Tuesday, 06 April 2010 14:08

A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis pt1 Featured

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The IMF has recently released a white paper labeled "Strategies for Fiscal Consolidation in the Post-Crisis World". Here's a synopsis:


  • The fiscal state of the developed world is facing the question of solvency for the first time since WWII, and this time demographic trends are incredibly unfavorable.  See  Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for explicit evidence.
  • Current fiscal models for the developed world see fiscal tightening starting in 2011 [in 8 months governments are going to start tightening liabilities? Possible, but I wouldn't hold my breath for this one]
  • The only G-7 economy with debt projected at <85% of GDP is Canada [True, but is that because it is temporally behind the curve? See Easter Weekend News Update:
    • Canadian Dollar Too Strong? Bloomberg.com:

    • Minority opposition in Canadian Parliament is growing over strengthening Loonie
    • Leaders fear fallout in exports from CAD nearly at parity with USD
    • CAD strength is directly tied to Chinese commodity demand (is the CAD bubblicious, too?)
  • Debts in emerging markets are beginning to look safer as they pare down stimulus packages plus old debt.

Potential Exit Strategies:

  • Inflating (debasing) one's own currency to pay off debt is too dangerous on a social level to be seriously considered, especially for emerging markets
  • Over the past three decades, the most successful method of managing debt and securing social safety has been to expand the primary balance surplus
Reference What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect

Click to enlarge... 

  • Currently, the biggest step toward renewing primary surpluses in the developed world would be to phase out entitlement/pension funding or drastically modify payout schemes
 [But who really knows where all of the bodies are buried? Reference Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

The French 

In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France's deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the pdfLaurent_Paul_and Christophe_Schalck_study for a background on the deal. I don't necessarily concur with their conclusions, but it does provide some info  france_telecomm_transaction.png

For the record and according to the doc referenced above, according to the State balance sheet for 2006, total pension liabilities of civil servants have been estimated at 941 billion €, i.e. 53% of annual GDP in France.  An attempt to reform all special schemes in 1995 collapsed because of severe strikes on the railways. Sounds awfully Hellenic in nature, doesn't it??? I, for one, believe that Greece is getting a bad rap, and not becaue it is being falsely accused but because it is just a lot sloppier at covering up its shenanigans than its European neighbors.

Now, back to France. A transaction similar to the France Telecomm deal took place in 2006 with La Poste which still employs 200,000 civil servants, but is now facing the same evolution as France Telecom in 1997. But an important difference with France Telecom is the obvious insufficiency of the lump sum paid by the postal company (2 billion €) compared to the amount of pension liabilities transferred (70 billion € at the end of 2006).
  • Almost 1/5 of public spending stabilization could come without affecting public investment, and simply cutting wage and transfer payments
  • The IMF recommends setting up government institutions to enforce budget restrictions (the ridiculousness of one government entity stopping a handful of spendthrift entities is mind boggling)

Global Adjustments:

  • Emerging markets that have opted to inflate away debt have seen interest rates skyrocket for years, while other who opted to adjust the primary balance deficit have seen interest rates fall
  • The average G-20 nation will need to adjust its balance sheet 8.8% by the end of the decade to reach public debt targets [RIIIGHT!!!! Like the Maastricht Treaty which, after 18 years has been respected by exactly 0.000000% of its members, all of whom are well below the 3% debt to GDP threshold by about an average of negative 300%!!!!]
  • Over the past 30 years, Greece has made a "large fiscal adjustment" once (1995), where they had more success generating new revenue, andbarely managed to cut expenditures. Greece's inability to make any sort of cuts to preserve fiscal responsibility is going to embarrass the cheerleaders looking to save Europe without lifting a finger. Spanish and Italian efforts have yielded similar results

Long Term Growth:

  • Over the previous 15 years, a clear inverse relationship has developed between debt ratios and real GDP growth
  • Evidence on whether adjustments should be upfront (shock therapy 1990's) or gradual is inconclusive according to IMF staff
  • One of the easier methods of reducing public expenditures is to tighten and reform pension policy (the days of mandatory retirements, backloaded payouts based on final five years average salary, etc, are numbered)
  • Countries with higher domestic debt ownership are more likely to honor debt and have higher debt tolerances among citizenry (i.e. Japanese JGB hoarding vs. USA tea parties)


            The IMF has an incredible data set to work with yet somehow continues to see a picture far rosier than what meets the eye.  The impacts of measures to manage sovereign debt loads seemed to be futile in the medium-long term.  The situation we currently see is similar to the 1950's in data only.  The demographic makeup of the world today (particularly in Europe) is one that is aging, dependent on entitlement programs, and underfunded pensions that are seeing falling/no incoming revenue.  This is a clear contradiction to the call for managing or reducing entitlement and wage expenditures at the government level (globally), and is a sign that fears over a global sovereign default among advanced economies is a legitimate threat over the next decade.

Related Subscriber Content:

  1. Spain public finances projections_033010 (Global Macro, Trades & Strategy)
  2. UK Public Finances March 2010 (Global Macro, Trades & Strategy)
  3. Italy public finances projection (Global Macro, Trades & Strategy)
  4. Greece Public Finances Projections (Global Macro, Trades & Strategy)
  5. Banks exposed to Central and Eastern Europe (Commercial & Investment Banks)
  6. Greek Banking Fundamental Tear Sheet (Commercial & Investment Banks)
  7. Italian Banking Macro-Fundamental Discussion Note (Commercial & Investment Banks)
  8. Spanish Banking Macro Discussion Note (Commercial & Investment Banks)
  9. China Macro Discussion 2-4-10 (Global Macro, Trades & Strategy)

 The Pan-European Sovereign Debt Crisis, to date (free to all)

1.     The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.

2.     What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect

3.     The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.

4.     The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

5.     The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

6.     The Beginning of the Endgame is Coming???

7.     I Think It's Confirmed, Greece Will Be the First Domino to Fall 

8.     Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

9.     Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

10.   "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! 

11.   Germany Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort of...

12.   The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino

13.   As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

14.   Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?

15.   Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

16.   Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

17.   Moody's Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks



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Read 8736 times Last modified on Thursday, 31 January 2013 14:55
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at Veritaseum.com, where we're ushering the P2P Economy.