The IMF is caught in a geopolitical tug-of-war between Germany and the US

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a conference on inequalities in Brussels, Belgium June 17, 2015.

#AceFinanceReport – Aug.13: The International Monetary Fund faces a stern test of its independence that could have repercussions far beyond the fate of the Greek economy, by far its biggest headache of the moment.

Euro-zone finance ministers are expected to approve a new rescue deal for Greece after months of contentious negotiations on debt relief and austerity ended in the capitulation of Greece’s left-wing government to its creditors. Those creditors include other euro zone governments, the European Central Bank, and the IMF.

The talks have led Greek leaders to vote today on further cuts to public spending and reforms designed to liberalize its sclerotic labor markets and clear failed loans from the books of its overwhelmed banks. These moves are expected to unlock a three-year bailout agreement worth some €85 billion ($95 billion)—or at least a bridge loan to cover a €3.2 billion bond repayment due to the ECB next week.

Nonetheless, the IMF has made clear that Greece’s debt load, expected to balloon to more than twice its annual economic output in 2016, is not sustainable without some form of relief—that is, a meaningful reduction in what Athens owes. The IMF’s rules prohibit lending to countries with so much debt that they are not able to pay the fund back. That means even though the IMF endorses the reforms required by the new Greek bailout agreement, it likely won’t sign on to participate in this new loan program unless there is enough debt relief to make repayment a reasonable possibility.

Test of mettle

While the IMF’s financial contribution would be welcome, what’s more important to Greece’s other creditors is the organization’s imprimatur as the global financial authority. This eases the passage of the bailout program in Europe’s parliaments, especially Berlin’s, where IMF participation is considered an essential condition for approval.

Now, Germany’s finance ministry is criticizing the proposed bailout terms as too lenient, even as it insists that the IMF and its director, former French finance minister Christine Lagarde, must sign off on a program that breaks the fund’s rules.

The last time this happened, with Greece’s first bailout in 2010, the IMF eventually broke under the pressure.

“The IMF was strong-armed into lending to Greece at massive scale in 2010,” Brett House, a former IMF staffer who is now chief economist at Alignvest Investment Management, told Quartz. “The board overrode the IMF’s own rules against lending into unsustainable situations and, in a terrible governance move, rewrote the IMF’s policies in the midst of its lending decision to make the loan to Greece possible.”

The IMF wants to “escape from the cloud of perception that it has been captured by Europe.” Then-IMF director Dominique Strauss-Kahn recently wrote that he felt the IMF had no choice but to join the EU to rescue Greece the first time, when a weakened global financial system faced broader exposure to the country’s economic troubles. But even he expressed regret for misdiagnosing the problem and now urges Greece’s creditors to adopt a policy of debt relief.

Can the IMF stick to its principles this time around? The odds may be better, in part thanks to divisions in Europe. The ECB and the European Commission wrote their own reports today expressing concerns that Greece’s debt is still not sustainable, concluding that debt relief will be necessary.

Washington is watching

The other factor that strengthens the IMF’s hand is the US position—Treasury Secretary Jack Lew has endorsed debt relief for Greece and remained engaged with the negotiations over the summer.

“Whether the IMF holds to its position or not depends entirely on the US Treasury,” House says. He adds:

In 2010, the US supported the policy fudge to make the loan to Greece in order to prevent Europe blowing up into a larger global crisis. This time around, the US seems to want Europe to put more of its own skin in the game. So long as the US sticks with this view, Lagarde will remain firm.

But if the IMF bows again to European officials’ insistence that regional politics trump economic reality, it will lose further credibility before the developing economies that are grasping a growing share of global economic power. House says the fund wants to “escape from the cloud of perception that it has been captured by Europe.”

But it may be too late. David Lipton, the American deputy director of the IMF, recently said he expects an end to the informal practice that the fund’s director come from Europe.

“The fact that there’s been so much focus on crisis in the United States right at the early stages of the global financial crisis and with Europe, is going to lead to a sense that there has to be a broader pool for the leadership role,” he told the BBC.

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MARKETS: China tries to quell fears of more big devaluations

In this Tuesday, Aug. 11, 2015 photo, a bank clerk counts Chinese currency notes at a bank outlet in Huaibei in central China's Anhui province. China’s surprise move on Tuesday to devalue its currency has intensified concerns about a slowdown in the world’s second-largest economy, whose growth rate has reached a six-year low. It is also fanning tensions with the United States and Europe, whose exports could become comparatively costlier. (Chinatopix via AP) CHINA OUT

#AceFinanceNews – Aug.13:BEIJING (AP):China’s central has tried to ease fears of more big devaluations in its currency, saying the yuan’s exchange rate is close to market levels.

A deputy central bank governor, Zhang Xiaohui, said Thursday there was “no basis for persistent and substantial devaluation.”

At a news conference, Zhang said the yuan is close to “market levels” after two days of sharp declines.

The yuan fell 1.9 percent on Tuesday after the bank announced a change in its exchange rate policy. The currency fell again Wednesday and Thursday morning, fueling concern about how far it would be allowed to slide.

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MARKETS: Yuan weakens for third day; central bank says no basis for more depreciation

#AceMarketsNews – SHANGHAI (Reuters):Aug.13: China’s yuan weakened slightly on Thursday to a fresh 4-year low, but the pace of decline eased after the central bank signalled it believes the yuan has found its proper new level.

The People’s Bank of China set the midpoint rate at 6.4010 per dollar prior to market open, weaker than the previous fix of 6.3306 but near the prior market close, following through on its commitment to set the midpoint with a closer eye on the previous day’s closing rate, seen as making the fixing more responsive to market forces.

The spot market opened at 6.3880 per dollar and was changing hands at 6.4085 at midday, 215 pips away from the previous close and 0.12 percent away from the midpoint – the closest it has been to the midpoint since November 2014.

“I think the range around 6.3 to 6.49 is acceptable for the central bank, and they may hope to fix the yuan in this range, seeing the messages they announced today given that some major banks tried to prop up the market at yesterday’s close,” said a forex trader at a Japanese bank in Shanghai.

The central bank is trying hard to stabilise the yuan so the major banks are very likely to follow its signals.

The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day, and had been trading far weaker than the midpoint for months until Tuesday’s sudden adjustment.

Central bank officials denied suggestions that they were preparing to push the currency down 10 percent in order to support exports, and they said the impact of the devaluation on the Hong Kong offshore yuan market was negligible, arguing that it was positive for the internationalisation of the currency.

Offshore yuan was trading 0.55 percent weaker than the onshore spot rate at 6.444 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.5525, some 2.31 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.

As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.

(Reporting by Pete Sweeney; Editing by Jacqueline Wong)

Yuan weakens for third day; central bank says no basis for more depreciation


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