Governments must not relax credit standards to boost growth IMF warns
After PM pledges to bring forward Help to Buy scheme, IMF says short-term benefits must be weighed against lending bubble risk. Read more…
International Monetary Fund adds to fears that the Chinese economy is running out of steam, hours before the EC announces whether it will give certain countries more time to lower their borrowing
Somehow, in the looking-glass world of Mr Osborne’s Treasury, the IMF’s litany of criticisms counts as relatively good news
The IMF on Wednesday told George Osborne that the UK remains a “long way from … recovery”; that “persistent slow growth could permanently damage medium-term growth prospects”; that, six years on from the collapse of Northern Rock, British banks are still not back to “healthy functionality”; and that the centrepiece of the chancellor’s last budget – the help-to-buy scheme aimed at boosting property sales – would inflate house prices and lock would-be first-time buyers out of the market.
And somehow, in the looking-glass world of Mr Osborne’s Treasury, that litany of stinging criticisms counts as relatively good news.
It was no such thing, of course. But neither did it mark an escalation of the hostilities in Washington last month, when IMF chief economist Olivier Blanchard warned the coalition that it was “playing with fire” by continuing with austerity.
The Fund rarely goes in for such standoffs, especially with a major shareholder (the UK is the fourth-biggest shareholder in the IMF). Particularly not after a delegation had spent weeks alongside Treasury officials conducting their annual health check, and would have shared in advance with senior mandarins the details of their report.
It is also germane to remember that the head of the IMF, Christine Lagarde, is a longtime ally and personal friend of Mr Osborne – and that he was the first major finance minister to support her in the bid for the Fund’s top job.
The great surprise was that the IMF went as far as it did last month, openly criticising the austerity that it is enforcing across southern Europe. Given that the chancellor has made clear that he will not repudiate his signature policy, it was to be expected that the intervention this time would be easier on Treasury ears.
Even so, this was a difference largely of tone, not of substance. As the deputy managing director David Lipton made clear when fielding questions from journalists, the IMF still believes that the government is following the wrong fiscal policy.
It still thinks the coalition ought to be spending more now to support the economy during the almighty bust; and cutting more later, when the economy has recovered somewhat.
In particular, Fund economists believe the UK ought to borrow up to £10bn more this year, and plough that money into public works. Observers can argue the toss about whether such a policy is Ed Balls’s plan B, but one thing is clear: it certainly isn’t the Osborne strategy.
The chancellor could have “back-loaded” the cuts, as the IMF now suggests, but refused – largely to fit a political timetable, with a general election due in 2015. He was backed at the outset by the Fund.
Back in September 2010, it chorused supportively: “The UK economy is on the mend. The [emergency budget] plan is essential to ensure debt sustainability. The plan … supports a balanced recovery.” One of those two bodies has since awoken to harsh reality: sadly, it isn’t the Treasury.
David Cameron was the first major leader to volunteer for austerity, even while Barack Obama was still gunning for fiscal stimulus in America. The comparison between the UK and the US performance is not flattering to the prime minister: our economy has yet to make up the ground lost after the banking crisis; the US has more than made up the lost ground and enjoys a tepid recovery.
As Bill Clinton’s former labour secretary Robert Reich remarked in London this week, up on Capitol Hill they now cite Britain’s experience over the past three years as the epitome of why austerity is a disaster.
One thing this week has shown again is the adeptness with which coalition spinners can play even bad news. There’s a lesson in this for Labour: Ed Balls and co run the risk of critiquing Mr Osborne’s plan A in 2015 even while the UK is making a technical recovery. By the election, the economy could be growing by 2% or more.
The opposition needs to set out the parameters of what a proper recovery would look like: in falling unemployment, rising wages and falling debt. Otherwise, it could look badly off the pace in less than two years.
After two weeks scrutinising the UK economy, the International Monetary Fund has called on the government to do more to speed up the recovery
Bailed out banks attempt to reassure City they will not need to tap investors – or taxpayers – for fresh capital
The government needs a “clear strategy” to privatise Lloyds Banking Group and Royal Bank of Scotland, the International Monetary Fund said on Wednesday, as the two bailed-out banks attempted to reassure the City that they would not need to tap investors – or the taxpayer – for fresh capital.
But the IMF told the government that if the banks did need more capital to bolster their financial strength it should plough more taxpayer funds into the banks on top of the £65bn already propping them up as it would prove beneficial to the economy.
The Washington-based fund also presented a dilemma for George Osborne as he mulled over the options for the two banks.
