Archive for April 24, 2012

IMF and the Asian Financial Crisis of 1997

Another example of the reckless and damaging policies of the IMF can be seen by how they help to create and then worsen the Asian Financial Crisis that started in the summer of 1997. It was Malaysia that refused IMF assistance and ignored their advice who escaped the crisis with far less damage than Thailand, South Korea, Indonesia and the Philippines.

The Asian Financial Crisis started in Thailand and quickly spread to many other countries in Asia as traders desperately tried to pull their money out of the region.

There are numerous reasons for the meltdown in Thailand including property speculation, but the main reason was the reliance of the Thai government on high interest short-term loans and their openness to ‘hot money’. Both these foolish policies were initiated after advising with the IMF.

It is almost tempting to think that the IMF wanted the Thai currency and other currencies in the region to collapse to cause a panic so that people moved their money back into dollars.

After the crisis started, Thailand and other countries asked for IMF assistance. Despite these countries running regular budget surpluses the IMF insisted that Thailand, Indonesia etc. rein in public spending and cut funding for much needed infrastructure projects, education and social projects. The result of doing this was only to lengthen the recession in the Asian countries; cutting spending slows down an economy.

It is amazing that the Asian countries agreed to this bad advice as most of the debt was to private debtors and not to Sovereign States. They also agreed to guarantee the debts made to private banks.

Malaysia in contrast refused IMF help and instead of opening its economy imposed capital controls to stop currency speculation. Even the IMF admits that in hindsight this was a smart move as Malaysia quickly recovered.

The only plus side to the Asian Financial Crisis was that the Thai Baht, Indonesian Rupiah and Philippine Peso suddenly became very cheap and lots of tourists arrived in Phuket, Koh Samui, Khao Lak, Manila and Jakarta. People could suddenly afford to stay in boutique hotels in Bangkok and experience the many interesting things to do in Bangkok, for example.

This introduced lots of people to the joys of traveling in Thailand, Indonesia and East Asia and probably helped in making the region the thriving tourist destination it is today.

IMF Gets Rich on Gold

The International Monetary Fund completed the sale of 403.3 tons of gold on December 22nd, 2010. What a Christmas present that was for the leading bankers behind the fund. Gold prices were at historic highs. From the sale of the gold the IMF made $3.5 billion more than it had originally projected.

Out of this windfall the IMF has chosen to give a measly $900 million in low interest debts to countries struggling.

The IMF and other ‘non-governmental’ entities that are ostensibly meant to help the plight of the world’s poorest are really just institutions designed to make a profit. They are also often a way of elite groups in positions of power to use influence through the persuasive powers of offering charity with strings attached. The fact that the IMF could make such a vast amount of money from buying and selling gold clearly casts the organization in its true light – namely, a self-serving group of financiers with an agenda to get rich and grab power.

Often it is the case that developing countries in the south have stagnant and struggling economies through no fault of their own. Natural disasters and the far-reaching effects of the global financial crisis have meant that several poor nations find themselves unable to make debt repayments. It’s a story that’s been frequently covered by the world’s media but little ever seems to change. The last was on the UK, which you can access online from anywhere using this technique to stream BBC News abroad.

It is immoral that the IMF has not responded by cancelling debt, reducing interest rates and delaying payment schedules. They have set up provision for countries like Haiti to be relieved of their debt burden, but a country needs to be as severely economically devastated as Haiti is to qualify for this assistance.

IMF is far from transparent. It is very unclear who they sold the 403 tons of gold to. Moreover, since American banks are virtually insolvent it is hard to see how the IMF continues to operate, and how it continues to maintain any degree of credibility. As the commentator in the video above points out, the IMF is essentially using the debts it holds as leverage to gain control of the assets of countries like Ireland, Spain and Greece which they will then sell at an incredible profit to themselves and their friends. At the same the time, the official coffers will be empty, especially when the south asks for assistance.

Market efficiency and the global debt crisis: is debt relief really necessary?

If we look at the global debt crisis the main problem is the lack of transparency among banks and reporting standard making it difficult to make a good comparison. The Efficient Market Hypothesis (EMH) was developed to explain different types of market efficiency. In the economic theory the Efficient Market Hypothesis says that in a financial market, where we know everything the market is perfect and complete. In such a perfect and homogenous world, as Modigliani and Miller (1961) like to describe it, the only factors that can impact the future value of a company are the investments and its return on its assets.In the recent paper “The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?” by Ray Ball of the University of Chicago the current crisis in relation to the EMH is further discussed.

But the question still remains if we can defuse the global debt crisis with debt relief? In the financial markets there are different forces at play and different theories available explaining part of the working of financial markets. Modigliani and Miller (1958, 1961) have already described the situation of perfect capital markets where there are no market imperfections. In the real world there are many market imperfections that influence the efficiency of financial markets. Therefore there are no arbitrage opportunities and there is no information asymmetry between different investors. The past decades due to rapid technological development such as the wide use of internet, information has become more widely and faster available.

Technological developments such internet have made our lives easier as, for example we no longer need social circles to meet people; we can just create a new social circle online with either Facebook, Myspace or in the case we look for a new love using online dating sites we have found on the internet. An example where we can both combine market efficiency and online dating site example is the share price of Meetic, the largest online dating portal in Europe that is listed on the Paris Euronext stock exchange, that gets both a lot of traffic via Google Search and via direct traffic.

