Economists are sceptical that the IMF firewall fund can seriously address the massive debt burdens facing the troubled European Union.
South Africa’s willingness to contribute to international funding efforts to stave off a second global economic crisis could gain it some political points, but economists are sceptical that the fund can seriously address the massive debt burdens facing the troubled European Union region and the rest of the developed world.
The government announced on Tuesday that it was making $2-billion of existing foreign exchange reserves available to the International Monetary Fund (IMF) for its firewall fund.
The move was criticised by trade federation Cosatu, which condemned the contribution as a “gift” to the institution at a time when the country had public sector wage increases looming and a still outstanding R20-billion South African National Roads Agency Limited debt.
Following a meeting of the G-20 countries in Mexico, a number of developing nations, notably the Brics – Brazil, Russia, India, China and South Africa – committed resources to the firewall fund, taking it to $456-billion, above targeted commitments of $430-billion.
But major economies such as the United States have not contributed to the fund. Reuters reported that the US believed the fund to be sufficiently resourced.
Non-European countries have so far contributed the most to the fund, giving $215.8-billion, and European countries that do not form part of the euro area have contributed $42.2-billion. Countries from the euro area have contributed $197.7-billion.
Contributions
South Africa’s contribution amounts to about 4% of its gross foreign exchange reserves, which are just less than $49-billion, according to the Reserve Bank’s more recent figures. This is compared to developing nations such as India, which has reserves of more than $287-billion, whereas China’s foreign-exchange reserves top $3-trillion.
Russian, India and Brazil have all committed $10-billion in funds and China has contributed $43-billion.
Germany, France and the United Kingdom have contributed $54.7-billion, $41.4-billion and $15-billion respectively. Treasury spokesperson Jabulani Sikhakhane stressed that the bulk of developed nations had contributed a total of $332.9-billion, or 73% of the total resources committed.
“Technically, the South African government is only pledging a portion of our foreign exchange reserves. It still belongs to South Africa,” said Chris Hart, chief strategist at Investment Solutions. “But, in practice, we know the IMF will use it to aid the European Union and this will be a permanent loan.”
He said South Africa would earn dollar-denominated interest on the loan but at a lower rate, representing a cost to the taxpayer. If the funds made available to the IMF did in fact work to aid the woes of the eurozone and prevent a crisis similar to the one in 2008, it could be argued that the loan had been a positive move.
Sources of new capital
Emerging markets are becoming the sources of new capital for the global economy and the move by South Africa and other developing nations to support the IMF reflects this dynamic. But Hart is sceptical about how far the IMF’s efforts will go towards preventing the crisis in the EU from coming to a head, or protecting other developed nations from further tribulations.
“The situation in the EU, the US and Japan is not stable,” he said.
Regardless of the economic systems in question, these are economies that have simply consumed more than they have produced and have borrowed extensively to fund this behaviour, according to Hart.
Part of the problem, he said, was that it was unclear how much was actually needed to solve Europe’s problems. The effort to aid Spain’s banks, with a $125-billion injection of funds last week, did little to stop yields on Spanish long-term government bonds from rising to 7%.
The Spanish case was an example of the murkiness of the problem, said Hart. Loans to property development companies by the Spanish banking sector had reached €340-billion, but about €175-billion had gone to what were viewed as “zombie loans” – loans that were granted to property companies simply to repay the debt on existing loans in a bid to keep them current.
The scale of the problem
This was only one category of loans in one banking sector in one country in the eurozone, said Hart.
It is not clear how deeply similar troubles afflict other countries in the region. As such, it is difficult to guess what would be required to fix the problem.
Efficient Group chief economist Dawie Roodt estimated that the amount needed to recapitalise Europe’s banks was about €2-trillion and about the same amount was needed to assist the region’s sovereigns. The IMF’s firewall fund was small in relation to the scale of the problem, he said, but it could be leveraged to prevent matters from escalating.
This could mean making initial funds available to banks to shore up their balance sheets and halt any potential domino effect.
Roodt said the $2-billion made available to the IMF by South Africa was money that, in any event, would have been invested in instruments such as US treasury bills. He speculated that the IMF could possibly give South Africa a better interest rate than the roughly 1.5% it now received on these types of instruments.
“This is a cheap way of getting good international public relations,” Roodt said. But the rate given would not be significantly different from those received on US Treasuries, according to the treasury. “For this type of investment, returns are not the only consideration,” said Sikhakane. “The safety of the investment and its liquidity are equally important.”
A real risk of global crisis
The question of whether the developing world should be aiding the profligate spending of the developed world was more of a moral question, said Roodt. It has been happening for some time already, given that Chinese surpluses have for many years funded the deficits of developed nations such as the US. This is ultimately unsustainable, but the trend is shifting, as could be seen by China’s investment in South Korean government bonds.
Economist Mike Schussler said Europe was an important market for South Africa and further declines in the region would have an effect on South Africa. Efforts by the government to aid an important “customer” for local goods were important.
This is an important emphasis for the government. In a statement on Wednesday, presidency spokesperson Mac Maharaj stressed that there was “a real risk of global crisis”.
“If the global economy falls sharply, there is a serious risk that we will lose more jobs. Our contribution to the IMF is intended to help stave off this kind of crisis.”
He pointed out that China and India had considerably lower per-capita incomes than South Africa, yet had contributed to the fund.
The money lent to the IMF is not a gift and will earn interest for South Africa and the capital of the loan will ultimately be repaid. “It’s like lending money to a strong bank. This is not a risky loan,” Maharaj said.
Democratic Alliance finance spokesperson Tim Harris said the government had to ensure that South Africa’s contribution came with the “condition that the generosity the IMF is showing to Europe is available to developing countries who may face potential financial crises in future”.