What is KJ's problem?

[londontrader]

If the Europeans can solve their problems on their own, why do we need to pledge US$ 4 billion. I was under the impression we have reached the stage where there is a sufficent risk that the Europeans cannot save themselves. We are therefore at the start of organising a global bailout of Europe. The US$ 4 billion is just for starters. If and when the need arises, they will be passing round the can for more funds.

The Europeans have the resources but lack the political will to save the collective. We have reached the stage where the Europeans might act too late and infect everyone. So, we set up an emergency arrangement (that's why pledges and not immediate contributions) just in case we need to contain that infection. We're also sending a signal to Europe that we'll act to stop contagion but not to bail out a bunch of idiots. Note that US Treasury Secretary Timothy Geithner has said that Europe has the resources to fix its own problems and the IMF loans should only be viewed as supplementary. That's the public view of the IMF's most influential member! That's the US govt communicating with those idiots in Europe!

 

[londontrader]

BTW, it is pretty ironic to me that Singapore would be so eager or nervous to put on the best per capital amount on the chopping board while US refused to commit any funds to set up this firewall!

The USA unlike Singapore, actually has to get Congressional approval to make that pledge
If you're been following the political gridlock in the US Congress, you'll understand why the USA is pledging zero

 

[londontrader]

I know what you are saying. Have you ever considered the haircut? You think Daiyilong when they make you sign an iou with actual rates locked in never consider you cannot pay up? In fact, sometimes, they want to make sure you cannot pay, hung you, cut the interest or forgive your remaining debt for an expensive favor you need to do for them. That is hardball negotiation hehehe. In the world of debt, I prefer you to be my slave than allowing you to pay free. Better to create an illusion you are given second chance. Makes you a more pliant slave. Deals among deals in the streets apply in the big leagues too. You control the world with debt as debt is formless and can take any form it wants. Be water my friend. lol. Never thought the BS line by Bruce Lee is so useful.

Actually, your description fits the real experience of being a debtor to the IMF!
No wonder these guys try their best to pay off the IMF ASAP

 

[londontrader]

Well, if that doesn't change the fact that interests (of 31.5) has been written off as well so to make up the repayment of the original loan of 100

Interest payments totalling 31.5 was collected
Interest totalling 13.5 (3*4.5) was forgiven
Principal Payments of 70 collected
Principal of 30 forgiven
That's how the accounts are booked, not the way you're implying
The IMF collects interests (& service charges) on the loans it gives out (works out to 4.5% historically)

Economist look at the opportunity cost of that 100 loan you made. Basically it means that even though you get back your principal, you still lose on the potential interests that you can get from making other loans on this 100 for the 7 years.

The IMF doesn't have the profit motive of a commercial bank
It's job is macroeconomic stabilization so opportunity cost doesn't rank that high
Come on!
Who charges 4.5% to debtors who have JUNK credit ratings (by the time they need the IMF), if they really care about opportunity costs!

If this loan method is used, the loss of interests would be reduced but there will still be a loss. Imagine if you have promised you upper stream that if they loan you 100 which you would help them to loan them out for certain interests, but at the end of the 7 years, you could only pay back their principal of 100, it basically means that there are no default of loan repayment to them but just interests payment, is it not?

THE IMF IS NOT A BANK!
The IMF works like a cooperative. The members make quota contributions which are pooled together and used to fund the IMF's operations eg. make loans. A quota contribution allows a member voting rights on the decisions made by the IMF. Loans are made out of these quotas, while the interest collected is used to pay operational expenses. So, the IMF doesn't operate in the way you describe ie. upper stream etc....

But if you look at your example, strictly speaking, there is a default of $30 of the principal (i.e. effectively a haircut) to your upper stream because the interests cannot be counted as this is part of the interests promised to them every year

Yeah, that's why it's called debt forgiveness
Something has to forgiven right?
But, this is an eg. to show that this particular debtor has been faithfully paying back principal + interests over 7 years
In aggregate, the payments in totality have surpassed the principal amount
Therefore, this debtor is a good candidate for debt forgiveness
That's how these decisions are actually made

Thus it is just a matter of how you account for the loss which I say, creative accounting... using interests payment to cover principal and declare there is no default of loans to your creditors, just that they lose interests.

No, the accounting entries don't work like that, as I already covered
A default is a default = like a flood is a flood (not ponding)
I was pointing out that a candidate for debt forgiveness typically has repaid a lot of principal + interest already (the kind of good behaviour that warrants forgiveness!)

PS. Even using your method, you can only claim that Principal has been recovered but interests have been defaulted.

Yes, it was a hypothetical eg. of a default
So, something must have been defaulted on right?

 

[londontrader]

Londontrader is pretty optimistic that Europe could solve their own problems, you are just too panicky.

I didn't express optimism.
I did merely state the facts ie. Europe has the resources to solve this problem if they agree to work for the collective good and stop blaming each other.
I am in fact not that optimistic that good sense will overcome bad politics in time
Therefore, I do fully expect the Europeans to screw this up (before finally getting the right fix) enough that we'll probably have our crisis (just not the end of civilization type thing that your experts talk about)
So, it's right to panick!

 

[londontrader]

My question to you is that, in view of the great amount involved in totality, would the difference between half a billion and $4 billion matters? We are even committing more than some EU members in terms of per capital basis!

1/2 billion would be too embarrassing for the PAP when the Philippines can pledge 1 billion

 

[Goh Meng Seng]

Londontrader,

While it is good that you have shown this example to justify who are the good kiddy worth forgiving their debts, but it still begs the question, is IMF that safe after all as claimed by PAP govt?