“Any strategy should seek to return the banks to private hands in a way that maximises the value for taxpayers, strengthens confidence and competition in the sector, and minimises outward spillovers. In this context, if a sovereign backstop is required to meet a capital shortfall, it should be provided, as this would have a high multiplier,” the IMF said as it indicated a strategy should be outlined by the end of the year.
Shares in the two banks rose as they said their discussions over capital with the City regulator, the Prudential Regulation Authority, had ended. Lloyds was up 2p at 62.88p – above the important 61p level the government now sees as break even – and RBS up 6p at 348p – still below breakeven points ranging from 407p to 502p for the taxpayer.
In response to the IMF, Osborne made his most explicit comment on the bailed out banks, saying that a strategy would be set out once the independent commission on banking publishes its report next month.
“Having refocused their business, now is the time for a clear strategy on how to return RBS and Lloyds to private to the private sector in a way that protects value for the taxpayer,” Osborne said.
The parliamentary commission may recommend fully nationalising RBS to break it up into good and banks while the chancellor is also facing calls from some Liberal Democrats to hand shares in the bailed out banks to taxpayers for free – which may be harder to prove is value for money – but is also considering options such as selling stakes to City investors with a Tell Sid-style privatisation for the public.
The IMF did not indicate when it thought the banks should be returned to the private sector and noted that “challenges remain” as the banks had failed to sell off the branches that the European Union had demanded should be disposed of in return for £65bn of state aid.
The intervention of the IMF came just hours after Lloyds, 39% taxpayer owned, and RBS, 81% taxpayer owned, attempted to end weeks of speculation about their capital positions by telling the stock market they would not need to tap investors to plug capital shortfalls.
While their specific shortfalls have not been published, the Bank of England’s Financial Policy Committee warned in March that the banking industry had a £25bn capital shortfall.
Lloyds, which analysts estimate has a £3bn shortfall, said it could plug its gap by generating profits and continuing to sell off non-core assets, such as problem loans – ensuring taxpayers or any other investors will not need to buy new shares or other types of financial instruments.
Lloyds’ share price has been trading just above 61p for the last few days – a price seen as significant because it has been set by the Treasury as the level at which it will consider paying out a bonus to the bank’s chief executive, António Horta-Osório, if a third of the stake is sold off above this price.
As he announced the end of the discussions with the PRA, he said: “We are pleased with the substantial progress being made in the delivery of our customer focused strategy. Our strong capital position enables the group to actively support growth and lending in the UK economy as well as delivering sustainable results for our shareholders.”
Stephen Hester, the chief executive of RBS, was similarly upbeat. “We are pleased with RBS’s progress and momentum. Our balance sheet has been transformed and our core business has plentiful surplus funding to support continued growth in lending,” Hester said.
The bank can fill its capital shortfall by selling off part of its US business, Citizens, and scaling back its investment bank.
The PRA said: “The two banks have advanced their plans to a position where disclosure is appropriate. Once discussions have concluded with all banks, more information will be provided along with confirmation that, where necessary, banks will take appropriate steps to ensure that they meet the FPC’s recommendation on capital.”
No 10 says it will not anticipate what IMF will say but insists government has right economic approach
Downing Street will launch a staunch defence of the government’s economic strategy and says it will stick to its plans when the International Monetary Fund publishes the findings of its annual survey of the British economy on Wednesday.
Treasury officials have gone to great lengths to prepare a response after Christine Lagarde, the head of the IMF, warned last month that George Osborne should rethink the pace of his deficit-reduction plan.
Downing Street said on Tuesday that it would not anticipate what the IMF will say when it publishes its annual healthcheck of the British economy under its article IV programme. But the prime minister’s spokesman added: “The government believes it has the right economic approach.”
Lagarde said in Washington last month that the IMF had always warned that if the economy grows at a slow rate then it is right to slow the pace of deficit reduction. She said: “We very much stand by that. Consideration should be given if growth weakens, and looking at the numbers, without having dwelled and looked under the skin of the British economy, as we will do in a few weeks’ time under the article IV, the growth numbers are certainly not particularly good.”
Downing Street said that the latest GDP figures showed that the British economy is growing and jobs are being created. “Our view is the economy is healing and we are on the right road but we have to stick to it,” Cameron’s spokesman said.
Danny Alexander, the chief secretary to the Treasury, said over the weekend that the economy was showing “increasing momentum” and it would be wrong to change course. He told the Sunday Politics on BBC1: “It’s a very, very hard road that we’re on. It’s going to continue to be hard for a while, but at a time when we’re seeing those signs of progress that would be entirely the wrong time to go back to scratch, to start again with an economic strategy from scratch.
