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Why the IMF thing works for the euro

Posted by WARREN MOSLER on November 28th, 2011

As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.

Perhaps most important,
the ECB lending to the IMF,
which then lends to euro member nations,
doesn’t count as ‘printing money’ in the Teutonic monetary bible.

To recap:

When the ECB buys bonds,
it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money’
So this is said to be ‘printing money’

The ECB then offers different euro accounts,
also data on the same ECB spreadsheet,
that pay interest with relatively short maturities.
This is called ‘sterilization’ because those deposits don’t count as ‘money’

However, when the ECB buys SDR from the IMF loans to the IMF,
and it credits the IMF account at the ECB with euro,
that doesn’t count as ‘printing money.’

Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’

And, while a bit of a stretch,
the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question
do have balance of payments issues.
So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.

Furthermore, if there’s one force that can be trusted to impose austerity,
it’s the IMF, of course.

Also interesting is that the IMF takes the credit risk for the loans it makes,
while the ECB takes IMF credit risk on its balance sheet.
This means the rest of world is assuming the risk for the loans to the national govts.

Lastly, while it triggers a massive relief rally,
it’s just Bigfoot kicking the can way down the road,
as the austerity continues to weaken the euro economy,
now to the point of driving up deficits as GDP growth goes negative.

So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image,
kicks the solvency issue down the road,
and all without the ECB ‘printing money’!

So now let’s see if it actually happens.

Merry Christmas!

32 Responses to “Why the IMF thing works for the euro”

  1. Walter Says:

    is the rest of the world prepared to take on the credit risk on IMF loans to euro member states?
    how about the US, ready to do that?



    hard to say! we did lend $600 billion unsecured via the fed swap lines just keep libor down not long ago, and stand ready to do it again.


    Walter Reply:

    until now China etc took the position: if you as ecb do not want why should we stick out our neck?
    The whole world is of the opinion that the eurozone has all the tools needed to solve its own problems.
    Only Germany (and Finland) see things differently.
    How about dumping German and Finnish bonds?



    or outvoting them on the ecb council

    john Reply:

    What lengths do you suppose the dynamic duo at Fed and Treasury would go to to contain contagion? As a thought experiment, suppose that in the moments he’s not reveling in pure evil Tim Geithner actually believes the Military Industrial Complex and FIRE are the two remaining comparative advantages America has in a globalized economy.

    In this context the IMF, World Bank and BIS remain exactly what they were created to be sixty years ago: instruments of American power, the main change in this period being our motives (and the creation of a Weimar obsessed ECB, a cute surprise!). From this perspective the only thing in the world prettier than a fully armed predator drone is a TBTF US bank (another form of predator drone).

    Cascading defaults in Euro land and the swap swamp they will inevitably create here are just another toxic bog that Ben can drain onto the Fed balance sheet. He’s gone in about 3 Trillion just to save TBTF US banks ( ). For a few Trillion more he can purchase all of Europe’s banks and we can force them into mergers with Citi and BA and give our zombies European brains to eat. Euro Zone banks can’t lobby Congress! As Ed Harrison pointed out several weeks ago, sans bad debt Europe is a pretty attractive property. And if you can get it with most of its citizens as serfs again, this is a once in a lifetime buying opportunity! I’m just sayin’….

    Its really no different from what the ECB is proposing for Greece, just bigger.



    my way to do it would be to offer the euro nat govs statehood, where they can switch to US dollars, in return for the US tsy taking over their national debts.

    and, of course, i’d also offer a federally funded job for anyone willing and able to work for all the 68 states.

    beowulf Reply:

    Warren Mosler,
    I like your statehood idea, but more practically, they should be offered Compacts of Free Association (there really is a legal precedent for anything). :o)

    The Compact of Free Association (COFA) defines the relationship that three sovereign states—the Federated States of Micronesia (FSM), the Republic of the Marshall Islands (RMI) and the Republic of Palau—have entered into… with the United States…
    Under the COFA relationship, the United States provides guaranteed financial assistance over a 15-year period administered through the Office of Insular Affairs in exchange for full international defense authority and responsibilities… The COFA allows the United States to operate armed forces in Compact areas, to demand land for operating bases (subject to negotiation), and excludes the militaries of other nations without U.S. permission. The U.S. in turn becomes responsible for protecting its affiliate nations and responsible for administering all international defense treaties and affairs, though it may not declare war on their behalf…

  2. Paul Says:

    So what is the IMF actually and what is its original mandate? I have always heard of it but never stopped to really understand its function and role.

    Thank you!


    ESM Reply:


    It was basically established to make sure that countries with fiat currencies would continue to operate as if they were on gold standards. It’s pretty much the anti-MMT fund. I can’t think of a single case where the IMF didn’t do more harm than good. That being said, I don’t think the harm it does is intentional. Just one of those deadly innocent frauds. And it’s sustained by a professional bureaucratic elite, much like the UN or the EU.


  3. JKH Says:

    “Also interesting is that the IMF takes the credit risk for the loans it makes, while the ECB takes IMF credit risk on its balance sheet.”

    More than interesting – I’d say its the purpose of it.

    Risk diffusion – even if its just kicking the can, it may still be better for the EZ at this point than just kicking it with ECB purchases direct, sans IMF, for the same amount and with the same austerity. Only the EZ is exposed to the ECB capital account risk; the whole world shares in the IMF capital account risk.


    Anders Reply:

    @JKH, surely it’s better for the ECB to bear the risk since the ECB can monetise any losses, unlike the IMF?


    JKH Reply:

    The ECB will monetize a loss, in effect, in either case.