We are looking at the two sides of the cup, it is either half empty or half full. Your concept of "loss" is very different from ours. PAP govt has claimed that IMF is safe, so safe that we could get interests plus principal back. And it seems that you and some others have agreed because "no one was not repaid" by IMF etc.

But from your example stated, it is either you take my view that IMF (and most probably the corresponding sponsors) has suffered 30% hair cut on principal or that, it has been defaulted on the interests promised, depending on how you look at it. This is even though that IMF may not "suffer loss" in its principal. Most supporters of IMF took the view that IMF only lost on the interests which is technically untrue. Whatever name you call it, debt forgiveness or debt write off, it has still technically suffered a default on 30% of principal.

My point is this, to make it sound that IMF is safe, repackaging for representation of such loss has been made. Instead of saying it technically suffered a haircut of loans to its clients and thus make IMF looks bad and risky institution, it was presented as "debt forgiveness" and "no loss in principal". For its corresponding sponsors, it will say "all principal borrowings are repaid". It avoids saying that its debtors have suffered a hair cut as well. Sometimes, it even avoids saying that "only interests is lost".

Yes, IMF has managed to stay afloat by not making more loans than it could afford or that suffered heavy losses.... but that doesn't erase the fact that IMF and most probably its sponsors, have lost the opportunity cost of interests, though that would make it sound much better than being defaulted by a hair cut.



Goh Meng Seng

Interest payments totalling 31.5 was collected
Interest totalling 13.5 (3*4.5) was forgiven
Principal Payments of 70 collected
Principal of 30 forgiven
That's how the accounts are booked, not the way you're implying
The IMF collects interests (& service charges) on the loans it gives out (works out to 4.5% historically)



The IMF doesn't have the profit motive of a commercial bank
It's job is macroeconomic stabilization so opportunity cost doesn't rank that high
Come on!
Who charges 4.5% to debtors who have JUNK credit ratings (by the time they need the IMF), if they really care about opportunity costs!



THE IMF IS NOT A BANK!
The IMF works like a cooperative. The members make quota contributions which are pooled together and used to fund the IMF's operations eg. make loans. A quota contribution allows a member voting rights on the decisions made by the IMF. Loans are made out of these quotas, while the interest collected is used to pay operational expenses. So, the IMF doesn't operate in the way you describe ie. upper stream etc....



Yeah, that's why it's called debt forgiveness
Something has to forgiven right?
But, this is an eg. to show that this particular debtor has been faithfully paying back principal + interests over 7 years
In aggregate, the payments in totality have surpassed the principal amount
Therefore, this debtor is a good candidate for debt forgiveness
That's how these decisions are actually made



No, the accounting entries don't work like that, as I already covered
A default is a default = like a flood is a flood (not ponding)
I was pointing out that a candidate for debt forgiveness typically has repaid a lot of principal + interest already (the kind of good behaviour that warrants forgiveness!)



Yes, it was a hypothetical eg. of a default
So, something must have been defaulted on right?

 

[Goh Meng Seng]

Dear Londontrader,

It is precisely so that IMF is just a "cooperative", it doesn't earn more money that it should. Most probably, it earns just enough to cover its operation costs. But it needs to pay those who lend it monies to carry out its job, which I would put it as "upper stream", though not exactly the same as commercial banking.

And precisely it is a cooperative, most of its profits and losses will be born by its sponsors... those who made loans to it or its members' contributions.

Thus, as we have seen, IMF has suffered losses.... whether you view it as default on capital or interests... and this will be born by its sponsors (i.e. those who have lend it money). It couldn't possibly just transfer such losses somewhere else!

Thus, this is the reason why I believe G8 was asked to pick up the tap... but of course, as you would like, show no capital loss but only loss in interests.

Goh Meng Seng

Goh Meng Seng

THE IMF IS NOT A BANK!
The IMF works like a cooperative. The members make quota contributions which are pooled together and used to fund the IMF's operations eg. make loans. A quota contribution allows a member voting rights on the decisions made by the IMF. Loans are made out of these quotas, while the interest collected is used to pay operational expenses. So, the IMF doesn't operate in the way you describe ie. upper stream etc....

 

[Kohliantye]

Good analysis. Loans and Grants--something KJ doesnt know about

What KJ did was good.

He surely knows about loans, grants, etc...

He is an ECONOMIST

 

[londontrader]

It is precisely so that IMF is just a "cooperative", it doesn't earn more money that it should. Most probably, it earns just enough to cover its operation costs. But it needs to pay those who lend it monies to carry out its job, which I would put it as "upper stream", though not exactly the same as commercial banking.

The IMF (like other cooperatives) earns income (from investments, interest & charges collected, occasional gold sales etc.). This is used to fund it's operations (not make loans). It main source of funds for granting loans is the pool of quota contributions from 188 members. Your analogy of an "Upper Stream with a promised rate of return on funds extended" is incorrect. The IMF only pays interests (remuneration) on a portion of the member nations' Reserve Trances Position (the smaller part of the quota that sits in the country's own OFR). The most recent accounts indicate remuneration of about 159 million SDRs paid out to RTP balances of 58.7 billion SDRs (against 250+ billion in total quota balances), which should indicate approx 0.3% SDR interest rate. So there clearly isn't any burden of promised excess returns to any Upper Stream like you claim.