“Instead we’re going to stick to the plans that we’ve set out, deliver the deficit reduction as we’ve set out, but also reform our economy to help businesses grow and create jobs.”
The prime minister’s spokesman dismissed suggestions that Britain may be witnessing the green shoots of recovery – an echo of the famous phrase used by Norman Lamont in the early 1990s to signal a return to growth.
“Ah, the gardening question – I suppose it is spring,” the spokesman said. “The prime minister’s view is the economy is healing.”
Fund says disposal of £65bn bank stakes should be priority as Lloyds shares reach level considered as break-even for taxpayer
Speculation about a government sell-off of Royal Bank of Scotland and Lloyds Banking Group was escalating on Tuesday night amid reports that the International Monetary Fund is urging the Treasury to accelerate its disposal of the £65bn stakes in the two bailed-out banks.
As part of its annual health check on the UK economy, the Washington-based fund is said to be telling the government that disposal of the share stakes should be a priority.
Hopes of a sell-off of the 39% stake in Lloyds and 81% stake in RBS have risen in recent days as their share prices have climbed. On Tuesday shares in Lloyds closed just above 61p, the level which the Treasury has signalled it now regards as break-even for the taxpayer, while RBS was at 342p, still below any break-even targets set by the government.
The City has been focusing on 61p as a potential price at which to sell off Lloyds since March, when the bonus for the bank’s chief executive, António Horta-Osório, was linked to selling off a third of the taxpayers’ stake above this price. It is lower than the targets the City had originally been expecting of 73p, and the chancellor is yet to make public pronouncements on his intentions to sell off stakes in any banks.
He has made clear that he does not want to plough in more taxpayer funds to fully nationalise RBS, to enable it to be split into a good and bad bank before being sold back into the private sector, as championed by some members of the parliamentary commission on banking standards.
The Treasury would not comment last night on the speculation about a possible IMF view on the stakes, which came amid expectations that more information would soon be provided about how major banks intend to plug the £25bn capital shortfall identified across the banking industry by the financial policy committee earlier this year.
A number of banks could soon provide information about how they intend to fill any discrepancies highlighted by the FPC. It was not immediately clear how many banks would be able to provide information or what their plans were to fill any shortfalls in announcements that could come as soon as on Wednesday .
Eonomists at the IMF found the Bank of England could sustain losses of anything up to 5.5% of GDP, or almost £80bn, when it sells the government bonds back into the market
The Bank of England’s recession-busting policy of quantitative easing could end up costing the Treasury up to £80bn – more than outweighing any profits it will make from the scheme, according to new research by the International Monetary Fund.
Policymakers have become increasingly concerned about their “exit strategy” from the unprecedented measures they have used to cushion their economies from the impact of the financial crisis over the past five years.
In a study of the impact of “unconventional” policies, including the Bank’s £375bn bond-buying programme, economists at the IMF found the Bank could sustain losses of anything up to 5.5% of GDP, or almost £80bn when it sells the government bonds back into the market.
The Treasury announced last November it would appropriate the interest payments from the Bank’s holdings of government bonds, in a move that helped to flatter the public finances. Recent Bank research suggested those cumulative gains could eventually add up to £60bn.
But once the economy looks healthier, the Bank is likely to want to unwind the emergency policy, by pushing up interest rates and selling off its bonds.
The IMF suggests that as soon as central banks signal that they are readying themselves to halt QE, bond prices are likely to fall sharply, as investors “run for the door”. Interest rates, which move in the opposite direction to bond prices, would jump and central banks might be forced to push up rates even further to prove they have not lost control of inflation.
“The potential sharp rise in long-term interest rates could prove difficult to control and might undermine the recovery (including through effects on financial stability and investment). It could also induce large fluctuations in capital flows and exchange rates,” the IMF warned.
The research analyses the potential losses to central banks under three possible scenarios, from a relatively benign one percentage point rise in interest rates, to a much more dramatic six percentage point increase in short-term borrowing costs.
Under the most extreme scenario the losses to the exchequer would be £80bn, so even if the Bank is right about the £60bn gains for the Treasury from QE, that could still blow a £20bn hole in the public finances.
Economists stressed that any direct costs of QE should be weighed against the wider benefits to the economy. Erik Britton, of City consultancy Fathom, said, “the losses could be large – that much is true, and they would be borne by the taxpayer; but that would only be in a scenario where we were back in growth, and the benefits to the Treasury of that would outweigh those costs.”
