[D66] Specter of global depression haunts IMF, World Bank meetings

[Antid Oto]

Specter of global depression haunts IMF, World Bank meetings
By Barry Grey
24 September 2011

Three years after the Wall Street crash of 2008, finance ministers, central
bankers and economists assembled in Washington for the annual meetings of the
International Monetary Fund (IMF) and World Bank present a picture of perplexity
and fear as the crisis spins out of control and lurches toward a full-scale
depression.

Following a massive sell-off on world stock markets Thursday, the finance
ministers and central bankers of the G20 leading economies, meeting on the
sidelines of the IMF-World Bank conferences, issued an unannounced and hastily
composed late-night communiqué. Its aim was to shore up investor confidence and
calm the markets.

The one-page document declared the commitment of the G20 countries to
“supporting growth, implementing credible fiscal consolidation plans, and
ensuring strong sustainable growth.”

Claiming that the G20 ministers and central bankers were “taking strong actions
to maintain financial stability, restore confidence and support growth,” the
statement asserted, “We commit to take all actions to preserve the stability of
banking systems and financial markets as required.”

However, apart from vague language about increasing the flexibility and
maximizing the resources of the European bailout fund, the communiqué offered no
specifics. It did little to inspire confidence in the financial markets, which
opened Friday in the red in both Europe and the US but ended the trading day
slightly higher. The minimal gains did little to relieve the sense of gloom and
crisis that produced a 5.9 percent drop (675 points) in the Dow Jones Industrial
Average over Wednesday and Thursday combined.

In a Friday article headlined “Grim Mood in IMF and World Bank,” the Financial
Times quoted Eswar Prasad, former head of the IMF’s China division and now a
fellow at the Brookings Institution in Washington, as saying: “The crisis of
confidence cannot be stanched merely by broad statements of concern and noble
policy intentions at a time when decisive and concerted policy actions are
sorely needed.” He added: “In the absence of specific and decisive policy
measures, markets are unlikely to be calmed by such broad statements.”

The atmosphere surrounding the meetings can be gauged from headlines that
appeared Friday in leading financial newspapers. The Wall Street Journal carried
a banner headline declaring “Markets Swoon on Recession Fears.” Below were two
articles, one entitled “World-Wide Distress Rises as Investors See Futility of
Governments, Central Banks,” and the other bearing the headline “Economic
Signals Heighten Worries of Double-Dip.”

The Financial Times gave a special insert devoted to the IMF-World Bank
conferences the headline “Financial Institutions Stare into the Abyss.” The lead
article began: “The world economy once again stands on a precipice.”

There are ample reasons for this assessment. Economic data pouring in shows a
sharp slowdown in growth from the US to Europe to India and China.

Greece is on the verge of state bankruptcy, with the IMF, the European Union and
the European Central Bank threatening to withhold a cash injection unless the
government imposes new and more savage austerity measures in the teeth of
mounting working class resistance.

Banks in Europe with heavy exposure to public and private debt in Greece and
other heavily indebted euro zone countries are tottering, as inter-bank lending
and private credit markets begin to freeze up as they did after the collapse of
Lehman Brothers. American banks are also being hit, with shares of Bank of
America collapsing and Morgan Stanley finding it difficult to raise funds.

On Tuesday, the IMF issued its World Economic Outlook report, in which it
sharply downgraded its forecast for economic growth worldwide, as well as in the
US, Europe, the advanced economies as a whole, and China and India. The report
projects growth of 2 percent or less for both the US and the euro zone in 2011
and 2012.

It begins: “The global economy is in a dangerous new phase. Global activity has
weakened and become more uneven, confidence has fallen sharply recently, and
downside risks are growing.”

The following day, the fund released its Global Financial Stability Report,
which declares: “Financial stability risks have increased substantially over the
past few months.” Pointing to the impact of weaker economic growth on both
public and private balance sheets, it alludes to the mounting threat of
sovereign defaults: “Public balance sheets in many advanced economies are highly
vulnerable to rising financing costs, in part owing to the transfer of private
risk to the public sector” (i.e., the bailout of the banks with public funds).

Noting the convergence of “shocks” such as the credit downgrade of the US, the
worsening European debt crisis and the deceleration of economic growth, the
report continues: “Risks are elevated and time is running out to tackle
vulnerabilities that threaten the global financial system and the ongoing
economic recovery.”

