What is KJ's problem?

[Goh Meng Seng]

Dear Locke,

No no. Nobody is saying IMF is like Lehman Brothers. We are just putting risk management mindset in perspective.

We agree, even with Londontrader, that IMF is an institution involved in very risky lending, never mind about how stringent the terms and conditions were set but basically, the loans it puts up are very risky in nature... that is why it is the "lender of last resort" because at times, nobody else in the world wants to lend money to these countries because the risks are just too high. Unless you want to dispute this as well?

Thus, it would be over-complacent to claim that IMF is the "safe institution" to loan to. That's pretty oxymoron to start with. An institution that makes the most risky loans to countries are the safest institution? It is just like saying the loan sharks business is the most safest business around.

Well, in spite of the claim IMF "has not defaulted" on its obligations to its lenders up till now, it is still an institution involved in risky business dealings.

Thus in that sense, Lehman Brothers Minibond saga rings the bell. It is more of how people visualize risk vs actual business dealings that matters. When Minibond investors went in and buy Minibond, they didn't even know what exactly it was. But they only hear, like what we are hearing now from PAP, that it is just like safe fixed deposits giving higher returns. We have to do our due diligence to examine IMF more thoroughly on our own to decide for ourselves, how safe is IMF.

IMF has complications as explained, due to the extraordinary situation we are facing in EU. This adds to the risk of any loans IMF intended to give them. And these loans are linked to what we are pledging or going to give to IMF. Thus again, Lehman Brother's experience comes into play. You cannot assume that the six institutions stated in Minibonds which look so branded and strong, will not fall in future. That's basically blind belief based on blind faith and branding.

Anyway, the conclusion is this, for whatever amount we decide to put into IMF, we must be ready to lose every single cents of it... never mind of whether we will be losing other funds at that time, but are we willing to lose these $4billion in addition?

Goh Meng Seng

Dear GMS

Here is when conflation and confusion and a good soundbite gets in the way of sound policy and discussion. Hey why not throw a little conspiracy in to begin with as well.

The IMF is not owned by Tharmen or the SG Gov. More democratic countries with smarter politicians and world government theorist have all questioned the IMF and have not come up with anything. As far as we know the IMF to date has not suffered losses and in a sense it has kept is roles as a lender of last resort to sovereigns who need loans to deal with balance of payments and or currency issues

The Lehman bonds were the results of what LondonTrader and banks create, derivatives linked monsters which MAS should not have allowed to be sold. The IMF is an age old institution which loans money as a lender of last resort and forces public sector accounts adjustment. Are u even suggesting that the IMF is a GS like IB selling derivatives to indebted countries ?



Locke

 

[Fook Seng]

I don't know what you guys are arguing about. The money belongs to Ho Ching. She can do whatever she wants with it.

That is the problem. It should not be treated as a common garden variety investment, away from prying eyes of the problem. It should really be part of the Govt's direct responsibility to address how this should be contributed with the support of parliament.

 

[londontrader]

At this moment, IMF may not have to activate and utilize additional loans from other countries like Singapore but as you have agreed, if this crisis is not managed properly, it may be blown out of proportion. That is why they need the pledge of $4B from Singapore and that's when the indication of IMF is going to loan beyond what it has in its coffers right now.

They asked for a collective effort which we joined in. It's a confidence building exercise.
As for loaning beyond it's ability, it's a cooperative so members (some have more clout than others) have to agree
got it?

We have stressed again, IMF doesn't need to go bust before we start losing our monies. Arrangement can be made for hair cut on both sides. As we all know, IMF has always been the international political tool of US and Europe, both Aurvandil and I believe that they would rather save Europe than maintain IMF's self preservation. This crisis is totally a different monster than all other monsters we have seen in the past.

Why would they need a haircut when they won't/can't risk that much in the 1st place without seeking permission

Save Europe before themselves?
I think Mr USA (strongest veto power) won't agree
Why should they? The Europeans have the means to save themselves right now!
It's the lack of political will that's stalling the process

If I am not wrong, IMF has already committed loans to EU.

Yes, under the Extended Fund Facility but nothing spectacular

You said IMF needs permission from stakeholders to grant loans to the PIIGS but look, let's be realistic, you have clearly stated that the G8 are the main stakeholders... who are they? US may not be able to help EU directly and thus, it would not want to lose an important ally in EU. Thus, most probably US will agree for IMF to grant the loans. No prize for guessing what will other EU members in the G8 cum IMF decide.

