Walker's World: The IMF fails again

WASHINGTON, Sept. 26 (UPI) -- There was disappointment, but no real surprise, that the annual meeting in Washington of the International Monetary Fund and the World Bank failed to produce a comprehensive solution to the euro crisis.

Although the regional commanders of the global economy were gathered, from finance ministers to central bankers and they all knew the stakes and the deep peril that now threatens, there was an air of fatalism to the meetings. It will get worse before it gets better, they seemed to conclude, because the politicians cannot bring themselves to deliver the financial measures that will be required.

There were three distinct problems that emerged at the Washington meetings over the weekend. The first was that the IMF doesn't have nearly enough firepower to tackle the euro crisis. Simon Johnson, former chief economist of the IMF, says his old institution has about $386 billion available.

The combined debt of the eurozone countries is around 25 times higher than that sum, roughly $9.5 trillion. Take away the $2.5 trillion of German debt and the far smaller sums of the other solvent countries like Finland, Austria and the Netherlands and the debt of troubled eurozone countries is still 10-20 times more that the IMF's available funds.

The second problem is that after repeated failures to get control of the problem, the IMF and the eurozone countries together have lost credibility. The markets have seen too many vaunted solutions that proved to be too little, too late.

The third problem follows from this; that nobody is at all sure that the IMF is still the competent and authoritative body to tackle such fundamentals threats to the global economy. Many governments in the emergent world are looking to the Group of 20, a grouping where they have more weight and influence, and the G20 summit comes in November. So one obvious problem in Washington was that too many people were suggesting it was better to wait.

But somebody always says that. The Germans were saying in Washington that they could decide nothing until their Parliament, the Bundestag, votes this week on the latest bailout plan for Greece and other euro weaklings. Others are waiting for Greece, to see if the Parliament in Athens will vote for the latest round of austerity measures and go on to enforce it.

"Will the Greeks do, or will they not do, what they have promised? Until there is clarity there, everything is on hold," Antonio Borges, head of the IMF's Europe department, said at a panel discussion Sunday.

Others say that it is better to wait until Mario Draghi, the new head of the European Central Bank, takes over next month. Some Americans suggest that nothing serious can happen until next year's U.S. presidential election is decided and some French bankers wonder whether this is all hypothetical until we learn whether Nicolas Sarkozy is re-elected president of France next year.

There are always good reasons to wait, which is why this problem has dragged on over the past 18 months and festered and metastasized. What began as a minor problem in Greece, a small country that was known to cook its books, has become a problem of debt and credibility that threatens countries the size of France and Italy and erodes the solvency of their banks.

One prime reason why the Greek problem was allowed to get out of control was that Dominique Strauss-Kahn, a French politician who thought he could defeat Sarkozy and be elected president of France next year, was at the helm of the IMF. Historians will say that his stewardship of the IMF, rather than his tawdry tale of arrest and non-prosecution for an alleged sexual attack, was the real Strauss-Kahn disaster.

He treated the Greek problem as a European politician and one who assumed he might need Greek support in Europe some day. So he backed and funded the eurozone countries in the fatal decision to bail out Greece with loans rather than to force it into richly deserved default.

Eighteen months ago, default would have been affordable. More than $150 billion in credits later, it is less and less affordable. By the end of next year, Greek debt will be 190 percent of its gross domestic product. This is unsustainable. Greece will default; the only question now is the terms.

There are solutions, none of them palatable. There is airy talk of a new eurozone commitment to pledge $2 trillion to assure the markets that Spain and Italy won't be allowed to fail, although nobody has asked German voters and Bundestag members what they think of such awesome sums. There is talk of a common eurobond, so that German credit would buttress Greek and Italian profligacy. There are fancy plans for special bank or insurance facilities to multiply the $440 billion the Europeans are now promising into a greater sum.

None of it is believable and the euro problem is going global. There will be almost no growth in Europe this year or next, so Chinese exports are slumping and the United States is stuck in stagnation verging on recession.

The solution was heard often enough in the corridors of the IMF meetings this week. Let Greece founder and use the $440 billion in the bailout fund to re-capitalize Europe's tottering banks, forcing them to offer shares to the taxpayers in return for the money.

The banks, and the financial systems they embody, are too big to fail. Greece isn't.