The IMF can also borrow bilaterally from it's members if need arises (ie. a major crisis). Such borrowings do attract interest, which is the SDR rate (a basket of short rates = quite low). But this is a secondary source of funds ie. activated when needed.

And precisely it is a cooperative, most of its profits and losses will be born by its sponsors... those who made loans to it or its members' contributions.

Nobody ever said that the IMF is completely risk free (just a much lower risk than your typical lending agency)
Yes, it's a co-op. So the members are expected to share the risk (the burden sharing mechanism) incurred against their quota contributions. The members' don't share the risks arising from IMF bilateral loans (like the one S'pore pledged). Those pledges are only at risk of an IMF bankruptcy. So, why is the Fund low risk? Because the members get to decide what kind of loans it makes and forgives! It's not Lehman Bros, who much pretty did whatever they wanted to chase profits!

Thus, as we have seen, IMF has suffered losses.... whether you view it as default on capital or interests... and this will be born by its sponsors (i.e. those who have lend it money). It couldn't possibly just transfer such losses somewhere else!

The IMF has mainly suffered losses on what it chooses to forgive ie. Multilateral Debt Relief Initiative (MDRI)
This debt relief was funded out of the MDRI-I & II Trusts that were created to absorb these losses. So it's members didn't share the Burden of the debt relief! Only the contributors to the MDRI trusts did!
The IMF has a near perfect record of collecting money (and interest) it is owed, minus the money it officially forgives
I say near perfect because Official default to the Fund is extremely rare, and has been confined to "pariah" or "failed" states ie. Afghanistan, Congo, Iraq, Liberia, Somalia, and Sudan.
Even Argentina, who defaulted on everyone else in the world HAD to repay the IMF eventually
That's why I call the IMF a super loan shark
Countries feel the need to repay the Fund because NOBODY ELSE will lend any money to any country that chooses to default an IMF loan. You become a PARIAH in the international financial community. No ability to engage in international trade, get FDIs etc... Nobody will take an IMF defaulter seriously anymore! That's the sword that hangs over the IMF's debtors.

Thus, this is the reason why I believe G8 was asked to pick up the tap... but of course, as you would like, show no capital loss but only loss in interests

G8 was asked to give the go ahead for multilateral debt relief ie. relief from IMF, World Bank etc.. debt

As for the IMF portion, While the G8 finance ministers agreed to fully fund the World Bank and African Development Bank portion of the deal, the finance ministers' statement says that the IMF debt relief "should be met by the use of existing IMF resources". So the G8 didn't pick up the IMF tap!

GMS, you do really need to check your facts if you want be taken as a serious politician

 

[londontrader]

it still begs the question, is IMF that safe after all as claimed by PAP govt?

The IMF will be as safe as it's members collectively choose
If the membership wants a Fund that plays high stakes poker with their money, then it's up to them!
That's why it's called a cooperative!
If it's unsafe, the members would quit right????

Your concept of "loss" is very different from ours

I already stated that a loss is a loss, like a flood is a flood (not ponding) ie. you don't get repaid what you owed, be it principal or interest.
Isn't it clear enough?

But from your example stated, it is either you take my view that IMF (and most probably the corresponding sponsors) has suffered 30% hair cut on principal or that, it has been defaulted on the interests promised, depending on how you look at it. This is even though that IMF may not "suffer loss" in its principal. Most supporters of IMF took the view that IMF only lost on the interests which is technically untrue. Whatever name you call it, debt forgiveness or debt write off, it has still technically suffered a default on 30% of principal.

From my hypothetical eg. the Lender lost both outstanding principal and interest (very clear)
BUT from an aggregate perspective, this borrower had already repaid quite a bit (in fact all the principal if you count the corresponding interest payments till date)
This is a good borrower who tries his best even in poor circumstances, so forgiveness is in order
Got it?
It is a default on 30 principal and also a default on 13.5 interest because the borrower is contractually bound to pay interest.

My point is this, to make it sound that IMF is safe, repackaging for representation of such loss has been made. Instead of saying it technically suffered a haircut of loans to its clients and thus make IMF looks bad and risky institution, it was presented as "debt forgiveness" and "no loss in principal". For its corresponding sponsors, it will say "all principal borrowings are repaid". It avoids saying that its debtors have suffered a hair cut as well. Sometimes, it even avoids saying that "only interests is lost".

1. The IMF didn't repackage anything because it is bound by accounting conventions like everyone else
2. It has so many critics that watch everything it reports
3. So, any attempt at such creative accounting that CHC is accused of in S'pore, would have been highlighted
4. The IMF portion of debt relief was funded entirely from Trusts set up specifically for this purpose

MOST IMPT,

4. No member has suffered a haircut because of IMF debt forgiveness (I asked you to provide names, remember)

Yes, IMF has managed to stay afloat by not making more loans than it could afford or that suffered heavy losses.... but that doesn't erase the fact that IMF and most probably its sponsors, have lost the opportunity cost of interests, though that would make it sound much better than being defaulted by a hair cut.

Why are you changing your position?
The IMF is now safer in your opinion?

Okay once again,

Opportunity costs don't factor for the world's macroeconomic fire fighter (and it's supporters)
The Fund main source of funding for loans is the quota contributions
The Fund only pays a small remuneration (SDR RATE) on the Reserve Trance Position (a smaller portion of the total quotas)
In order words, the IMF is not NTUC ie. not set up to pay dividends to members

 

[londontrader]

What KJ did was good.