The USA alone can veto anything the Fund does
What makes you think Europe needs the rest of the world to save it?
This is not Latin America in the 70s and 80s okay
If and when certain rich european nations find the balls to act, this problem can be solved

The source of the potential international crisis starts right in EU. I think it would be silly for IMF to sit and do nothing in EU at first sight of fire there and wait for the fire to spread to other places before it starts to open its hoses. Even that, that EU source of crisis isn't that small at all. The conclusion we have is, whatever amount Singapore is ready to pledge, we better make sure that's what we could afford to lose totally.

That's right!
The IMF's 1st priority is to stop the contagion
NOT to save Europe
Fire Fighting can also be about ring fencing the fire and not saying the culprit
A ring fencing exercise will not bankrupt the IMF

why should we lose more peanuts when other countries are smart enough in keeping self preservation as their first priority?

The other countries are taking part in the same exercise as S'pore (means that they are smart enough to see the same contagion)
so I don't know what you're talking about!

The Germans and French are not ready to jump into the hell hole just yet because of self preservation consideration, not just politics. So I would think the most convenient side steps they could get is to get IMFs (under their heavy influences) and World Bank to be first in line to burn in this hell hole.

Actually, self preservation dictates that the Germans etc. act now!
Their leaders know that and would act if the politics allowed
The problem is that self interest (politician's that is) reign supreme right now
Nobody wants to be a hero and die politically
get it?

As for passing the buck to the IMF and World Bank?
Fat chance!
The USA has already indicated that this is a European mess ripe for a European solution

The present consideration of whether to break up the EU to contain the problems is not merely political one, but also involves economic considerations. If you break up EU during normal peaceful times, there would be little impact. But if they are going to do it now under the tremendous pressure of crisis, it will create tremendous fear factor and the psychological impact on the economic front would be like a 100m Tsunami which may just drown everyone within and beyond. As you should know, part of the problem lies in psychological shifts and impacts, just as any pledge would give people some psychological confidence in IMF and the whole system and thus, would not result in total mob panick. To break up the EU right now would do exactly the reverse economically as well as politically. Thus, it is the view of many experts that such move is a very dangerous one. It may just give the whole system more than what it needs in shock sparks to trigger an even worse crisis.

You're supposed to be an economist right?

So you should understand why the 2007/8 crisis peaked at the Lehman bankruptcy.
Markets can handle bad things happening. Markets are only bad at handling uncertainty.
Therefore, an EU solution can be contained (thru liquidity injections) if you address the issues and remove that uncertainty. That's why many learned people acknowledge that the Lehman bankruptcy was handled badly, creating a worse crisis than needed.

But I think the more likely solution is the ownership by all Europeans of this uniquely European problem. Some will be asked to sacrifice make the collective good. But that sacrifice can/should be uniquely European!

 

[londontrader]

The key difference really is who do you think the US and key players will save when the chips are down.

You come from the point of view that the IMF will be saved. To do this, they will restrict the IMF to make only very conservative loans. This is even if the ECB goes bust and the euro becomes worthless.

I come from the point of view that they will save Europe rather than the IMF. If the chips go down and the ECB is in danger, they will break the piggy bank wide open. They will pass the can around and around again and again. If we want to play good global citizen, the US$ 4 billion will just be the start. Which is why I asked the question how big a loan pledge before we need a referendum. How about US$ 40 billion? Will that be large enough to warrant a referendum?

The IMF is there to stop contagion
Not to bail out idiots
You should understand that the Europeans have the means to save themselves
The IMF is there to make sure that the world doesn't catch flu because the Europeans keep twiddling their thumbs
If and when it gets bad enough, Europe will act
Just look at how the german position keeps shifting everytime the Greeks up the political ante

 

[londontrader]

Referring to the Wikilinks article, this view of referendums is not universal. There are non binding referendums and even referendums initiated by private citizens who have garnered a required level of public support via petition.

Just wonder if you can find a referendum out there carried out for an IMF pledge?

 

[londontrader]

The Lehman bonds were the results of what LondonTrader and banks create, derivatives linked monsters which MAS should not have allowed to be sold.

Never worked a structured products desk and never in sales
So Not Quilty

Are u even suggesting that the IMF is a GS like IB selling derivatives to indebted countries ?

Okay Guilty on this one

 

[londontrader]

I don't know what you guys are arguing about. The money belongs to Ho Ching. She can do whatever she wants with it.

Aiya! She can at least pretend to ask for permission.

 

[londontrader]

Dear Londontrader,

You are truly very optimistic!

