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Is Lagarde Lying?

  • Written by Syndicated Publisher No Comments Comments
    September 12, 2012

    The boss of the IMF, Christine Lagarde, has been talking the past few days. She said some things that I thought were interesting.

    A few weeks ago, the ECB’s Mario Draghi laid out his plan to buy unlimited amounts of bonds of Spain and Italy in a desperate attempt to stabilize the European bond markets. In order to placate German criticism of the bailout, Draghi made it clear that there would be stiff “conditionality” that must be accepted by Spain and Italy before any bond buying is commenced. To give teeth to the promise of conditionality, Draghi was very specific that both Spain and Italy would have to accept an IMF involvement in the internal affairs of the countries involved. Mario said:


    “The involvement of the IMF shall be sought also for the design of country-specific conditionality and the monitoring of such programs.”


    Lagarde has responded to Draghi’s proposal with her full support (Link):


    According to Christine, the IMF is ready to roll up its sleeves and get down to work “fixing” Spain and Italy’s financial affairs:


    “The IMF would be an active player in restoring the situation in the euro zone.”

    “We obviously have to do it under our normal framework, which implies conditionalities.”

    “The IMF is ready to get involved in designing and monitoring its implementation.”

    Think about the implications of this. The IMF is going to set up a “mission” in Rome and Madrid. There will be hundreds of IMF technocrats running around insisting that the countries bend over backward and accept the severe austerity measures that always come with an IMF bailout.


    To the people of Spain I say:


    Don’t let this woman in your country! She will make your life miserable. You will loose your financial destiny the day she arrives. Your unemployment rate will rise, your economy will suffer. Your political leaders will have given up the authority to rule on critical issues. You will become a ward of the IMF state.


    Don’t believe me? Then please ask other Spanish speaking countries what they think of the IMF. Ask Mexico, Chile or Argentina if they hate the IMF. They do.


    To the people of Italy I say:


    I can’t believe you would allow this to happen! Your country is not bankrupt; you do not need to become a slave of the IMF. Your fellow countryman, Mario Draghi, has put you in a vice. Now you must come begging to him on your knees for help. While you are on your knees begging, you must accept that Christine Lagarde comes into your country and tells you what you can and can’t do.


    I urge you to talk with the people of Brazil. They have been under the thumb of the IMF. They hated it. So will you.


    Of course Ms. Lagarde is a political hack that plays to two audiences at once. She also had this to say about Italy and Spain:

    IMF Managing Director Christine Lagarde said large, debt-strapped euro zone countries Spain and Italy had taken enough action to merit aid. 

    Already “taken enough action” you say, Ms. Lagarde? Are you saying that no more reforms are needed? That Italy and Spain don’t have to bite the bullet? Does this mean that the promise of “conditionality” has no substance? It sure sounds like it.


    To the people of Germany I say:


    The involvement of the IMF in the affairs of Spain and Italy is the only protection that you have. Lagarde has said that nothing more needs to be done to allow them to borrow freely, at cheap rates, and from your country’s Treasury vault!

    If there is no conditionality, then you are about to write an enormous check. It will be measured in the Trillions of Euros once the floodgates are open. The wealth of your country is about to head south.

    Do you really want this to happen?


    Which is it Ms. Lagarde? You can’t have it both ways, and there is no compromise in the middle. Either there is meaningful conditionality, or there is not. Are you lying to the people in Spain and Italy? Or are you lying to the citizens of Germany? Is it possible you are lying to all of the countries involved?

    Images: Flickr (licence attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.