Even The IMF Has Awakened To The Global Debt Curse: The Greek Flashpoint Crystalizes The Risks

A baby boom and surging work-force enabled us to grow out of debt in the 1950s and 1960s without noticing it. No such outcome looks plausible today.

The IMF’s World Economic Outlook describes a prostrate planet caught in a low-growth trap as the population ages across the Northern Hemisphere, and productivity splutters. Nor is this malaise confined to the West. The fertility rate has collapsed across the Far East. China’s work-force is shrinking by three million a year.

The report warned of a “persistent reduction” in the global growth rate since the Great Recession of 2008-2009, with no sign yet of a return to normal. “Lower potential growth will make it more difficult to reduce high public and private debt ratios,” it said.

^{Mapped: How the world became addicted to debt}

Christine Lagarde, the Fund’s managing-director, calls it the “New Mediocre”. The height of elegance as always, and seemingly inexhaustible as she holds court at IMF Headquarters, Mrs Lagarde has learned the hard way that something is badly out of kilter in the world.

The painful ritual of her IMF tenure has been to admit at each meeting that the previous forecasts were too hopeful. First it was Europe’s debt crisis. Now it is because China, Brazil, Russia, and a host of mini-BRICS have hit the limits of easy catch-up growth.

This year the curse was finally broken. There will be no downgrade. The IMF is crossing its fingers that world growth will still be 3.5pc for 2015.

Yet the Fund’s underlying message is that sky-high debt ratios and old-age populations are a dangerous mix, leaving the world prone to the “Japanese” diseases of deflation and atrophy. The monetary and fiscal buffers are largely exhausted. Authorities have little left in their policy arsenal to fight the next downturn, whenever it comes.

There is of course a time-honoured way to clear unpayable debts and wipe the slate clean. It is called default. Some wicked wit at the IMF ended the Hitchcock trailer with a killer quote, this one from the Canadian poet and novelist Margaret Atwood, strangely constructed but pithy in its way: “And then the REVENGE that comes when they are not paid back.

This touches a raw nerve, for that is more or less what may happen within weeks if an angry Greece – aggrieved at the way it was sacrificed to save Europe’s banks in 2010 – becomes the first developed country to miss a payment to the IMF, and perhaps the first of a long string of debtor-nations to turn the tables on their foreign creditors. Athens is where it all begins.

George Osborne said talk of a Grecian debacle was on everybody’s lips at this year’s Spring Meeting. “The mood is notably more gloomy, and it is now clear to me that a misstep or a miscalculation by either side could easily return European economies to the kind of perilous situation we saw three or four years ago. The crunch appears to be coming in May,” he said.

His French counterpart, Michel Sapin, no longer sounded like the avuncular protector of Greece’s radical-Left Syriza government. “Nothing has changed,” he said in despair.

“A lot of time has been wasted, and patience is not eternal. The Greek have side have either not wanted to, or don’t known how to, work seriously. We’re getting to the moment when this could become difficult, and I think the Greeks need to get this this into their heads,” he said.

Ms Lagarde told Greece sternly that any delay in payments to the IMF – the world’s sacrosanct creditor – would put the country on a path to pariah status. “It is clearly not a course of action that would be fit or recommended,” she said.

^{Ms Lagarde has warned Greece she will not countenance any delayed repayments}

How can a relatively rich nation justify defaulting to an IMF family where many members are in a “direr situation”, she asked. Greece’s per capita income is $25.667 to compared to $780 in Malawi, $2,498 in Bangladesh, $5,418 in India, or $11,906 in China.

The Greek Left has been demonising the IMF for so long as an agent of oppression that it is having trouble facing up to this moral dilemma. As one official told the Telegraph earlier this month: “If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer.”

Syriza is tempted to buy time with a temporary arrears to the IMF – short of default – as a shot across the bows of the creditor bloc. They do not have enough money to pay a €1.7bn bill for salaries and pensions at the end of this month, and to then repay the IMF €1bn in early May. Almost everything that can be raided, has been raided, legally or otherwise.

This may change if Russia comes through with €3bn to €5bn in advance funding this week for the ‘Turkish Stream’ pipeline project, as reported by Germany’s Spiegel, and at first denied. Greek sources tell the Telegraph that there is indeed a deal of sorts, mysteriously brokered by Panagiotis Lafazanis, Greece’s energy minister and head of Syriza’s militant Left Platform.

Hence his fire-breathing rhetoric on Saturday that Syriza would not “betray the people’s mandate” whatever the consequences. “There can’t be a deal with neo-liberal, neo-colonial powers that rule the EU and the IMF unless Greece really threatens their deep economic and geo-strategic interests,” he said.

^{Yanis Varoufakis gathered with his fellow finance ministers in Washington this week}

If Greece swings into the Russian orbit – dissolving NATO’s eastern flank – nothing can then be ruled out. Syriza might opt to pay the IMF and default instead on €6.7bn of bonds in July and August held by the ECB, deemed the enemy number one.

German finance minister Wolfgang Schauble remains serene. He seems to have made his decision long ago that Greece has no place in EMU, and scoffs at warnings of contagion. “It’s not a major part of the economy of the eurozone. Markets have already priced in whatever will happen. You can’t see any contagion,” he said.

That is not a view shared by the US Treasury or by the IMF’s own experts. “One should not underestimate the risk of a Greek exit,” said Poul Thomsen, head of the Fund’s mission in Greece.

The Greek crisis can perhaps be defused. But there is little that anybody can do about that the infinitely bigger threat of a “super taper tantrum” as the US Federal Reserve raises rates for the first time in eight years, calling time on the era of cheap and abundant liquidity.

The IMF warned of a “cascade of disruptive adjustments”, doubly dangerous since the markets have yet to believe or “price in” what may soon hit them. It amounts to a short-squeeze on $9 trillion of external dollar debt outside US jurisdiction, half of it owed by companies in Russia, Brazil, South Africa, China and the rest of emerging market nexus.

Agustin Carstens, Mexico’s central bank governor, said that even the fattest foreign reserves are no protection. “However much you have, they are never enough when you need them.”

The IMF said the world must brace for a sudden jump of 100 basis points in 10-year Treasury yields, combined with a soaring dollar. “Shifts of this magnitude can generate negative shocks globally. Emerging market economies are particularly exposed: they could face a reversal in capital flows,” it said.

The Fund said markets have been lulled into a complacency by the lowest bond yields in history and a strange lack of volatility – “an illusion of liquidity” – seemingly based on trust that central banks will always come to the rescue.

“A sudden shift in market views that unwinds compressed premiums and sends yields higher could trigger a market liquidity shock,” it said. The ‘flash crash’ on US bond markets last October was a first tremor, a warning of just how quickly liquidity can vanish.

Behind it all is debt. The whole world has been drawn deeper into a Faustian Pact. Total public and private debt levels have reached a record 275pc of GDP in rich countries, and 175pc in emerging markets. Both are up 30 points since the Lehman crisis.

Nobody knows for sure whether this is benign, or how it will end. The haunting fear for the lords of global finance at IMF headquarters this year is that it may never be repaid. Caveat Creditor.

Caveat creditor as IMF chiefs mull unpayable debts – Telegraph.