The awkward balance

It's said that fuller prescriptions for bailouts aren't handed out. Greece would have been in a better position and Argentina certainly so as it celebrates the $57 billion that the International Monetary Fund (IMF) has agreed to foot to prevent the country from collapse. This like any other bailout comes with a strong grain of salt that all of this may never get repaid and indeed will have lost value over time.

Yet the same IMF that insisted on liquidity injection in collapsing times is now warning higher interest rates will make repayments more costly. The sobering lecture in Indonesia is both a warning not to borrow against international loans and an appeal to keep interest levels low in the US and Europe.

For all the bite of depression the European Union (EU) has stuck as close to zero interest as possible but such a scenario cannot be permanent for too long or banks will find profit targets difficult to maintain. Such interest rates work against consumer deposits as it costs to keep money in the bank. And yet, recession-burnt business fingers are wary of borrowing against high interest. Understandably the higher costs of repayment rankle high.

Usually, loans are set against hedged interest prices to allow for certainty but when hedges go wrong banks have to renegotiate. Japan has already asked Bangladesh to pay more interest against loan now that it is a lower middle-income country. Commonwealth scholars from Bangladesh are bemoaning their being left out due to the same criteria and yet in the world of pay as you can, preferential terms were designed that way. The Commerce Minister has pleaded for extension of generalised scheme of preferences (GSP) privileges even after low middle-income status for the country has been achieved. Forget the controversy over what this status means and implies, the country doesn't have the resources to shoulder the burden of withdrawal of privileges beyond just going up a notch in complex world economic indicators. What Argentina has done to seek a stepping up of its second tranche of $22 billion is anyone's guess. In a real world few banks would have forked out such cash.

It begs the question why the economists do not work out a situation whereby loans granted are payable back and there's sufficient buffer to weather economic volatility such as interest rates. Donors put up cash for institutions such as the International Monetary Fund (IMF) but that money needs to be refunded at some stage. In a zero interest or beneficial interest term situation it doesn't make economic sense.

Greece's former Finance Minister has described his country' bailout as borrowing from different cards to payoff another. In other words, deeper in to the morass of debt. He sees no way of any repayment suggesting that land and asset coupling with loans will tear apart sovereignty issues. Increasingly governments are being forced into unpopular austerity measures that, in turn, are fuelling populist and nationalistic sentiments that go against the grain of the global village fabric. Suddenly international trade pacts that made sense are losing relevance and raising questions whether global diversity is heading back to the same conflict it was supposed to have solved.

[email protected]