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The Euro crisis, IMF and India

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The G20 summit has been interesting. The Spiegel writes:

The shaky victory of the conservative New Democracy party in Sunday’s Greek election, despite providing a measure of stability to the political landscape in Athens, serves as yet another reminder of just how fragile the currency union is.

For the Europeans, lodged in an all-inclusive hotel complex in the Mexican desert featuring palm trees, pools and golf courses, there was no escaping the renewed pressure. The euro crisis is no longer a European affair, OECD General Secretary Angel Gurria said. It’s about the world economy. British Prime Minister David Cameron said one has to exert “constructive pressure” on the euro zone.

Other evidence from the Mexican meeting that the euro crisis is now an international one came from International Monetary Fund chief Christine Lagarde, who said the most important developing countries are chipping in billions to shore up the International Monetary Fund’s efforts to fight the global financial crisis.

China said it will contribute $43 billion and India and Russia will each give $10 billion. The three countries are members of the so-called BRICS nations, which also include Brazil and South Africa. The contributions will not be made in cash but in credit offered by the countries’ central banks to the IMF for use when and if a $400 billion emergency fund is used up.

There has been little discussion yet of the reasons and mechanics behind India’s promise of up to INR 55,000 crores to the IMF. BS emphasized an important rider:

“These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members,” said IMF Managing Director Christine Lagarde.

“They will be drawn only if they are needed as a second line of defense” when other IMF loans have been depleted, she said in a statement during a Group of 20 summit in Mexico.

The leaders of BRICS nations — Brazil, Russia, India, China and South Africa — said earlier that they “agreed to enhance their own contributions to the IMF” but had insisted that the money be used only after existing funds were depleted.

The report in ET shows that the PM is on top of a complicated game plan. He is with the BRICS countries in trying to push a reform of the IMF. At the same time he has a sensible plan for pulling the world out of a mess- not just the usual banker’s trick of fine-tuning the money supply, but also to ramp up productivity and consumer demand.

The contributions from the emerging countries came ahead of the planned reforms of the voting system and quota shares of IMF, which are expected to result in a change in composition of its board. Singh urged the G-20 summit to send a strong signal that the Eurozone countries will protect their banking system and the global community will back a credible response from the region. He added that there was growing recognition in the financial markets that austerity without growth would not result in a return to a sustainable debt position of the affected countries.

The Prime Minister warned that the risks of contagion, or the spread of crisis, in Europe remained because they reflected weaknesses in the banking sector arising from excessive sovereign debt and low growth prospects.

“A crisis in the European banking system can choke trade finance quite quickly, and end up choking economic growth not just in the Eurozone but in the world in general,” he said. While debt-ridden Eurozone members have been required to follow an austerity programme, centred on wage cuts, job reductions and higher taxes, Singh said there was an alternate view that with growth impulses seriously weakened, synchronized austerity across many countries may not be the right medicine.

For a supposedly non-communicative prime minister, that is a wonderfully complex and balanced statement. Could it be that our press cannot follow nuances in the PM’s statements and therefore ignores them?

Singh’s statement about economic growth has been converted into business fact in the USA but could be difficult to translate into acceptable politics in India. Nevertheless, Livemint reports:

Indian stocks climbed amid speculation the biggest loss in two weeks undervalued earnings prospects, and after emerging market nations pledged to support the International Monetary Fund (IMF).

The BSE’s Sensex rose 0.9% to 16,859.80 at the 3.30pm close in Mumbai. The gauge slid 1.4% on Monday, the most since 1 June. ITC Ltd led gains among consumer staples companies, rising to a record on speculation that earnings will be sheltered from slowing economic growth. Reliance Industries Ltd, owner of the world’s largest refining complex, surged the most since 30 March.

The Sensex’s valuation sank on Monday to 13 times estimated profit after the central bank unexpectedly refrained from cutting interest rates as the impact of Europe’s debt crisis fans through Asia and dominates the agenda of a Group of Twenty (G-20) summit in Mexico. India and China pledged to contribute to the IMF to help protect the world economy from the crisis.

The difficult of achieving real economic growth, and not just the ups and downs of a market, is clear from a report in BS:

“What proportion is interest cost in the total cost? Just about three per cent,” [RBI governor, Subbarao] put simply. He elaborated that real interest rates were lower than in the pre-crisis period, so there were other factors at play for investment remaining sluggish.

Growth, he said, needed to be supported by higher investment but the high fiscal deficit was crowding out private investment — in other words, putting the ball squarely in the government’s court.

“The most important thing we need to do to revive growth is to revive investment and not support consumption so much now. To contain the fiscal deficit, government must reduce unproductive expenditure and not raise taxes alone,” he said.

Recall that the credit rating adjustment by Standard and Poor had also cited the industry’s low reinvestment rate into modernization of manufacturing as a significant part of the current problems with India. The root causes of India’s loss of steam can be debated, but it seems unarguable that the days of easy credit passed with 2008. After this G20 meeting global banking reforms and tightening of credits seems very much on the cards.

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Written by Arhopala Bazaloides

June 20, 2012 at 3:53 am

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