failures will cost the FDIC's deposit insurance fund about $40 billion from 2008 to 2013, with almost $13 billion of that amount used this year.
In Q2 FDIC reports $4'462bn insured domestic deposits out of $7'036bn total domestic deposits--> only 63% of domestic deposits are insured. By law, the FDIC maintains a rainy-day fund (i.e. reserves) equal to 1.25 percent of the level of insured deposits. After IndyMac's failure and others in the past quarter, the federal deposit insurance fund declined from $53 billion to $45 billion. Fund is invested in ultra-safe Treasuries.
Sep 25: WaMu is the largest bank failure in the U.S. and the 13th FDIC takeover this year and the 15th since the crisis startet. JPMorgan assumes all deposits and with no additional costs to the FDIC.
FDIC troubled bank list increases to 117 in Q2 from 90. Total assets of troubled banks jumped from $26 billion to $78 billion in Q2 (incl. $36bn from IndyMac). On average, 13% of banks that make the list fail.
August 11: FDIC plans to increase premiums after IndyMac failure (no new fee established yet.), although this will hurt banks precisely at the wrong time--> premiums could rise to 10 to 15 cents per $100 of domestic deposits from the current 5 to 7 basis points premium for most institutions (American Banker). In comparison: all institutions had to pay 23 basis points in the wake of the savings and loan crisis.
If necessary, the agency can also tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.
Whalen (IRA via SF Gate): Our analysis puts roughly 8% of all FDIC insured institutions in the stressed category as of Q1 2008 and roughly that same number headed in that direction. That 8% of all US banks translates into over 700 institutions as of Q1 2008. At the end of March, the FDIC had 90 institutions on its troubled institution list.
Whalen (RGE FinanceMonitor): By July 2009, we estimate the number of US banks likely to fail at 110 and total assets of said failed banks at $800 billion.
RBC (via MarketWatch), May 27: If U.S. slips into recession on the scale of those from the 1980s and early 1990's, the number of failures will be probably as high as 300.
Jones/Oshinsky (FDIC): The insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the ten largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of the banking insurance fund insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.
Slate: The FDIC was created, over the vociferous opposition of its beneficiaries—the banking industry—in the dark spring of 1933, when 4,000 banks had closed. In 75 years, no insured deposit—the current limit for a regular account is $100,000—has been lost, even in the lean years between 1986 and 1992, when 2,304 institutions went bust.