Goh Meng Seng

Not really!
Seriously, been thru a lot of these situations
the "experts" like to talk shit because an impending crisis invites a large audience
It also pays to be dramatic because that gets you the media attention
There is also the small outside chance that you turn out partially right (even though you've wrong so often in the past!)
Then you become the next media darling and earn all the big bucks on the lecture circuit
Us traders are more circumspect
We look at hard facts and not so hard politics
This situation has tripped up all the quant models precisely because it is political in nature

 

[londontrader]

Dear London trader, please do not waste your time with the in-house jester. Would appreciate some quantity simulation and analysis. Not too much point talking about general legal stipulations as there are many escape clauses on how to circumvent the these general assertions made to the world. Media and the PR department of global institutions do not report accurately as they know little. The EFSF is an overly leveraged fund but was played up like it is real money committed from the bank vaults. If your purpose is to elucidate by all means do so. Do not bother reading very badly thought through previous posts when the in-house jester (with clowns) tells you to. If you have clear intention to educate please think through and then write and rewrite before publishing. You will be doing everyone who reads for entertainment and more a public service albeit limited in impact. You would be doing a disservice to the intellectual community in the real world and a portion in the SBF world, by trying to reconcile gobbledygook from an individual who is low in potential but high in complex, thereby messing up your relatively well organized mental map with a quick and relatively efficient knowledge extraction algorithm. Peace.

Yes, it would be good to link to actual evidence and raise the intellectual level of this discussion
BUT, I'm doing this while eyeballing other screens at the same time.
Explains the poor typing and bad English
This is serious stuff for those budding economists out there
I'll try and act accordingly

 

[londontrader]

It is kind of creative accounting way to hide the fact that members do lose when IMF write off its loans when it just claims that only interests is lost as these interests were used to cover the principle loans. Thus, it will sound good to people to make them think that IMF has never defaulted on its debts, only forgo interests when things doesn't turn out well.

Well, you have used this line of argument a couple of times here in this thread previously that IMF is safe and when it writes off its loans to other countries, it has already earned enough interests to cover the losses.

You really are confusing!

Okay here is my point again:

When the IMF allows a country to default, in most cases the nation has already been servicing the loan (interest + principal).
Therefore, part of the face value of the loan had already been paid back (so loss is less)
In some cases, the face value had already been paid once you add up all the interest payments as well as the principal payments the nation paid up to the point of default
This is not creative accounting, it is just the plain simple truth

 

[londontrader]

I am extremely surprised by this statement. USD 4 billion out of USD 260 billion GDP represents a 1.5 % in our annual growth. Put another way, it can also mean USD 2000 more a year for every employee in Singapore or increase the salary of those who earn less than S$1000 per month to S$1500 and correspondingly all those below S$1500 to an appropriately higher figure.

We're talking about the FX mkt dude!
The FX mkt doesn't give a shit about the average employee in Singapore
The FX mkt responds to news and $$$$$
That's why 4 billion is peanuts in a mkt that trades trillions

 

[londontrader]

It is claimed that what countries lost is merely the "interests" (or in technical terms, opportunity cost of money) but the principles are intact when IMF wrote off billions of debts. This confused the situation because it turns the accounts around. What is lost is actually the initial principles but the interests earned over the period of loan, are more or less recovered these losses. Thus, technically, by twisting this interest - principles around, IMF can claim that it has never failed to repay its members who gave it the loans. But this hides the actual fact that member countries are asked to write off their loans to IMF but for the front, claimed that they have not lost their principle loans because the interests they have earned have recovered the initial loans made. This is a kind of "creative accounting" method to hide the inherent risks. It is better to say that what you have lost is potential interests earned than saying, you have lost your whole loans to IMF while you have earned interests from it in the past.

Actually it is very simple GMS,

Just name the country that wasn't paid back by the IMF
Just name one

 

[Goh Meng Seng]

I have to say again, I am not against Singapore playing its role in helping to contain the problems. However, HOW MUCH?

My last check, even the EU members have more or less based on a "per capital" basis to even out their responsibilities and obligations. Each member country has less than Euro1800 per capital, with most of them having about Euro1500 per capital burden in providing the guarantees to the stability funds. Thus, this bags the question, why are we acting as if we are part of Euro, committing even more than some of their smallest member as in per capital?

As I have said, the risk involved is not merely about the size of the sovereign debts but rather, the problem of having a common Monetary system with separate fiscal systems each embedded with sovereignty. You may put it in simpler terms as "politics" but I believe it is more than that.

You are a bit off in IMF commitment to this Euro problems. IMF has directly involved itself in the bailout of Greece in 2010. That's a total of Euro110Billion altogether with other European members' help. IMF, together with EU, has also put up Euro5Billion bonds in 2011 for Ireland as well. For the Portugal's bailout in 2011, IMF has come up with Euro 26Billion as well.