He surely knows about loans, grants, etc...

He is an ECONOMIST

KJ is barking up the wrong tree with allegations of "ultra vires"
But his intentions are good
KJ doesn't know much law but he certainly knows enough economics

 

[Goh Meng Seng]

There are a lot more things we agree than disagree here, if you have not noticed. However, it is the differences in the interpretations that varied.

1) We have agreed that whatever pledged by any countries (including Singapore's portion) to IMF apart from its normal obligations and contributions as a member, will bear risk. However, we dispute on the risk terms.

2) While you are saying that IMF always gets back the loans owed to it minus the debts "it has forgiven", I am saying that IMF didn't always get back all the loans and it has to write off some of them. It is a difference in interpretation but the facts still remain, IMF has to write off some of its debts under various circumstances. Most of the time, it is that these countries are too poor to repay IMF, thus, bo pian, IMF has to write it off or just "forgiven" them. It is just like having a half rotten banana but you just cut off the bad ones and say, you forgive it and we still have a good banana.

3) Thus, when there is a loss, it is a loss. And such losses should be taken into account as a risk factor, regardless of who are the ones who will bear the burden.

4) I agree with you that there are various means for IMF to finance its loaning. Although you may still continue to keep the view that IMF has not missed any payment to its debtors, but the present situation is very different. IMF's potential loans to EU is topping at $500Billion now, more than doubled the funds it has. If there is going to be any write off of debts this time round, who will bear the brunt? The "upper stream" here refers to those countries like Singapore which has pledged additional funding for this project and they will be the ones who will suffer.

5) You are assuming that we will only lose our money if IMF bankrupt but at the same, members of IMF do not share the risk of those pledges. This is what I have been saying, member states of IMF will not guarantee those pledges made to IMF. We do not differ here. But only that we will only lose money on the pledges if IMF bankrupted. I agree with you that nobody would want to see IMF bankrupted but that doesn't mean that we will not lose our money as in the pledges.

6) If any of the PIIGS which take the loans from IMF cannot repay their loans at all and here again, IMF may have to "forgive" (technically write off) these loans which were loaned out using our pledges, then it would become clear that IMF would go back and negotiate with countries like us to take a hair cut. If we don't agree, we can well sue IMF for bankruptcy but nobody would want to do that.

7) Thus, while IMF will not be bankrupted, we will still be forced to take hair cut and lose part of our monies, if not all.

8) So, are you saying that such situation won't happen at all?

9) I know that the write offs in the past were absorbed by the MDRI-I arrangement but at the IMF side, someone would need to take the losses as well.

10) Losses may be absorbed but ultimately, someone would need to bear the brunt. Well, the resources in IMF must come from somewhere, it cannot just fall down from the sky. What it could have meant is no additional funding is needed from G8 but it could have just write off the interests via internal arrangement.

Goh Meng Seng

The IMF (like other cooperatives) earns income (from investments, interest & charges collected, occasional gold sales etc.). This is used to fund it's operations (not make loans). It main source of funds for granting loans is the pool of quota contributions from 188 members. Your analogy of an "Upper Stream with a promised rate of return on funds extended" is incorrect. The IMF only pays interests (remuneration) on a portion of the member nations' Reserve Trances Position (the smaller part of the quota that sits in the country's own OFR). The most recent accounts indicate remuneration of about 159 million SDRs paid out to RTP balances of 58.7 billion SDRs (against 250+ billion in total quota balances), which should indicate approx 0.3% SDR interest rate. So there clearly isn't any burden of promised excess returns to any Upper Stream like you claim.

The IMF can also borrow bilaterally from it's members if need arises (ie. a major crisis). Such borrowings do attract interest, which is the SDR rate (a basket of short rates = quite low). But this is a secondary source of funds ie. activated when needed.



Nobody ever said that the IMF is completely risk free (just a much lower risk than your typical lending agency)
Yes, it's a co-op. So the members are expected to share the risk (the burden sharing mechanism) incurred against their quota contributions. The members' don't share the risks arising from IMF bilateral loans (like the one S'pore pledged). Those pledges are only at risk of an IMF bankruptcy. So, why is the Fund low risk? Because the members get to decide what kind of loans it makes and forgives! It's not Lehman Bros, who much pretty did whatever they wanted to chase profits!



The IMF has mainly suffered losses on what it chooses to forgive ie. Multilateral Debt Relief Initiative (MDRI)
This debt relief was funded out of the MDRI-I & II Trusts that were created to absorb these losses. So it's members didn't share the Burden of the debt relief! Only the contributors to the MDRI trusts did!
The IMF has a near perfect record of collecting money (and interest) it is owed, minus the money it officially forgives
I say near perfect because Official default to the Fund is extremely rare, and has been confined to "pariah" or "failed" states ie. Afghanistan, Congo, Iraq, Liberia, Somalia, and Sudan.
Even Argentina, who defaulted on everyone else in the world HAD to repay the IMF eventually
That's why I call the IMF a super loan shark
Countries feel the need to repay the Fund because NOBODY ELSE will lend any money to any country that chooses to default an IMF loan. You become a PARIAH in the international financial community. No ability to engage in international trade, get FDIs etc... Nobody will take an IMF defaulter seriously anymore! That's the sword that hangs over the IMF's debtors.



G8 was asked to give the go ahead for multilateral debt relief ie. relief from IMF, World Bank etc.. debt

As for the IMF portion, While the G8 finance ministers agreed to fully fund the World Bank and African Development Bank portion of the deal, the finance ministers' statement says that the IMF debt relief "should be met by the use of existing IMF resources". So the G8 didn't pick up the IMF tap!

