Violating FDR Framework Will Not Work for IMF and European Regulators

At the conclusion of the G-20 meeting, the IMF and European regulators reiterated their intent to continue violating the recommendations offered by the FDR Framework.

The FDR Framework specifies what governments should and should not do with regards to the financial markets.  Governments should insure that all useful, relevant information is made available in an appropriate, timely manner to all market participants.  Governments should not endorse specific investments.

According to a Bloomberg article, the IMF and European regulators find themselves chasing the market and trying to make a convincing case that they have their arms around the sovereign debt crisis.

Their solution, which they have already unsuccessfully tried variations of before, is the exact opposite of what the FDR Framework would advise.

First, the IMF and the European regulators violate the guideline of not endorsing specific investments by trying to convince the market of something.  This strategy is doomed from the beginning as it puts the market analysts in a position to say why what the IMF and European regulators propose as a solution will not work.  Given that the market analysts have been right for the last year, more of the same does not sound promising.

Second, the IMF and the European regulators violate the guideline of insuring that all useful, relevant information is made available in an appropriate, timely manner to all market participants.  Instead, the IMF and European regulators limit access to this data.  This strategy is doomed from the beginning because it is only when the market has and can analyze the data that the market can decide if the IMF and European regulators' solution works.

A much better strategy would be for the IMF and European regulators to announce that all the useful, relevant information will be made available in an appropriate, timely manner to all market participants.  They should encourage the market to analyze this data and confirm that their solution will work to address the sovereign debt crisis.  They should also promise to do more if needed.

Then, they should make the financial institution current asset-level data available and see what the market concludes is needed in the way of additional capital at the financial institution and sovereign level.  [emphasis added]

International Monetary Fund Managing Director Dominique Strauss-Kahn said European Union leaders must convince investors that they can fix the region’s debt crisis and he’s “confident” they will do so by the end of next month. 

“Markets aren’t everything, but markets are important,” Strauss-Kahn said in a Bloomberg Television interview with David Tweed in Paris. “You have to do something that will be seen, not only by markets, to work.” 

After rescuing Greece and Ireland, EU leaders are now seeking to overhaul the governance of the 17-nation euro area and create a permanent system to offer members financial support. While talks continue as governments prepare for two summits in Brussels next month, the EU’s decision-making process has sometimes slowed a resolution to the crisis that began more than a year ago. 

If a solution “comes too late, you’re always behind the curve,” Strauss-Kahn said in an interview after meeting with Group of 20 officials in Paris. “Talking with the most important leaders in Europe, I think they understand well the need to have a comprehensive approach” and “I’m rather confident they’ll come up with something rather comprehensive by the end of March.” 

... Euro-region finance ministers shifted the focus away from the near-term crisis management with a decision last week that the permanent said mechanism to be set up in 2013 will be able to lend 500 billion euros ($675 billion), twice the amount of the fund set up in the wake of Greece’s near-default last year. As with the current mechanism, the IMF will contribute 50 cents for every euro from European governments. 

Strauss-Kahn wasn’t alone today in stepping up pressure on EU governments. European Central Bank President Jean-Claude Trichet told the region’s leaders that it’s up to them to retain the confidence of bond investors. 

“We call all governments in Europe without any exception” to “apply the plan they have as rigorously and as convincingly” as possible, Trichet said at a press conference in Paris after the G-20 meeting. “We have a very strong message for Portugal as well as for others. It’s up to countries to be convincing” and make their case to the markets.