Friday, June 22, 2012

IMF unveils its blueprint to save EU

The IMF unveiled its blueprint to save the EU and lo and behold bailouts were in and requiring banks to recognize their losses and proved ultra transparency was out.

Since the bank solvency led financial crisis is not going to end until we stop bailing out the banks and start requiring the banks to recognize their losses and provide ultra transparency, it is safe to say that the IMF blueprint will do more harm than good if implemented.

As reported by the Telegraph,

The International Monetary Fund has directly confronted Germany by urging the eurozone to take a "determined and forceful move" to "complete economic and monetary union" by sharing government debt and underwriting failing banks.
In short, the IMF would reject RBS's Stephen Hester's advice and use up scarce government resources on needlessly bailing out the banks rather than on economic growth.

The IMF would continue with policies that have not worked since the beginning of the financial crisis and that have no chance of working. 
The IMF's intervention is timed to tip the balance against Angela Merkel at a critical summit between Germany, France, Italy and Spain in Rome today where the embattled German Chancellor will be fighting off identical demands. 
Christine Lagarde, the IMF's managing director, last night unveiled the blueprint to save the euro while warning that the EU's single currency was under "acute stress" that threatened "the viability of the monetary union itself". 
"We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," she said. 
"With that in mind, the IMF believes that a determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith in the system, because we see at the moment the viability of the European monetary system is questioned." 
The way to restore faith in the system is to adopt the Swedish model with ultra transparency.

Under the Swedish model, banks are required to recognize all the losses on the excesses in the financial system today.  This protects the real economy from the existing drag of carrying the debt associated with the zombie borrowers.  Subsequently, the banks can rebuild their book capital levels through retention of 100% of pre-banker bonus earnings.

Ultra transparency is needed so that market participants can confirm all the losses were realized and exert discipline on the banks to keep their risk levels in check.
Germany is opposed to almost every single element of the IMF measures, including "common debt", a European deposit guarantee scheme, a single banking resolution fund, sovereign bond purchases by the European Central Bank and direct aid by euro bail-out funds to struggling financial institutions....

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