GMS, you do really need to check your facts if you want be taken as a serious politician

 

[Goh Meng Seng]

As I have said and you have shown, if taken in aggregate, it gave an impression that there is no loss of capital or hair cut, just loss of interests. But in technical terms, there is a partial default on the capital.

So imagine IMF will lend to country A if only Singapore is to make loans to IMF. The loan to Country A is purely and solely financed by Singapore's loan to IMF. For simplicity, just take that whatever interests put on Country A will be given to Singapore. If by the 7th year, IMF has no choice to write off (or in your words, forgiven) the debts of Country A, what happens to Singapore then?

If by technicality, Singapore will suffer a default of 30% principal. But in aggregation, it can be presented that all principal has been repaid to Singapore.... (just that Singapore has forgone the interest earned).

It is thus, a matter of presentation which may just make IMF as well as Singapore look good. Because, no govt can answer to their voters convincingly if they say they have lost 30% of the principal! So, by putting in your way, presented it as principal has been recovered, just forfeited the interests for the 7 years, it will be easier to convince voters everything is ok.

Thus, I say, it is either the cup is half empty or half full... a matter of presentation.

Goh Meng Seng

MOST IMPT,

4. No member has suffered a haircut because of IMF debt forgiveness (I asked you to provide names, remember)



Why are you changing your position?
The IMF is now safer in your opinion?

Okay once again,

Opportunity costs don't factor for the world's macroeconomic fire fighter (and it's supporters)
The Fund main source of funding for loans is the quota contributions
The Fund only pays a small remuneration (SDR RATE) on the Reserve Trance Position (a smaller portion of the total quotas)
In order words, the IMF is not NTUC ie. not set up to pay dividends to members

 

[aurvandil]

I know you don't like quants but here's a quant view of things.

The outcomes of the Euro crisis has been modelled extensively using Game Theory. Most studies agree that the favourable outcome of Europeans getting their act together is the most likely outcome. The probability of that is generally within the 70% to 80% range. This leaves an outisde chance of 20% to 30% that they will fail and we find ourselves starting the nightmare scenario. This is generally the limts of the modelling for the nightmare scenarios. Beyonnd this point, no one has stuck their neck to predict what will happen. The forecast that the G8 will hands off and preserve the IMF at the expennse of Europe is not a mainstream view. The world can get along quite nicely without the IMF. It cannot get along with a bankrupt Europe and a euro which is worthless.

The recent events in Greece and Spain have caused many to wonder if the models have been unnderstating the risk. At the heart of it is new survey data which shows that austerity is deeply unpopular. What is even more unpopular however is the use of national assets to bail out neighbouring European countries. As you said before, elected politicans are supposed to take the pulse of the people and obey the will of the people. How can the European politicans act if there is no public support? All important Germany will be having elections. My expectation is that this will be reflected strongly in the polls.

Putting it together, there is good empirical evidence to suggest that the risk is probably understated at the moment. Beyond this, there is no data to reliably model the nightmare scenarios. We can therefore only speculate and guess. Given the most recent survey data, my guess is that the Europeans are going to make their problem the world's problem. The IMF has been selected as the vehicle to solve the prolblem. Due to the unprecedented nature of the crisis, the IMF will be forced to make unprecedented concessions. We will therfore probably not be getting that US$ 4 billion back anytime soon. Instead we will debating how much more we need to contribute to save Europe.

Here is should be noted that the probabilty that all will end well is still the more likely of the outcomes. The nightmare family of scenarios in my view is probably in the 25% to 35% range. While still the outside bet, a risk which is uncomfortably high.

The Europeans have the resources but lack the political will to save the collective. We have reached the stage where the Europeans might act too late and infect everyone. So, we set up an emergency arrangement (that's why pledges and not immediate contributions) just in case we need to contain that infection. We're also sending a signal to Europe that we'll act to stop contagion but not to bail out a bunch of idiots. Note that US Treasury Secretary Timothy Geithner has said that Europe has the resources to fix its own problems and the IMF loans should only be viewed as supplementary. That's the public view of the IMF's most influential member! That's the US govt communicating with those idiots in Europe!

 

[londontrader]

The outcomes of the Euro crisis has been modelled extensively using Game Theory

Game theoretic models are appropriate in this context compared to typical statistical/econometric stuff that depends too much on data.
Political economy can be modelled very nicely using game theory and the euro crisis is a political one.
What's more interesting are the new Behavioural Models BUT all these game theoretic models don't work that well with data
Therefore, not that popular with traders, banks, macroeconomists etc.

Beyonnd this point, no one has stuck their neck to predict what will happen.

Actually, quite a few of the usual suspects have stuck their necks out and predicted the end of civilisation type scenarios
It's a great time to stick your neck out because:

1. The media is hungry for any predictions, the more ugly the better!
2. You can't really lose because if things work out, you can say that your dire predictions scared people into the right course of action
3. If things go belly up, then you look like Moses Parting the Red Sea (the book deals and invites to lectures etc. will follow)
4. In the economic pundit game, you only need to be spectacularly right ONCE, even if you're dead wrong the rest of the time

It cannot get along with a bankrupt Europe and a euro which is worthless.

