Jun 09, 2009
The bailout of private banks and financial
institutions has become a touchy political issue in the United States,
ever since President Bush's Treasury Secretary and former Goldman Sachs
CEO Hank Paulson asked Congress for a $700 billion dollar blank check
last September.
Now the Obama administration is asking the
Congress for $108 billion for the International Monetary Fund. This was
in accordance with a plan that the administration has helped organize
to raise $500 billion in additional funds for the IMF. This would add
to the approximately $200 billion that the IMF has on hand, $100
billion in gold reserves, and another $250 billion that the Fund will
create in its own currency. These are enormous sums of money that the
IMF has never come close to before.
What is all this money for? There is an answer staring us in the face from the financial press: European banks.
It seems that Europe's banks have gotten into a
mess in their own neighborhood that is comparable to the "troubled
assets" that our financial institutions accumulated in the course of
the housing bubble - which they also shared. These banks had a fit of
irrational exuberance in Central and Eastern Europe in recent years,
with the result that they now have at least $1.4 trillion - and that is
a conservative estimate - in exposure there to loans that are certain
to have a very high default rate.
Most of the Central and Eastern European
economies are in free fall right now. To make matters much worse, much
of their borrowing from European banks was in foreign currency. This
extended even to households: e.g. over 60% of Hungary's mortgages are
in foreign currency. When these currencies fall, as some already have,
many of the borrowers - both businesses and households - are faced with
unpayable debt burdens. Others, such as Latvia, are teetering on the
brink of devaluation, which could set off a chain reaction in other
countries, as well as mass insolvencies.
The exposure of European banks to the region is
astoundingly large relative to their economies. Austria is off the
charts with about 64 percent of GDP lent in Eastern Europe; Belgium and
Sweden both have more than 20 percent, and Switzerland and the
Netherlands are in double digits.
This is where the IMF comes in. In the United
States, we have not only the $700 billion TARP bailout, but more than
three times that amount, which has been dispensed by the Federal
Reserve. The Fed has been used because it is non-transparent and
unaccountable to Congress - unlike for the TARP, where Congress
attached some rules for accountability, the taxpayers do not even know
who has received the more than $2 trillion on the Fed's balance sheet.
For various reasons, the European Central Bank
is not going to play the role that the Fed has played here. (The Fed
itself has recently been hit by strong demands for more transparency,
with 186 Members of Congress sponsoring a bill that would require it to
be audited by the Government Accountability Office). The European banks
are therefore counting on the IMF to help save them from the costs of
their bad decisions.
The Obama administration has argued that the
money is necessary to help provide a global stimulus, and to help poor
people in poor countries. But the facts do not support this claim.
Almost all of the agreements that the IMF has concluded since the
global economic crisis began have included the opposite of stimulus
programs: for example spending cuts or interest rate increases. The
amount of money that will help poor countries is tiny. And it is
difficult to see why the IMF would need hundreds of billions of dollars
to help governments with balance of payments support: for sixteen
Standby Arrangements negotiated since the crisis intensified last year,
the total has been less than $46 billion.
On the other hand, European banks are facing
potential losses in the hundreds of billions of dollars. Some, like
France's Societe Generale, have already gotten billions of dollars from
the TARP bailout. If the purpose of adding these vast sums to the IMF's
coffers is to bail out these banks, then the taxpayers of the United
States (and other countries who are being asked to contribute) ought to
know about it.
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Mark Weisbrot
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research (CEPR), in Washington, DC. He is also president of Just Foreign Policy. His latest book is "Failed: What the "Experts" Got Wrong about the Global Economy" (2015). He is author of co-author, with Dean Baker, of "Social Security: The Phony Crisis" (2001).
The bailout of private banks and financial
institutions has become a touchy political issue in the United States,
ever since President Bush's Treasury Secretary and former Goldman Sachs
CEO Hank Paulson asked Congress for a $700 billion dollar blank check
last September.
Now the Obama administration is asking the
Congress for $108 billion for the International Monetary Fund. This was
in accordance with a plan that the administration has helped organize
to raise $500 billion in additional funds for the IMF. This would add
to the approximately $200 billion that the IMF has on hand, $100
billion in gold reserves, and another $250 billion that the Fund will
create in its own currency. These are enormous sums of money that the
IMF has never come close to before.
What is all this money for? There is an answer staring us in the face from the financial press: European banks.
It seems that Europe's banks have gotten into a
mess in their own neighborhood that is comparable to the "troubled
assets" that our financial institutions accumulated in the course of
the housing bubble - which they also shared. These banks had a fit of
irrational exuberance in Central and Eastern Europe in recent years,
with the result that they now have at least $1.4 trillion - and that is
a conservative estimate - in exposure there to loans that are certain
to have a very high default rate.
Most of the Central and Eastern European
economies are in free fall right now. To make matters much worse, much
of their borrowing from European banks was in foreign currency. This
extended even to households: e.g. over 60% of Hungary's mortgages are
in foreign currency. When these currencies fall, as some already have,
many of the borrowers - both businesses and households - are faced with
unpayable debt burdens. Others, such as Latvia, are teetering on the
brink of devaluation, which could set off a chain reaction in other
countries, as well as mass insolvencies.