    But the size of the loss will be different.

    The choice is between monetizing a loss from a direct claim on EZ (e.g. Greek bond), versus monetizing a loss from a direct claim on IMF, which itself holds the direct claim on EZ.

    I think the loss for the ECB in the latter case will be smaller, depending on the terms of the ECB’s loan exposure, relative to the overall funding structure of the IMF. But I’m not familiar with the details of the liability and capital structure for the IMF, including the risk position of this loan.


    Anders Reply:

    @JKH, ECB lending direct » zero ‘fiscal’ loss for anyone.

    IMF as direct lender » IMF funding countries (incl EZ) incur some level of ‘fiscal’ loss.


    JKH Reply:


    ECB profits and losses are distributed/allocated to capital contributors, which are the EZ countries; that’s a fiscal impact


    and, actually, the ECB just ignores losses.


  4. Jim Thomson Says:

    Fascinating post. Indeed, it just kicks the can further down the road. Until the IMF funders realize what they are into, supporting the bonds of EZ countries, which they will eventually decide to stop doing, as austerity continues and budget deficits increase. Germany has been replaced by the IMF funders.


    Jim Thomson Reply:

    @Jim Thomson, My comment shows I misunderstood the original post. The IMF funding comes from the ECB, not from other IMF funders. The ECB balance sheet still expands, no matter what route the money takes to buy the bonds. A nice deal for the IMF as they get to remain in the game.


    Unforgiven Reply:

    @Jim Thomson,

    And so the EZ gets the Mutt & Jeff routine. And a lot of ninnys get a reason to wear a suit. Hey! Maybe they should have a PIIGS boutique at IMF headquarters!


  5. Tom Hickey Says:

    The ECB lending to the IMF to circumvent the politically imposed restraints that are exploding the EZ is similar to the platinum coin gambit in the US to avoid the debt limit. Both show how the system is poorly designed and could easily be fixed by simply removing the political restraints since there are no operational constraints.

    The huge difference is that in the platinum coin gambit, the Treasury get to pay bills previously incurred by past appropriations. However, in the ECB lending to the IMF, the IMF becomes the bad cop imposing austerity on the borrowing countries while the ECB appears a good cop as provider of the currency.

    What we are seeing is global finance stuck between the gold standard and a fiat regime, with TPTB unable to choose between these alternatives and trying to have the best of both worlds by combining elements of both through political imposition. It’s not working very well.


  6. wh10 Says:


    Would they not consider this ‘money printing’ if the ECB continued to do this indefinitely?


  7. PZ Says:

    Who/what is backstopping ECB? Financial press keeps saying it’s Germany, yet that can’t be right because individual EZ governments are limited in their ability to conduct fiscal operations, while ECB is unlimited. ECB seems to be backstopping itself since it can absorb all losses and function with negative capital.



    yes, the ecb spends without regard to ‘finance’


  8. SG Says:

    “However, when the ECB buys SDR from the IMF loans to the IMF,
    and it credits the IMF account at the ECB with euro,
    that doesn’t count as ‘printing money.’”

    not sure i follow this…simplify?



    it’s just that ‘they’ happen to count some ECB purchases as ‘printing money’ and not others.
    form over substance


  9. Adam (ak) Says:

    The husband of Anne Applebaum from Washington Post (who just happens to be the Polish Foreign Minister) has delivered the blunt message from Mr Geithner to Mrs. Merkel.

    “The European Lemmings given up their sovereignty but you have to take the responsibility.
    (you may need to go through a Google search page to bypass the paywall)

    It remains to be seen when I will have to start putting “DANZIG” instead of “GDANSK” as my birth place. I need to ask whether in Chinese it is the same character.


    beowulf Reply:

    @Adam (ak),
    “Nobody else can do it. I will probably be the first Polish foreign minister in history to say this, but here it is: I fear German power less than I am beginning to fear its inactivity.”

    Well yeah, belonging to NATO is like being friends with the Godfather.
    Don Corleone: [shakes his head ruefully] Bonasera, Bonasera. What have I ever done to make you treat me so disrespectfully? If you’d come to me in friendship, then this scum that wounded your daughter would be suffering this very day. And if by chance an honest man like yourself should make enemies, then they would become my enemies. And then they would fear you.
    Bonasera: Be my friend – Godfather.
    [The Don shrugs, Bonasera bows toward the Don and kisses the Don's hand]
    Don Corleone: Good. Someday, and that day may never come, I’ll call upon you to do a service for me. But until that day – accept this justice as a gift on my daughter’s wedding day.
    Bonasera: Grazie, Godfather.


    pebird Reply:

    @Adam (ak), Although her statement:

    “The UK’s total sovereign, corporate and household debt exceeds 400 per cent of gross domestic product. ”

    shows a bit of double-counting. Let’s balance everyone’s public and private budgets and start all over at zero.


  10. Anonymous Says:

    May I ask a mostly unrelated question here?

    Does anyone know of some Public Finances literature I could use to push MMT?


  11. PG Says:

    Coordinated opt-outs from the EZ, with EUR liabilities duly apportioned, debt restructuring according to growth capabilities under MMT policies and capital controls would solve the problem and allow people to face more relevant issues it would not be the case that…

    … all the problem non-solving approaches were not tried in full yet.



    and the conservatives are against apportion…


    beowulf Reply:


    Well I am out pushing the optimal solution… :o)

    Since the ECB doesn’t know what the hell they’re doing, just paying Warren Mosler a €1 billion retainer to run the railroad would actually be a very cost-effective move…




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