The great faith put on Europe to have the means to save itself is misplaced. It has inevitably turned to IMF to provide additional financial pledges of more than Euro250Billions and this may not be the last request. The point means that Europe itself will only put in that much commitment to solve its own problems. The fact that IMF has agreed to it means that even US has to consent in such move. Thus I am not too sure why you keep thinking that US will veto IMF's involvement in this Europe crisis.

It is pretty ironic here that when the parliaments of all EU member states have to go through robust debates and voting to support whatever guarantees or pledges of funds to maintain stability in EU which they have the most vested interests, we have people here in Singapore who think that no parliamentary debate or vote or endorsement by the President is needed when we are making quite a substantial per capital commitment to IMF to help Europeans fighting their problems.

Goh Meng Seng

Save Europe before themselves?
I think Mr USA (strongest veto power) won't agree
Why should they? The Europeans have the means to save themselves right now!
It's the lack of political will that's stalling the process



Yes, under the Extended Fund Facility but nothing spectacular



The USA alone can veto anything the Fund does
What makes you think Europe needs the rest of the world to save it?
This is not Latin America in the 70s and 80s okay
If and when certain rich european nations find the balls to act, this problem can be solved



That's right!
The IMF's 1st priority is to stop the contagion
NOT to save Europe
Fire Fighting can also be about ring fencing the fire and not saying the culprit
A ring fencing exercise will not bankrupt the IMF



The other countries are taking part in the same exercise as S'pore (means that they are smart enough to see the same contagion)
so I don't know what you're talking about!



Actually, self preservation dictates that the Germans etc. act now!
Their leaders know that and would act if the politics allowed
The problem is that self interest (politician's that is) reign supreme right now
Nobody wants to be a hero and die politically
get it?

So you should understand why the 2007/8 crisis peaked at the Lehman bankruptcy.
Markets can handle bad things happening. Markets are only bad at handling uncertainty.
Therefore, an EU solution can be contained (thru liquidity injections) if you address the issues and remove that uncertainty. That's why many learned people acknowledge that the Lehman bankruptcy was handled badly, creating a worse crisis than needed.

But I think the more likely solution is the ownership by all Europeans of this uniquely European problem. Some will be asked to sacrifice make the collective good. But that sacrifice can/should be uniquely European!

 

[scroobal]

My sense is that this discussion is revolving around the same issues because the people are unable to reconcile the role of IMF. It seems to mean many things to many people. If we move away from IMF and whether it is a pledge or loan etc, we might be able to make headway.

The issue is whether the controls are in place, have they been followed and should such significant amounts before being disbursed or pledged be discussion in an appropriate forum. KJ feels that a breach has taken place and the President's office has also stated that it has not been consulted but did not indicate if it should be. Its valid point and I am glad that he has taken this to court.

Referendum is the not appropriate instrument. A parliament debate certainly is. These are not exactly BAU stuff so the premise on which the pledge is made requires some level of airing in parliament.

At the end of the day, this has nothing to down with any forms of financials drivers, rates, ratios, quantitative or qualitative analysis. Its a political decision based on global citizenship and goodwill. No different to our people serving as observors, peacekeepers in the UN etc. We have sent people to Amman, Dili, Namibia, Saudi Arabia, etc on various missions . This falls in this bucket. We are not obliged or required to. It is done so that in time of need, people remember and help.

 

[londontrader]

My sense is that this discussion is revolving around the same issues because the people are unable to reconcile the role of IMF. It seems to mean many things to many people. If we move away from IMF and whether it is a pledge or loan etc, we might be able to make headway.

The issue is whether the controls are in place, have they been followed and should such significant amounts before being disbursed or pledged be discussion in an appropriate forum. KJ feels that a breach has taken place and the President's office has also stated that it has not been consulted but did not indicate if it should be. Its valid point and I am glad that he has taken this to court.

Referendum is the not appropriate instrument. A parliament debate certainly is. These are not exactly BAU stuff so the premise on which the pledge is made requires some level of airing in parliament.

At the end of the day, this has nothing to down with any forms of financials drivers, rates, ratios, quantitative or qualitative analysis. Its a political decision based on global citizenship and goodwill. No different to our people serving as observors, peacekeepers in the UN etc. We have sent people to Amman, Dili, Namibia, Saudi Arabia, etc on various missions . This falls in this bucket. We are not obliged or required to. It is done so that in time of need, people remember and help.

Well said!

 

[Goh Meng Seng]

Well, I will research into that.... also on whether IMF made special arrangement for debtors to "write off interests" earned and use that interests to repay their principle amount.