The exposure of European banks to the region is
astoundingly large relative to their economies. Austria is off the
charts with about 64 percent of GDP lent in Eastern Europe; Belgium and
Sweden both have more than 20 percent, and Switzerland and the
Netherlands are in double digits.
This is where the IMF comes in. In the United
States, we have not only the $700 billion TARP bailout, but more than
three times that amount, which has been dispensed by the Federal
Reserve. The Fed has been used because it is non-transparent and
unaccountable to Congress - unlike for the TARP, where Congress
attached some rules for accountability, the taxpayers do not even know
who has received the more than $2 trillion on the Fed's balance sheet.
For various reasons, the European Central Bank
is not going to play the role that the Fed has played here. (The Fed
itself has recently been hit by strong demands for more transparency,
with 186 Members of Congress sponsoring a bill that would require it to
be audited by the Government Accountability Office). The European banks
are therefore counting on the IMF to help save them from the costs of
their bad decisions.
The Obama administration has argued that the
money is necessary to help provide a global stimulus, and to help poor
people in poor countries. But the facts do not support this claim.
Almost all of the agreements that the IMF has concluded since the
global economic crisis began have included the opposite of stimulus
programs: for example spending cuts or interest rate increases. The
amount of money that will help poor countries is tiny. And it is
difficult to see why the IMF would need hundreds of billions of dollars
to help governments with balance of payments support: for sixteen
Standby Arrangements negotiated since the crisis intensified last year,
the total has been less than $46 billion.
On the other hand, European banks are facing
potential losses in the hundreds of billions of dollars. Some, like
France's Societe Generale, have already gotten billions of dollars from
the TARP bailout. If the purpose of adding these vast sums to the IMF's
coffers is to bail out these banks, then the taxpayers of the United
States (and other countries who are being asked to contribute) ought to
know about it.
Mark Weisbrot
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research (CEPR), in Washington, DC. He is also president of Just Foreign Policy. His latest book is "Failed: What the "Experts" Got Wrong about the Global Economy" (2015). He is author of co-author, with Dean Baker, of "Social Security: The Phony Crisis" (2001).
The bailout of private banks and financial
institutions has become a touchy political issue in the United States,
ever since President Bush's Treasury Secretary and former Goldman Sachs
CEO Hank Paulson asked Congress for a $700 billion dollar blank check
last September.
Now the Obama administration is asking the
Congress for $108 billion for the International Monetary Fund. This was
in accordance with a plan that the administration has helped organize
to raise $500 billion in additional funds for the IMF. This would add
to the approximately $200 billion that the IMF has on hand, $100
billion in gold reserves, and another $250 billion that the Fund will
create in its own currency. These are enormous sums of money that the
IMF has never come close to before.
What is all this money for? There is an answer staring us in the face from the financial press: European banks.
It seems that Europe's banks have gotten into a
mess in their own neighborhood that is comparable to the "troubled
assets" that our financial institutions accumulated in the course of
the housing bubble - which they also shared. These banks had a fit of
irrational exuberance in Central and Eastern Europe in recent years,
with the result that they now have at least $1.4 trillion - and that is
a conservative estimate - in exposure there to loans that are certain
to have a very high default rate.
Most of the Central and Eastern European
economies are in free fall right now. To make matters much worse, much
of their borrowing from European banks was in foreign currency. This
extended even to households: e.g. over 60% of Hungary's mortgages are
in foreign currency. When these currencies fall, as some already have,
many of the borrowers - both businesses and households - are faced with
unpayable debt burdens. Others, such as Latvia, are teetering on the
brink of devaluation, which could set off a chain reaction in other
countries, as well as mass insolvencies.
The exposure of European banks to the region is
astoundingly large relative to their economies. Austria is off the
charts with about 64 percent of GDP lent in Eastern Europe; Belgium and
Sweden both have more than 20 percent, and Switzerland and the
Netherlands are in double digits.
This is where the IMF comes in. In the United
States, we have not only the $700 billion TARP bailout, but more than
three times that amount, which has been dispensed by the Federal
Reserve. The Fed has been used because it is non-transparent and
unaccountable to Congress - unlike for the TARP, where Congress
attached some rules for accountability, the taxpayers do not even know
who has received the more than $2 trillion on the Fed's balance sheet.
For various reasons, the European Central Bank
is not going to play the role that the Fed has played here. (The Fed
itself has recently been hit by strong demands for more transparency,
with 186 Members of Congress sponsoring a bill that would require it to
be audited by the Government Accountability Office). The European banks
are therefore counting on the IMF to help save them from the costs of
their bad decisions.
The Obama administration has argued that the
money is necessary to help provide a global stimulus, and to help poor
people in poor countries. But the facts do not support this claim.
Almost all of the agreements that the IMF has concluded since the
global economic crisis began have included the opposite of stimulus
programs: for example spending cuts or interest rate increases. The
amount of money that will help poor countries is tiny. And it is
difficult to see why the IMF would need hundreds of billions of dollars
to help governments with balance of payments support: for sixteen
Standby Arrangements negotiated since the crisis intensified last year,
the total has been less than $46 billion.
On the other hand, European banks are facing
potential losses in the hundreds of billions of dollars. Some, like
France's Societe Generale, have already gotten billions of dollars from
the TARP bailout. If the purpose of adding these vast sums to the IMF's
coffers is to bail out these banks, then the taxpayers of the United
States (and other countries who are being asked to contribute) ought to
know about it.
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