The IMF frets over mounting government debts, and revises downwards – yes, that’s downwards – estimates of total bank write-downs, but adopts a new anti-bank plan designed to kill bonuses and make banks pay for their recklessness.
It’s a funny thing, but most people think of the IMF as being a paragon of capitalism. This is the organisation that always inflicts the same medicine on indebted countries that come calling with their begging bowls – that is to say, it enforces austerity. But now it has joined the anti-bank club. The blogosphere is full of comments about how its boss, Dominique Strauss-Kahn, is a French socialist.
It is always fun making jibes about Franco plots to undermine Anglo-Saxon banks, but on this occasion it is hard to find fault with the IMF plan. The thing about taxing banks is that if one country does it, the banks just move elsewhere. But if, instead, we see a global tax, then the banks have got nowhere to hide. And that’s the beauty of the IMF plan. They want to impose a bank levy, a tax on future profits and a new bonus tax. Not even Saint Vince is likely to accuse the IMF of being soft on banks. Of course the banks won’t like it, but frankly they can’t really complain. The case for making banks pay when they are making profits, so that the money is available to bail them out when they come back crying, is overwhelming.
Mind you, the IMF is being a tad rich when it slates banks for recklessness. You will see why in a moment.
Ironically, just as the IMF turns its might on how banks can pay their dues in future, it has revised its estimate of the total level of write-down incurred by banks between 2007 and 2010. It had previously estimated total write-down would be $2.8bn, now it is projecting $2.3bn. So that’s a half a billion down on its previous estimate. Just for once, that’s a revision in the right direction.
For UK banks, it has revised its estimate of write-downs from $604m to $455m.
But while banks’ woes seem to be less dire than we originally thought, the IMF is getting worried over something else.
The IMF said: “The biggest threats have moved from the private to the public sectors in advanced economies. Governments not only took on many of the bad assets from private institutions but due to the recession face continuing heavy borrowing needs for the next few years… If jittery investors worried about long-run government solvency cause a decline sovereign bond prices in the advanced economies, still-recovering banks, which are major investors in government debt, could face new hits to the value of assets on their balance sheets. And rising interest rates on public debt could also flow through to the private sector raising borrowing costs for businesses, consumers, and banks.
The IMF is right to worry, but just bear the following in mind. Not so long ago it was saying it would be a mistake for governments to start reversing their fiscal push too soon. Frankly, its latest warning did smack somewhat of stating the b****ing obvious.
Just bear this in mind. In 2006 the IMF said: “Mortgage securitization had helped channel foreign savings into the US housing market while allowing mortgage originators greater flexibility to diversify credit exposures and reduce systemic risk.” Err, so the IMF said mortgage securitization reduces risk. Maybe the levy should not only be applied to banks, but to the IMF too.
© Investment & Business News 2013