Goh Meng Seng

Actually it is very simple GMS,

Just name the country that wasn't paid back by the IMF
Just name one

 

[lockeliberal]

Dear GMS

Firstly the IMF is the lender of last resort but it is also SUPER SENIOR debt, it gets paid first. Its not very profitable but it gets paid and maintains a rate of return equal to protection of principle plus inflation.


Lehmans Minibonds is a different kettle of fish in structure and complexity of issues from a loan to the IMF. Equating the two and conflating the two is pure politicking plain and simple. If the IMF fails then the world has failed and we are back to the days of global economic depression and or meltdown aka Reich Economics , etc etc

If THAT happens we lose everything and more in a meltdown. So I can;t understand why you are expanding photons on what if the IMF fails, what if we lose our quota, what if we lose 4 billion because if that happens it would mean the great depression ALL over again


Locke

Dear Locke,

No no. Nobody is saying IMF is like Lehman Brothers. We are just putting risk management mindset in perspective.

We agree, even with Londontrader, that IMF is an institution involved in very risky lending, never mind about how stringent the terms and conditions were set but basically, the loans it puts up are very risky in nature... that is why it is the "lender of last resort" because at times, nobody else in the world wants to lend money to these countries because the risks are just too high. Unless you want to dispute this as well?

Thus, it would be over-complacent to claim that IMF is the "safe institution" to loan to. That's pretty oxymoron to start with. An institution that makes the most risky loans to countries are the safest institution? It is just like saying the loan sharks business is the most safest business around.

Well, in spite of the claim IMF "has not defaulted" on its obligations to its lenders up till now, it is still an institution involved in risky business dealings.

Thus in that sense, Lehman Brothers Minibond saga rings the bell. It is more of how people visualize risk vs actual business dealings that matters. When Minibond investors went in and buy Minibond, they didn't even know what exactly it was. But they only hear, like what we are hearing now from PAP, that it is just like safe fixed deposits giving higher returns. We have to do our due diligence to examine IMF more thoroughly on our own to decide for ourselves, how safe is IMF.

IMF has complications as explained, due to the extraordinary situation we are facing in EU. This adds to the risk of any loans IMF intended to give them. And these loans are linked to what we are pledging or going to give to IMF. Thus again, Lehman Brother's experience comes into play. You cannot assume that the six institutions stated in Minibonds which look so branded and strong, will not fall in future. That's basically blind belief based on blind faith and branding.

Anyway, the conclusion is this, for whatever amount we decide to put into IMF, we must be ready to lose every single cents of it... never mind of whether we will be losing other funds at that time, but are we willing to lose these $4billion in addition?

Goh Meng Seng

 

[londontrader]

You are a bit off in IMF commitment to this Euro problems. IMF has directly involved itself in the bailout of Greece in 2010. That's a total of Euro110Billion altogether with other European members' help. IMF, together with EU, has also put up Euro5Billion bonds in 2011 for Ireland as well. For the Portugal's bailout in 2011, IMF has come up with Euro 26Billion as well.

Like I said, nothing spectacular
The Fund is a fire fighter and is going about it's usual business
These are nations facing macroeconomic adjustment problems and have been granted loans under various IMF facilities like the Extended Fund Facility (for Greece) among others
really is business as usual

 

[Goh Meng Seng]

Dear Londontrader,

You amused me. If the country has already repaid the interests plus principals, there is no need to default anything! You must have mistaken. The country might have serviced the interests which add together, may be equal or bigger than the initial principal, but technically, it didn't repay the principal in totality. But to IMF and its members, as long as the principals have been covered by total interests payment, they feel it is ok to write off the debt...aka principal amount.

That is why many writers and commentators wrote that the only loss IMF took, was the loss of interests.... which was used to cover the principal amount.

Goh Meng Seng

You really are confusing!

Okay here is my point again:

When the IMF allows a country to default, in most cases the nation has already been servicing the loan (interest + principal).
Therefore, part of the face value of the loan had already been paid back (so loss is less)
In some cases, the face value had already been paid once you add up all the interest payments as well as the principal payments the nation paid up to the point of default
This is not creative accounting, it is just the plain simple truth

 

[lockeliberal]

Dear Lon

Why why is it so hard to explain the market to a supposedly trained economist. Why Why is it so hard to get someone to stop worrying about that spot of rain and losing billions when possible economic havoc on the scale of trillions is on the cards. Well welcome to the world of principled politicians.


Locke

The IMF is there to stop contagion
Not to bail out idiots
You should understand that the Europeans have the means to save themselves
The IMF is there to make sure that the world doesn't catch flu because the Europeans keep twiddling their thumbs
If and when it gets bad enough, Europe will act
Just look at how the german position keeps shifting everytime the Greeks up the political ante