Outlook What with the Budget, I've not found space so far this week to engage in a favourite sport – IMF bashing. So a little late, here's my take on a couple of bizarrely alarmist reports published this week by the International Monetary Fund – the Global Financial Stability Report and the World Economic Outlook.
Both are notable for their extreme gloominess. Whereas this might seem a perfectly valid point of view, and certainly a rather more credible one than the Chancellor's extraordinarily optimistic forecasts in the Budget of a return to high-trend growth, the IMF is not noted for being right on these matters. In fact, it is one of the best contrary indicators around.
You can set your watch by its observations and forecasts, which are almost invariably either too optimistic or too pessimistic. Having been far too positive about the outlook for major economies, the IMF is now in danger of over-correcting the other way and being too negative.
The same goes for its analysis of the global financial system. There was very little warning from the IMF of the financial maelstrom to come a couple of years back, but now that it has been and shows some signs of going, the IMF depicts the banking system as more bust than ever and still in need of massive new injections of capital.
While everyone else is desperately trying to talk up the economy and convince the markets that the banking crisis is largely over, the IMF wants to paint things as black as can be. On page 41, my colleague Hamish McRae deals with the economic forecasts, which are now almost certainly too gloomy.
Yet the IMF is also spectacularly wrong in its analysis of the costs of the banking crisis. In all recessions, banks become technically insolvent, in the sense that the value of assets and capital combined is depleted by economic contraction to a level where they are worth less than the liabilities. But eventually the economy recovers, and with it the value of the assets.
In estimating the costs to the UK Treasury of the banking support given to date, the IMF grossly underestimates the amount which the Government will eventually get back. Among other mistakes in the IMF's methodology, it failed to net off the very substantial fees the Government receives for key parts of its support package.
The first version of the Global Stability Report published on the IMF's website this week put the cost of support to date at 13.4 per cent of GDP, or around £200bn. After a good talking to by the UK Treasury, the IMF sheepishly changed this number to 9.1 per cent and dropped many of the international comparisons to boot, many of which seem to have been equally flawed. Yet even this latter figure seems far too high.
I'd be amazed if the Treasury's own, much smaller, contingency provision in Wednesday's Budget of £60bn is actually needed. All these estimates seem to assume the taxpayer is called on to honour a substantial proportion of the assets insured under the Government's asset protection scheme. This is possible, but unlikely unless we are heading into a repeat of the Great Depression, which even the IMF seems disinclined to believe.
As for the $250bn the IMF estimates that British banks would need to raise in new capital to return leverage to its mid-1990s level, this is an equally fatuous figure of no practical significance.
I'm not asking the IMF to ignore brutal realities. Yet banking is all about confidence, and what may be true of the value of banking assets right now, when many loans are essentially unsaleable at any price, won't be the case once we are through the recession. It would be a complete waste of public and private money as well as being a massive over-reaction to recapitalise the banks in the manner the IMF seems to think appropriate.
This kind of "mark-to-market", worst-case scenario analysis is extraordinarily damaging, and has a lot to answer for in the way it has exacerbated the scale of the banking and economic crisis. The IMF is meant to be assuming a beefed-up role in policing the world economy. Heaven help us. Alarmist nonsense such as this does the IMF little credit.Reuse content