It's pretty hard to bankrupt Europe when you look at the aggregate resources available. At worse, we're talking about a temp period of deleveraging ie. restructuring. There are 2 really awful consequences to follow this event:

1. The swift contagion that will sweep across the world with financial markets as a conduit

2. The possible decade plus depression to follow as deleveraging works it's way through the system (that's what the USA is facing now & what Asia faced in the 1990s)

The euro won't be worthless because the euro is really a Deutsche Mark in disguise
I'm old enough to actually remember trading Deutsche Marks

The forecast that the G8 will hands off and preserve the IMF at the expennse of Europe is not a mainstream view.

Actually preserving the IMF is not even an issue. The Fund will be pretty helpless if it ever came to that kind of scenario. It won't go bust, just won't be able to do much. So, everyone knows that the G8 can't be hands off. That's why the Europeans are so busy trying to share the problem! These guys all studied Game Theory too.

The real worry is that we all sit around playing game theory and the shit hits the fan all of a sudden ie. A Lehman type incident. The nightmare is an unprepared Europe (slow to act) as opposed to a stubborn Europe (refusing to act). Markets can handle bad (even terrible) news ie. the mkt will adjust risk vs return accordingly. The nightmare occurs when mkts face severe uncertainty (like the Lehman crisis), when everything stalls because there is no plan and nobody dares to trust anyone.

At the heart of it is new survey data which shows that austerity is deeply unpopular.

History is going judge these right wing nutcases that pass for macroeconomists very harshly
Austerity is the most idiotic approach in a situation like this

How can the European politicans act if there is no public support?

1. Drop the dumb austerity act and give people one less thing to bitch about
2. Have the courage (difficult for politicians) to explain the honest truth to their electorate. There are enough rational voters out there
3. Cheat! There are ways around the treaty conditions that's stalling action right now. Even the IMF can be a convenient vehicle for a European funded bailout which doesn't look so outwardly European in origination
4. Note that rampant cheating was common when it came to setting up the euro in the 1st place

Putting it together, there is good empirical evidence to suggest that the risk is probably understated at the moment

This kind of risk is unmeasurable
That's why Quant models have been a disaster for hedge funds and banks trading euro markets

my guess is that the Europeans are going to make their problem the world's problem.

They are trying but the world also studied game theory, so the europeans won't succeed
That's why the Germans are slowly edging towards the right mindset

The IMF has been selected as the vehicle to solve the prolblem. Due to the unprecedented nature of the crisis, the IMF will be forced to make unprecedented concessions. We will therfore probably not be getting that US$ 4 billion back anytime soon. Instead we will debating how much more we need to contribute to save Europe.

The IMF is pretty useless by itself (in this context). The combined debt servicing requirements of Spain and Italy alone dwarf the Fund's asset base. The IMF won't be allowed to make concessions because the USA won't/can't allow it (political gridlock in Congress, remember?). So, at best, the IMF can be crisis HQ ie. a rally point for coordinated action (with major European input).

We haven't paid out the 4 billion and my guess is that it won't be called. This war chest is about confidence building and not an actual bail out. The most likely scenario is coordinated European/IMF action (with mostly European resources).

I would also point out that no one selected the IMF as the key lead agency for this crisis. The IMF just likes to butt in and play boss man whenever a macro crisis pops up anywhere. It's how they justify their existence.

Here is should be noted that the probabilty that all will end well is still the more likely of the outcomes. The nightmare family of scenarios in my view is probably in the 25% to 35% range. While still the outside bet, a risk which is uncomfortably high.

The tail risk is a crisis so bad that S'pore loses 100s of billions
and we get another great depression (that lasts longer)
In that event, nobody will remember that paltry 4 billion

 

[londontrader]

As I have said and you have shown, if taken in aggregate, it gave an impression that there is no loss of capital or hair cut, just loss of interests. But in technical terms, there is a partial default on the capital.

You missed the entire point of the eg.

Okay again,

1. It was an eg. of the kind of poor nation that becomes a candidate for debt relief ie. one who has behaved well and tried to pay debts owed

2. The eg. also reflected the reality that the poor nation probably already paid back most of the principal (if interest payments are aggregated). So actual losses are contained! That's why the IMF could offer debt relief with no member being asked to share the loss.

3. There is no attempt to offer an IMPRESSION that the is no loss of capital by using interest to cover the loss. This is the IMF not City Harvest Church! The accounts will reflect the actual principal forgiven.

4. When a country is offered debt relief, a debt default MUST happen, not a default in disguise!

So imagine IMF will lend to country A if only Singapore is to make loans to IMF. The loan to Country A is purely and solely financed by Singapore's loan to IMF. For simplicity, just take that whatever interests put on Country A will be given to Singapore. If by the 7th year, IMF has no choice to write off (or in your words, forgiven) the debts of Country A, what happens to Singapore then?

Okay I'm assuming you refer to S'pore's quota contribution to the IMF

You're wrong again because you don't understand how the IMF functions.
So, here is how it really works:

1. S'pore makes a quota contribution
2. The IMF lends using some of those funds
3. The IMF collects principal and interest
4. The principal is returned to the S'pore quota
5. A small amount of interest is paid to only part of S'pore quota ie. the reserve tranche
6. The IMF keeps the rest of the interest as it's own income

If you use the same numbers in my eg.
Should the debtor default in year 7, S'pore's quota position will still be repaid in full
Why?, because the Fund will have collected enough income (interest) to cover the lost principal and the small amount of interest payable to S'pore reserve tranche
The IMF would be the loser in terms of lost income (interest) because it is duty bound to repay S'pore's quota 1st, followed by that small amount of remuneration for S'pore Reserve Tranche.