We can see the ranking the site has, so it is publically available information as well as the potential client base they have as the amount of people logging into the Meetic sites across Europe. Additionally we can look into the retention rate (how long members stay as members) and activity rate of users (how many messages an average member sends), which we can find in the annual reports. Thus with the publically available information we can calculate the actual market value of the dating site Meetic. This has made many investors more knowledgeable and better informed about financial news hitting the markets.

As explained with the above example the key to understanding the true value of the market valuation of a company and its debt (with its bankruptcy/default risk) included is transparency. I personally strongly encourage companies to become more transparent so we can actually avoid the discussion of mutual debt relief which can only temporarily solve the problem. The best solution to defusing the global debt crisis is to promote more transparency in financial reporting so we can better assess the risks a company or country has. And in case we have tracked down holes in a company’s pockets, we can easily mend these pockets so financial distress can be avoided. So, I urge all companies around the world as well as countries to become more transparent! –

The IMF and Tourism

The revenue from tourism has grown exponentially since the 1960s. The importance of tourism has been recognized by the IMF and part of what they see as a successful economy. Accordingly, the IMF has set preconditions for receiving loans. These preconditions are set out in SAPs – structural adjustment programs. SAPs are far from innocuous, and one group that have been negatively impacted are indigenous peoples.

According to the World Tourism Organization in the 1950s 25 million people traveled abroad. In the 1960s this number was 70 million and in 1997 the number of people going to a foreign country jumped to 617 million. In terms of revenue in the 1960s tourism generated revenues in the region of US$ 6.8 billion. By 1997 that number was US$448 billion.

If a developing country wants to receive a loan from the IMF it must make certain changes. These include moving from an agricultural to an industrial and service based economy, to liberalizing the economy and to removing trade barriers. The latter policy allows transnational companies to move in and buy valuable resources in developing countries. In short, to receive desperately needed financial help countries must be prepared to see their markets and resources taken over by multinationals.

In terms of tourism, SAPs stipulate that a developing country must open up its nature reserves, build hotels and promote eco-tourism.

The result is that previously unvisited areas such as the forests and savannah lands of Africa, remote parts of the Philippines and many other places in world such as the Amazon and the islands off Koh Samui and Khao Lak that were once the home to indigenous peoples are being ‘invaded’ by tourists. Even though eco-tourism promises to tread lightly it still encourages indigenous people to leave their traditional occupations and work for tourism. Moreover, the wild life is scared by the tourists. Eco tourism disrupts patterns that have persisted for many thousands of years.

The promotion of tourism by the IMF is just another example of the pernicious influence of an organization whose primary goal is to further enrich banks and other financial institutions.

The Power of Pressure to Right Wrongs

Debt is one of the main instruments of control that the developed world have over poor developing countries. It is also of crucial importance in the Eurozone with the present crisis over Greek debt. In short, those who own the debt can make demands that are virtually impossible to refuse. The alternative is to default on debt. Defaulting is a disastrous policy as it makes future governments unable to borrow. In short, defaulting gives a country pariah status, and cripples social improvement programs.

What is commonly not understood about debt servicing by the average man or woman on the street is that it is a very, very lucrative business for a few banks and larger corporations. These monied institutions are keen to hide the fact that debt relief has reversed the flow of money. Because of interest, poor countries pay several times more than they borrowed in the past. The IMF and the World Bank are no better than loan sharks. Thanks to them, if you add all the money donated to Africa to the sum of money lent to African countries it would be less than the amount of money Africa has collectively paid to the ‘West’ in debt servicing. While people think that charity is not working in Africa, the truth is that aid agencies and NGOs have not been able to make a difference because of the crippling amount of debt that African countries have.

Debt is one of the main reasons why there have been running battles between the police and protestors outside World Bank and IMF meetings.

Realizing just how unpopular the topic of third world debt had made the International Monetary Fund the institution has sought to improve its public relations with its Heavily Indebted Poor Country (HIPC) initiative that allowed them the discretion to cancel debt.

Liberia amassed a massive debt under the military dictatorship of Samuel Doe who came to power in a coup in 1980. The IMF was more than happy to lend money to the Doe regime. This money was spent on weapons and other means to consolidate power, not to help the people of Liberia. The IMF must have known full well how bloody the dictatorship of Samuel Doe was but they had no qualms lending it money. Nor did they expect the debt to ever be paid off.

After 14 years of bloody civil war the Doe regime eventually collapsed, and in 2005 Ellen Johnson-Sirleaf won a fair election to become the leader of Liberia. When she did the country inherited a crippling debt of US$842 million to the IMF. With such a debt the chances of reconstruction were severely limited.

Liberia applied for debt cancellation through the HIPC initiative but the IMF dragged its heels.

It was mostly thanks to the 48,000 emails that the IMF received from ONE members calling for the cancellation of Liberia’s debt that anything was done. A full 2 years after Liberia gained democracy the IMF agreed to cancel the debt. During that time they continued to collect on the debt and endanger the fragile new democracy in the country.

One has to wonder that if the IMF had not been pressured by public opinion whether Liberia’s debt would have ever been cancelled. Clearly it is a matter of bringing the facts to light and organizing protests and petitions that will make the IMF keep its promises to help the poorest countries of the world. Otherwise it is business as usual.

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