Dear Londontrader,
You are pretty optimistic here.
At this moment, IMF may not have to activate and utilize additional loans from other countries like Singapore but as you have agreed, if this crisis is not managed properly, it may be blown out of proportion. That is why they need the pledge of $4B from Singapore and that's when the indication of IMF is going to loan beyond what it has in its coffers right now.
We have stressed again, IMF doesn't need to go bust before we start losing our monies. Arrangement can be made for hair cut on both sides. As we all know, IMF has always been the international political tool of US and Europe, both Aurvandil and I believe that they would rather save Europe than maintain IMF's self preservation. This crisis is totally a different monster than all other monsters we have seen in the past.
If I am not wrong, IMF has already committed loans to EU. You said IMF needs permission from stakeholders to grant loans to the PIIGS but look, let's be realistic, you have clearly stated that the G8 are the main stakeholders... who are they? US may not be able to help EU directly and thus, it would not want to lose an important ally in EU. Thus, most probably US will agree for IMF to grant the loans. No prize for guessing what will other EU members in the G8 cum IMF decide.
The source of the potential international crisis starts right in EU. I think it would be silly for IMF to sit and do nothing in EU at first sight of fire there and wait for the fire to spread to other places before it starts to open its hoses. Even that, that EU source of crisis isn't that small at all. The conclusion we have is, whatever amount Singapore is ready to pledge, we better make sure that's what we could afford to lose totally.
As I have said, Singapore is just a tiny little ally of US and we are pledging S$1500 per capital. What about Korea, Japan and Taiwan? India? These countries have substantial foreign reserves as well!
What you are saying now is that even if we lose that $4B in IMF, it is still peanuts to the potential $100B we would lose in an extended crisis derived from EU fire. I think it really depends but most probably, Singapore may lose even more than that by the look at the Singapore PAP's attitude at risk taking, keep talking about EU bonds are good buy! The most important question is, it may be peanuts but why should we lose more peanuts when other countries are smart enough in keeping self preservation as their first priority?
The Germans and French are not ready to jump into the hell hole just yet because of self preservation consideration, not just politics. So I would think the most convenient side steps they could get is to get IMFs (under their heavy influences) and World Bank to be first in line to burn in this hell hole.
The present consideration of whether to break up the EU to contain the problems is not merely political one, but also involves economic considerations. If you break up EU during normal peaceful times, there would be little impact. But if they are going to do it now under the tremendous pressure of crisis, it will create tremendous fear factor and the psychological impact on the economic front would be like a 100m Tsunami which may just drown everyone within and beyond. As you should know, part of the problem lies in psychological shifts and impacts, just as any pledge would give people some psychological confidence in IMF and the whole system and thus, would not result in total mob panick. To break up the EU right now would do exactly the reverse economically as well as politically. Thus, it is the view of many experts that such move is a very dangerous one. It may just give the whole system more than what it needs in shock sparks to trigger an even worse crisis.
There is no right or wrong here, just a matter of different perspectives in dark motions where nobody knows exactly how the storm will act up because there isn't any precedent experience where we could tap on. I stress again, as a small country like Singapore, it is important for us to consider very carefully what's the best options we have. Our $4Billion is peanuts to the whole situation, be it to our potential loss of hundreds of billions or to the whole EU problem. Insignificant in size doesn't equate to insignificant to our small population.
Goh Meng Seng
Dear GMS,
How do you go bankrupt when you lend out less than you have on hand?
Even if no one repays you!
1) What IMF loans? It's the ECB and Europe's banks that have loaned the most!
2) The IMF doesn't need to borrow from S'pore etc because they need to cover losses in Europe (they aren't exposed to this problem)
3) The IMF is asking for a pledge to build up an emergency reserve (money to be drawn when needed) to deal with a potential international financial crisis
4) You're saying that the IMF MIGHT bankrupt itself trying to save Europe (unlikely because they need permission from their key stakeholders to commit suicide!). If this happens, S'pore will lose that 4 billion pledge BUT it will be peanuts compared to the 100s of billions we will lose in such a crisis.
5) So, Maybe it's a wise thing to Pledge now to help prevent something worse later.
40 to 50 Billion USD conservatively and most likely more
IMF says about 8 billion USD, which everyone knows is rubbish because of the special accounting for that Gold Reserve
Actually, there are a few simple solutions
1) Break up the euro and ring fence the problem countries (there will be contagion but it can be managed with liquidity injections)
2) Get the Europeans to actually OWN the problem ie. agree that it's not a Greek/Italian/Spanish problem etc. but a European one and act accordingly
What's holding back Europe right now is POLITICS and not Economics