The report warns that European banks are at risk to the tune of 300 billion
euros and calls for the injection of massive amounts of capital to shore up
their balance sheets, in the form of new public bailouts if necessary.

On Thursday, new data was released showing that business activity in the
17-nation euro zone actually contracted in September, the first decline since
July 2009. Other data indicated that Chinese manufacturing declined in
September, marking the third straight month of contraction.

On Friday, the World Trade Organization reported that global trade has slowed
precipitously. The WTO cut its estimate for growth in world goods trade in 2011
to 5.8 percent from an already low forecast of 6.5 percent, and warned that the
risks were “firmly rooted on the downside.”

Meanwhile, the ratings agencies this week downgraded the debt of Italy and
Slovenia as well as three of the biggest US banks—Bank of America, Citigroup and
Wells Fargo—and several Italian banks. On Friday, Moody’s Investor Service
downgraded eight Greek banks, two of which are majority-owned by the besieged
French banking giants Credit Agricole and Societe Generale.

In Washington on Friday, IMF Managing Director Christine Lagarde invoked the
need for urgent and coordinated action to confront a deteriorating economic and
financial situation. “There are dark clouds over Europe and there is huge
uncertainty in the US,” she said. “And with that we could risk a collapse in
global demand. Well, so what? Let’s remove the clouds and remove the
uncertainty. Easier said than done, and it requires clearly a collective action.”

World Bank President Robert Zoellick said he still believed the world could
avoid a double-dip recession “but my confidence in that belief is being eroded
daily.”

The measures being proposed by Lagarde, with the support of the US, are
themselves at best palliatives that in no way address the underlying problems
that produced the crisis. Essentially, they consist of more austerity for the
working class, combined with some short-term stimulus for the US and the
stronger European economies and a further use of public funds to bail out the
banks. These are the very policies that have exacerbated the crisis to the point
where it threatens the bankruptcy of entire countries whose treasuries have been
plundered to rescue the financial oligarchs, and a descent into full-scale
depression.

There is little chance of coordinated action to avert this prospect. The
self-congratulatory praise of multilateralism and cooperation among the major
powers that attended the early stages of the crisis has given way to bitter
regional and national divisions and a mood of mutual suspicion and animosity.

The US, for its part, has sought to offload the crisis onto its economic rivals,
in part by pursuing a cheap dollar policy to gain a trade advantage. This has
led to the downgrading of US debt, which has fatally undermined the dollar and
the global monetary system based on the US currency.

It has also increased tensions with the European Union, particularly with
Germany, the strongest economy in Europe and one that is highly dependent on
exports. Germany is leading the opposition within the EU to a major expansion of
the 440 billion euro European Financial Stability Facility or other measures,
such as euro bonds, to underwrite the weaker economies—from Greece, Portugal and
Ireland to Spain and Italy—largely at Germany’s expense.

German officials have in recent days publicly floated the option of allowing
Greece to go bankrupt in a “controlled default,” and, along with their allies in
Austria and other northern European countries, slapped down US Treasury
Secretary Timothy Geithner when he attended a meeting of euro zone financial
ministers last weekend to push for a bigger bailout fund and minimal stimulus
measures.

At the IMF meeting on Friday, Wolfgang Schäuble, the German finance minister,
made clear that Germany remains opposed to the policies being pushed by
Washington and the IMF. He declared that a rejection of further fiscal stimulus
is “widely shared” in the G20. He also suggested that a second bailout package
for Greece agreed to earlier this year should be reconsidered in light of the
country’s failure to meet its deficit-reduction targets.

As Karen Ward, an analyst at HSBC, wrote in a note to clients cited by the New
York Times, “Quite simply this is a beggar-thy-neighbor, not a coordinated world.”

The inability of policy makers to provide a solution to the crisis stems
fundamentally from the fact that it is a crisis of the capitalist system itself,
and no measures can be considered by governments beholden to the banks and
corporations that challenge the wealth and power of the corporate-financial
elite. Instead, all factions within the bourgeoisie, however bitter their
differences, seek to extricate themselves through the impoverishment of the
working class.

http://wsws.org/articles/2011/sep2011/econ-s24.shtml