The IMF’s researchers stressed that the prospect of losses on central banks’ balance sheets should not prevent them from unwinding their unconventional policies, but warned that, “the path ahead will be challenging, with many unknowns.”
The Bank of England questioned the IMF’s results, however, saying, “as the IMF report acknowledges, the analysis ignores capital gains and coupon income from bond holdings: that makes the results very misleading”.
When even the IMF’s free market ideologues recoil from the UK chancellor’s austerity politics, democracy itself is at stake
George Osborne and his Treasury officials are gearing up for a fight. They’ve promised to make life difficult for the other side for the next two weeks. The unlikely opponents are the team of economists visiting from the IMF for a regular policy review.
Why has this routine meeting, which would hardly be noticed outside professional circles, become a confrontation? Because the IMF has recently dropped its support for the chancellor’s austerity policy and repeatedly urged him to rethink it. It even said he was “playing with fire” in refusing to change course.
This is an astonishing development. For in the past three decades the IMF has been the standard-bearer for austerity. Back in 1997 it even forced South Korea – with an existing budget surplus and one of the smallest public debts in the world (as a proportion of GDP) – to cut government spending. Only when the policy turned what was already the biggest recession in the country’s history into a catastrophe, with more than 100 firms going bankrupt every day for five months, did it do an embarrassing U-turn and allow a budget deficit to develop.
Given this history, being told by the IMF to go easy on austerity is like being told by the Spanish Inquisition to be more tolerant of heretics. The chancellor and his team should be worried.
If even the IMF doesn’t approve, why is the UK government persisting with a policy that is clearly not working? Or, for that matter, why is the same policy pushed through across Europe? A certain dead economist would have said it is because the government is “in reality instituted for the defence of the rich against the poor“. Dead right.
Current policies in the UK and other European countries are really about making poor people pay for the mistakes of the rich. Millions of poor people have lost their jobs and the support they received through welfare, but how many of those top bankers who caused the crisis have suffered – except for a cancelled knighthood here and a partially returned pension pot there? If anyone has suffered in the financial industry, it is its poorer members – junior analysts who lost their jobs and tellers who are working longer hours for shrinking real wages.
In case you were wondering, it wasn’t Karl Marx who wrote the words that I quoted above. He would have never put it so crudely. His version, delivered with typical panache, was that the “executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie”. No, those damning words came from Adam Smith, the supposed patron saint of free-market economics.
To Smith and Marx, the class bias of the state was plain to see. They lived at a time when only the rich had votes (if there were elections at all) and so there were few checks on the extent to which they could dictate government policy.
With the subsequent broadening of suffrage, ultimately to every adult, the class nature of the state has been significantly diluted. The welfare state, regulations on monopoly, consumer protection, and protection of worker rights are all things that have been established only because of this political change. Democracy, despite its limitations, is in the end the only way to ensure that policies do not simply benefit the privileged few.
This is, of course, exactly why free-market economists and others who are on the side of the rich have been so negative about democracy. In the old days, free-market economists strongly opposed universal suffrage on the grounds that it would destroy capitalism: poor people would elect politicians who would appropriate the means of the rich and give handouts to the poor, they argued, completely destroying incentives for wealth creation.
Once universal suffrage was introduced, they could not openly oppose democracy. So they started criticising “politics” in general. Politicians, it was argued, would adopt policies that maximised their chances of re-election but damaged the economy – printing money, handing out favours to powerful monopolies, and increasing social welfare spending for the poor. Politicians needed to be prevented from making important policy decisions, the argument went.
On this advice, since the 1980s, many countries have ring-fenced the most important policy areas to keep politicians out. Independent central banks (such as the European Central Bank), independent regulatory agencies (such as Ofcom and Ofgem) and strict rules on government spending and deficits (such as the “balanced budget” rule) have been introduced.
In particularly difficult economic times, it was even argued, we need to insulate economic policies from politics altogether. Latin American military dictatorships were justified in such terms. The recent imposition of “technocratic” governments, made up of economists and bankers who have not been “tainted” by politics, on Greece and Italy comes from the same intellectual stable.
What free-market economists are not telling us is that the politics they want to get rid of are none other than those of democracy itself. When they say we need to insulate economic policies from politics, they are in effect advocating the castration of democracy.
The conflict surrounding austerity policies in Europe is, then, not just about figures on budget, unemployment and growth rate. It is also about the meaning of democracy.