But this is a hypothetical case because in reality, the IMF covers losses from debt relief by using funds dedicated to the purpose ie. the Trust's monies. The accounting will indicate a draw upon the Trust accounts to repay the S'pore quota completely.

If by technicality, Singapore will suffer a default of 30% principal. But in aggregation, it can be presented that all principal has been repaid to Singapore.... (just that Singapore has forgone the interest earned).

Again, you don't know what you're talking about
S'pore had no right to the interest payments (except for that small bit of remuneration paid to it's reserve tranche at the SDR rate ie. very much lower interest rate)
The bulk of the interest charge is IMF income!

It is thus, a matter of presentation which may just make IMF as well as Singapore look good. Because, no govt can answer to their voters convincingly if they say they have lost 30% of the principal! So, by putting in your way, presented it as principal has been recovered, just forfeited the interests for the 7 years, it will be easier to convince voters everything is ok.

Such a presentation would be illegal from the IMF's point of view
S'pore isn't even entitled to most of the interest in the first place!

Thus, I say, it is either the cup is half empty or half full... a matter of presentation.

You don't even understand how the IMF fills the cup in the 1st place
Go read up on IMF operations and finances

 

[londontrader]

1) We have agreed that whatever pledged by any countries (including Singapore's portion) to IMF apart from its normal obligations and contributions as a member, will bear risk. However, we dispute on the risk terms.

To clarify,
The normal quota contributions also bear risk
a. The risk of a complete IMF bankruptcy
b. The risk of burden sharing because the quotas are considered "general resources" ie. risks to be shared across the membership

2) While you are saying that IMF always gets back the loans owed to it minus the debts "it has forgiven", I am saying that IMF didn't always get back all the loans and it has to write off some of them. It is a difference in interpretation but the facts still remain, IMF has to write off some of its debts under various circumstances. Most of the time, it is that these countries are too poor to repay IMF, thus, bo pian, IMF has to write it off or just "forgiven" them. It is just like having a half rotten banana but you just cut off the bad ones and say, you forgive it and we still have a good banana.

Not quite right,

a. The IMF has a near perfect collection record because deliberately defaulting an IMF loan makes a country a Pariah in the international community ie. no one will lend, trade with you etc...

b. So most of the monies the IMF doesn't get back are officially "forgiven" thru multilateral debt relief. There is very little that has to be written off because countries refuse to pay, as opposed to ask for (and get) relief.

c. The "refuse to pay" camp number very little and are Pariah nations or defunct nations.

d. There is really no such situation as "too poor" to pay back the IMF. Because you can stop paying everyone else and use whatever money you have to pay the IMF.

3) Thus, when there is a loss, it is a loss. And such losses should be taken into account as a risk factor, regardless of who are the ones who will bear the burden.

Who bears the burden is the cornerstone of risk mgt
eg. If the IMF bears the burden, then the real risk is IMF bankruptcy and not the risk associated with individual debtors, like you suggest.

4) I agree with you that there are various means for IMF to finance its loaning. Although you may still continue to keep the view that IMF has not missed any payment to its debtors, but the present situation is very different. IMF's potential loans to EU is topping at $500Billion now, more than doubled the funds it has. If there is going to be any write off of debts this time round, who will bear the brunt? The "upper stream" here refers to those countries like Singapore which has pledged additional funding for this project and they will be the ones who will suffer.

a. It's not a view, it's a FACT that the IMF has never not repaid a member nation

b. 500 billion? So far, the IMF lends to Europe in association with the EU ie. the IMF lends only a portion (the smaller portion) and the EU lends the rest (the BIG portion). So where did the direct 500 billion IMF exposure come from?

c. The key members (your upper stream) of the IMF already expressed concern that the EU will require more funds than the IMF can prudently lend. Therefore, it is already evident that the IMF will not be permitted to lend recklessly to Europe. It's a cooperative remember? The members have a say in the kind of risks it takes.

d. S'pore contribution (and $$ at risk) is paltry compared to the key members. So, there are people out there who have a lot more to lose than us. They have a vested interest in keeping the IMF in check.

5) You are assuming that we will only lose our money if IMF bankrupt but at the same, members of IMF do not share the risk of those pledges. This is what I have been saying, member states of IMF will not guarantee those pledges made to IMF. We do not differ here. But only that we will only lose money on the pledges if IMF bankrupted. I agree with you that nobody would want to see IMF bankrupted but that doesn't mean that we will not lose our money as in the pledges.

The IMF guarantees repayment of the pledged monies.
We lose the money only if the Fund goes bust
The Fund goes bust if the members choose not to support it
Therefore, the membership has given the Fund an implicit guarantee to support all it's operations and obligations (like the pledges)
That's why the membership has to be consulted on key decisions.

6) If any of the PIIGS which take the loans from IMF cannot repay their loans at all and here again, IMF may have to "forgive" (technically write off) these loans which were loaned out using our pledges, then it would become clear that IMF would go back and negotiate with countries like us to take a hair cut. If we don't agree, we can well sue IMF for bankruptcy but nobody would want to do that.

Why would any of these nations choose to default an IMF loan?
They can default on everyone else and still pay the IMF
Why? Because when you default on the IMF, you can kiss bye bye to any future role in the international financial community ie. no bank etc. will ever lend you anything ever again

7) Thus, while IMF will not be bankrupted, we will still be forced to take hair cut and lose part of our monies, if not all.
8) So, are you saying that such situation won't happen at all?

