Thursday, October 15, 2009

IMF runs into political turbulence


LONDON — The International Monetary Fund is facing key political crunch points in its dealings across Eastern Europe even though it has done much to lose its previous reputation as an advocate of austerity.

Tuesday's collapse of Romania's center-right government led by Prime Minister Emil Boc, has raised concerns about adherence to conditions on the IMF's loan program with the country, just a month before presidential elections.

Though economic matters were not a direct reason for the government's collapse, Romania is now another potential headache for the IMF, alongside Ukraine, which faces turbulence ahead of Jan. 17 presidential elections, and Latvia, where the IMF is among lenders pushing for budget cuts.

"At the start of the week it was Latvia and their reluctance to cut the budget deficit to shape, but now the Romanian government has been defeated during office, which has not been seen for 20 years and confirms how politicians want to remain popular, with the economic outlook so explosive," said Guillaume Tresca, an analyst at Calyon Credit Agricole.

Romania's IMF representative Mihai Tanasescu said Wednesday a delegation would arrive in Bucharest next week to determine whether the country can keep to the terms of an agreement under which the IMF agreed to give the country $17.1 billion loan package to deal with the financial crisis. The IMF is concerned that instability could lead to Romania being unable to meet an agreed budget deficit of not more than 5.9 percent of gross domestic product next year.

Ironically, the IMF and its head, Dominique Strauss-Kahn, are encountering a bumpy political environment after shedding much of the IMF's reputation for being overly severe in enforcing austerity on governments it loans money to.

However, the IMF has shown increased flexibility and started a no-strings loan program for countries considered relatively good risks. Mexico and Poland have been two countries that have benefited from this new flexible credit line.

Meanwhile, the IMF was given up to $750 billion more resources by the Group of 20 rich and developing countries to help countries whose state finances and currencies have come under serious pressure due to the world financial and economic crisis.

And though it's been quick to make its new financial firepower available to troubled countries, the IMF still expects things in return.

Neil Shearing, emerging Europe economist at Capital Economics, said the IMF has "recently shown a much more lenient side" throughout Eastern Europe, particularly in Ukraine but that there was a limit.

For Romania, he said the economic impact of the political crisis "depends largely on the immediate implications for relations with the Fund" and that the longer the country is without an effective government "raises the possibility of the government missing its IMF budget targets."

Ukraine, like Romania has suffered badly from the financial crisis and the ensuing global recession. The IMF estimates that the Ukrainian economy will shrink 14 percent this year; Romania by around 10 percent.

The IMF could delay or withhold the next $3.7 billion installment to Ukraine due to be transferred in November if authorities — already engaged in politicking for the Jan. 17 presidential election — refusal to make unpopular moves such as raising household gas prices and cut back on government spending.

The rivalry between Prime Minister and presidential hopeful Yulia Tymoshenko and President Viktor Yushchenko has intensified ahead of the vote, with both leaders seeking to undo each other's policies. The biggest opposition Party of Regions has been paralyzing the parliament's work in recent weeks, demanding an increase in social spending.

Meanwhile, Latvia's government is in a tight spot after its recent 2010 budget fell short of promises made to international lenders. The euro7.5 billion euro economic recovery program for Latvia is mainly financed by the European Union, though the IMF is playing its part. Much of Latvia's pain, however comes from its own decision to keep its lat currency pegged to the euro, a move that means tough economic trade-offs.

It was top EU financial official Joaquin Almunia who held an emergency meeting with Latvian officials and urged them to make the additional budget cuts.

The government has backtracked and said it will outline how it will make 500 million lats ($1.1 billion) of cuts next year in a statement at the end of the month.

Even with the new IMF, being bailed out is still tough.

The country will "live from hand to mouth," in the words of Finance Minister Einars Repse.

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