As José Manuel Barroso, the president of the European commission, has recently recognised, the policy of austerity has “reached its limits” in terms of “political and social support”. If European leaders, including the British chancellor, keep pushing these policies against those limits, people will inevitably start asking: what is the point of democracy, when policies serve only the interest of the tiny minority at the top? This is nothing less than crunch time for democracy in Europe.
Officials to investigate economic outlook as unions argue austerity policies are causing UK to lag behind in global recovery
International Monetary Fund officials arrive in London today for their annual health check of Britain’s economy as the government faces a fresh warning its austerity drive is causing a “lost decade of growth”.
Echoing the IMF’s recent warning that George Osborne, the chancellor, needed to ease up on austerity cuts in the face of a stagnant economy, the Trades Union Congress (TUC) has argued that the UK is being left behind in the global recovery.
It said the UK is experiencing a slower economic recovery than 23 of the 33 advanced economies monitored by the IMF. The TUC report, issued to coincide with the arrival of the IMF mission, also claims the vast majority of eurozone countries are performing better.
TUC general secretary Frances O’Grady said: “We truly are experiencing a lost decade for growth. While other countries are already seeing a rise in economic output, the UK won’t return to its pre-crash level for another four years.
“The chancellor’s commitment to self-defeating austerity has prolonged people’s suffering and put the brakes on our economic recovery – so much so that escaping a triple-recession is considered by some to be a cause for celebration. Even George Osborne’s favourite economic institution, the IMF, is calling on him to change course.”
Looking at income per head, the TUC warned the UK would not return to its pre-crash level until 2017. By contrast, income per head in Germany and the US would be more than 10% higher a decade on from the financial crisis.
The TUC said the figures, based on the IMF’s latest GDP forecasts, also revealed how the UK is emerging from recession at a slower rate than at any time in recent history. The report says: “In 1985, UK income per head was 6% higher than it was before the 1980 crash. In 1995, UK income per head was 7% higher than it was before the 1990 recession. UK income per head is today still 6% below its 2008 level.”
Over the next two weeks IMF officials will be gathering information on the UK’s economic prospects from the Treasury, Bank of England, private sector economists, trade union officials and the government’s independent forecaster, the Office for Budget Responsibility. The IMF deputy managing director, David Lipton, is then expected to hold a news conference on or around 22 May at the end of the discussions.
IMF officials caused embarrassment for Osborne last month when, alarmed at the flatlining of the British economy in 2011 and 2012, they urged him to do more to boost growth and to rethink plans to cut the structural budget deficit by 1% of national income in 2013-14.
The Washington-based organisation was initially a strong supporter of the coalition’s approach to tackling the UK’s record peacetime budget deficit. But its chief economist, Olivier Blanchard, singled out the UK as a country that had the scope to ease fiscal policy to boost growth. Osborne was particularly irritated by Blanchard’s comment that the UK was “playing with fire” by refusing to change tack.
Osborne, however, will stand firm at meetings with the IMF delegation. Treasury officials intend to show that any change to the strategy they have followed for the last three years would damage the government’s credibility in the financial markets and the subsequent increase in long-term interest rates would outweigh any benefits from cutting taxes or increasing spending.
The Treasury will say that the economy is gradually on the mend and that the IMF’s anxiety about the weakness of growth has already been addressed in recent policy initiatives. They will also say that the sluggishness of the economy in 2012 was a result of the drop in exports to the crisis-hit eurozone, rather than weak consumer spending.
The TUC argues that many eurozone economies, including France, Germany, Ireland and the Netherlands, are recovering faster in GDP per head terms and so Osborne “cannot blame Europe for the UK’s economic woes”. It wants the chancellor to ease off on austerity and focus more on jobs and spurs to growth and confidence such as an extensive house building programme.
“He should start learning from countries like the US whose ambitious programme of investment in jobs is helping to turn its economy around,” said O’Grady.
A Treasury spokesperson said: “This is an own goal by Labour’s paymasters. This analysis starts in 2008 and so includes the biggest recession in modern history – which happened under Labour. Clearing up the mess we inherited won’t happen overnight.”
Chris Leslie, shadow financial secretary to the Treasury, said: “George Osborne should not arrogantly dismiss the advice of hte IMF team flying into London this week. It is time the chancellor listened to their warnings that his failing economic poilicies are plahing with fire and that Britian now needs a plan ‘B for jobs and growth.”
The IMF cut its forecast for UK growth in both 2013 and 2014 last month. Its publication – the half-yearly World Economic Outlook – said GDP would rise by 0 .7% this year and by 1.5% in 2014 – in both cases a cut of 0.3 points from its last set of predictions in January.