I'm saying it more likely that the IMF becomes bankrupt than S'pore being asked to take a haircut on that pledge

9) I know that the write offs in the past were absorbed by the MDRI-I arrangement but at the IMF side, someone would need to take the losses as well.

Yes, some one took on the loss
who? the ones who paid into the MDRI Trusts

10) Losses may be absorbed but ultimately, someone would need to bear the brunt. Well, the resources in IMF must come from somewhere, it cannot just fall down from the sky. What it could have meant is no additional funding is needed from G8 but it could have just write off the interests via internal arrangement.

yes, funding fell into the MDRI Trust in order to pay for the losses
Not from the sky
Not from the G8
Yes, from internal resources in the IMF eg. retained income, proceeds from gold sales etc..

 

[Goh Meng Seng]

Dear Londontrader,

Pretty good discussion with you here.

The Euro500billion warchest was declared when EU decided to increase its warchest from the initial Euro800B to 1.5 Trillion, with IMF contributing to 500B to it. Apparently, if you look at the trend from 500B vs 250B and now, 1.5trillion vs 500Billion, there is a certain proportionate burden instilled. i.e. IMF is expected to take up one third of financial burden in saving Europe.

MDR I Trust, part of it comes from IMF and IMF funding comes from who?

When Singapore put up pledges, the terms are that IMF will pay Singapore an interests if the funds have been utilized, isn't it not? Thus, the case study is still valid. If things didn't work out well and from the example you have cited, the public presentation would just be the forgo of interests but Singapore gets paid back its initial funds loaned to IMF.

As you have pointed out, there is no need to have a "default" to IMF to speak of. May be I should stop using the word default here. Let's say these funds Singapore pledged has been activated to be loaned to the PIIGS. After some years, the interests and capital payments by these PIIGS were too heavy on them. IMF, under strong influence of G8, decided to "forgive" their loans and wanted countries like Singapore to write off part of their loans to IMF as well. Please remember US has not contributed anything and it would just agree to it. The EU members would definitely agree to that. That would practically effect a hair cut to our loans to IMF. We may or may not recover fully the capital funding, even after taking interests payment into consideration.

Your point about "implicit guarantee" doesn't stand. As long as there is no obligation on the part of members to come up with funds to repay back every pledges, it means no guarantee.

Goh Meng Seng

 

[aurvandil]

Game theoretic models are appropriate in this context compared to typical statistical/econometric stuff that depends too much on data.
Political economy can be modelled very nicely using game theory and the euro crisis is a political one.
What's more interesting are the new Behavioural Models BUT all these game theoretic models don't work that well with data
Therefore, not that popular with traders, banks, macroeconomists etc.

Which Behavioral Model in particular are you looking at? In the quant world, new is not always better. Very often, new models are really old models with new names and a very minor twist. Maybe it is because I remember DMs too but I believe that Game Theory is the best analytical technique to model this crisis.

Actually, quite a few of the usual suspects have stuck their necks out and predicted the end of civilisation type scenarios

I know all about economic grandstanding to make a name for yourself. What I meant was that no one has done any serious work post-nightmare which can stand the scrutiny of their peers. As i said before, we have pretty robust results up to the point of whether the Europeans can get their act together to save themselves. Beyond that, the permutations are so varied that there isn't any way to predict what will happen. As a general point, you should only stop and spend 1 minute to listen to quants who are honest enough to admit the limits of their data and methodology.

The euro won't be worthless because the euro is really a Deutsche Mark in disguise
I'm old enough to actually remember trading Deutsche Marks

I also remember the lira, the franc and when there were actual pits in Simex.

History is going judge these right wing nutcases that pass for macroeconomists very harshly
Austerity is the most idiotic approach in a situation like this

If you look carefully at the manifestos, what they are really saying is Austerity for everyone else ! Within Germany itself, no one is talking about belt tightening for Germany. As things go, life is pretty OK for the average German and the average German is determined to keep it that way. There is the fear that if they commit fully to the saving of Europe, they will join the rest of Europe in the hellhole of debt and austerity. These survey findings are coming out in poll after poll which leads me to believe that we are probably understating the risk of the Europeans failing to get their act together.

That's why Quant models have been a disaster for hedge funds and banks trading euro markets

Quant models are almost always a disaster if you use them to trade the markets. The EMH is true 99.99% of the time. For a quant to find a stable anomaly, the person would have to use math which is literally from Star Trek and completely beyond the capability of their peers. If you know the likely inputs and outputs of any trading technique, you can use non linear soft computing techniques to either reverse engineer the technique or create a proxy which is 80% t0 90% accurate. As a side note, that incidentally is how a quant first blew the whistle on Madoff. He was trying to replicate what Madoff was doing and came so far short that he concluded Madoff was running a ponzi scheme. Hence if you have someone show you stable super normal returns over the long run, you should be thinking "conman" rather than "math genius". For the short run, it is always possible to generate super normal returns without cheating. It is called "getting lucky".

The most likely scenario is coordinated European/IMF action (with mostly European resources).

No disagreement here. 65% to 75% chance of this happening. The problem is that 25% to 35% chance that the world as we know it might fall off a cliff and having no idea what will precisely happen if that scenario comes to bear. To say that if that happens we won't really miss that US$4 billion is not very much comfort. Still knowledge has its privileges and I am sure that you have some contingency plan in case the worst happens so you don't end up in the breadline.