EUROPE: Some EU Countries Seen Making Wrong Fiscal Choices, says IMF.

As published on finance.yahoo.com, Friday 14 October, 2022.

The European Union’s Economic Affairs Commissioner Paolo Gentiloni cautioned that not all countries in the bloc are managing to avoid a clash between fiscal and monetary policies.

Speaking to Bloomberg Television on the sidelines of the International Monetary Fund meetings in Washington, Gentiloni said that while government support for households and firms is necessary, it must be temporary and targeted to avoid fueling inflation that central banks are trying to combat.

“I don’t’ think that all the measures taken are going exactly in this direction, so we have to make further efforts,” Gentiloni said. “If we give the impression to our citizens that we can support each and every activity, as it was the case during the lockdowns, I think we make the wrong choice.”

He said the EU cannot repeat the historic move it took during the pandemic, of issuing joint debt on a massive scale to invest in boosting and rebuilding their economies. But, he said some kind of common tool is needed to help manage bridge the gaps between countries afflicted by different inflationary pressures.

The IMF is holding its annual meetings this week, bringing global finance and central bank chiefs -- along with their development and banking counterparts -- to the US capital at a fragile moment for the global economy. Among the key events taking place Thursday is the Group of 20 forum of nations comprising the world’s largest economies.

Even after the misery of this year -- surging inflation, war in Ukraine, China’s slowdown -- Bloomberg Economics expects next year could be even worse. The IMF on Tuesday cut its forecast for worldwide growth in 2023 and said that policies to tame high inflation may add risks to the global economy. Even President Joe Biden said this week that the US, the world’s biggest economy, could suffer a “very slight” recession.

Emerging markets have become “collateral damage” in developed nations’ aggressive interest-rate hiking cycles, and a failure to consider and address the spillover effects will have costly spillback consequences, Kenya’s central bank chief said.

“It is very very difficult for emerging markets -- I don’t think there’s that appreciation,” Central Bank of Kenya Governor Patrick Njoroge said in an interview in Washington Thursday. “To be shut out of the capital markets because of actions of others” means “you’re actually collateral damage,” he said adding that this is “punishing those that are the innocent bystanders”

The global corporate-tax agreement that’s become mired in implementation challenges since it was struck last year has received some much-needed support.

The European Union’s economy commissioner, Paolo Gentiloni, pledged on Thursday to “never give up” seeking to bring to life what he called a “historical agreement.” He spoke during a meeting with US Treasury Secretary Janet Yellen.

Indonesian Finance Minister Sri Mulyani Indrawati separately said the Group of 20, which her nation currently heads, remains committed to the deal. She said progress was “slightly delayed,” but added, “we also reaffirm our commitment to the implementation of the international tax package. This is very important.”

Almost 140 countries last year backed a plan to revamp the way multinational companies are taxed. But it hasn’t garnered necessary approvals from EU member countries -- where unanimity is required -- or from the US Congress. The delays have threatened to kill the agreement before it even comes into force.

Irish Finance Minister Paschal Donohoe, who runs the meetings of his counterparts in Europe’s common currency area, also said Thursday the EU shouldn’t wait for the US Congress to move forward in approving the deal before implementing a global minimum tax.

“What we need to do in Europe, as opposed to folks in other parts of the world, we need to play our part now and reach an agreement on the implementation,” Donohoe said in an interview with Bloomberg News. “We now are nearly there in reaching unanimity.”

Investors are calling on multilateral lenders to do more to support countries that are struggling to repay debts as global funding conditions dry up.

How to help indebted countries regain access to credit markets was a common theme of discussion in panels at International Monetary Fund meetings in Washington Thursday.

“I’m just hoping there’s some leadership from Washington now, especially the multilaterals, in terms of acknowledging there’s a chock in many parts of the world which needs to be released,” said Hari Hariharan, the chief executive officer of New York-based hedge fund NWI Management. “But, we’ll see. I’m not very hopeful.”

Typically, an IMF loan helps restore market access for countries that have been shut out, according to Gorky Urquieta, a money manager at Neuberger Berman. That hasn’t been the case for some high-yielding nations working with the IMF this year.

“That means that they’re going to have to do more, or they’re going to have to rely more on their domestic markets,” he said.

Latin American central banks should beware not to cut interest rates too early as inflationary pressure will remain elevated for some time, according to a new International Monetary Fund report.

The average inflation rate in Latin America and the Caribbean will rise to 14.6% by the end of this year, slowing to 9.5% in 2023, the fund said, with most of the countries registering inflation rates above their central bank targets.

“Going forward, monetary policy should stay the course and not ease prematurely,” according to the report prepared by the IMF’s Western Hemisphere director Ilan Goldfajn, together with economists Santiago Acosta Ormaechea, Gustavo Adler, and Anna Ivanova. “Price pressures have recently broadened, affecting items of the consumption baskets beyond food and energy.”

Mairead McGuinness, the European Union’s commissioner for financial services, said the bloc’s sanctions against Russia are “here to stay.” There is no appetite for appeasement of Vladimir Putin’s regime and “no going back,” she said, speaking at the Institute of International Finance’s annual meeting on Thursday.

The commissioner also said the EU’s regulation of crypto assets was being broadly welcomed by participants who valued the clarity offered by a legal framework. She said a move to digital central bank currencies was inevitable.

The Group of 20 finance chiefs warned that risks to the global economy will likely continue into next year and called for coordinated responses from policymakers.

“The world is in a dangerous condition,” Finance Minister Sri Mulyani Indrawati of Indonesia, the current G-20 host nation, told reporters in Washington on Thursday, summing up discussions following a meeting of finance ministers and central bankers.

“We are now facing increasing and compounding risk, high inflation rate growth, energy and food insecurity or crisis, climate risk and geopolitical fragmentation,” she said. She also warned of an increasing risk of recession.

Policymakers in the world’s largest economies need to be “very mindful about the potential spillover effects for other countries,” Indrawati said.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the Federal Reserve is unlikely to engineer a “soft landing” for the US economy as it raises interest rates to choke off inflation.

Central bank policy makers probably can’t cool the red-hot economy without bringing on a recession, Dimon at an industry conference in Washington Thursday. He also said his “gut” tells him that the Fed’s benchmark rate will probably have to rise higher than the 4% to 4.5% level many economists are predicting, as inflation persists.

The Wall Street chief still said he has “total faith and trust” in Fed Chair Jay Powell, and that stagflation would be far worse than most of the other potential outcomes as the Fed works to cool price pressures.

International Monetary Fund Managing Director Kristalina Georgieva welcomed reports that the UK is preparing to abandon a central part of its tax-cutting agenda in an attempt to stabilize markets.

UK Treasury and 10 Downing Street officials are drafting options for Prime Minister Liz Truss, but no final decision has been taken, Bloomberg reported. Truss could scrap her pledge to keep corporation tax unchanged next year, and instead raise it as previously planned, the Sun said.

“It is correct to be led by evidence, and if the evidence is that there has to be a recalibration it is right for governments to do so,” Georgieva said at the IMF’s annual meeting in Washington Thursday.

Georgieva met UK Chancellor Kwasi Kwarteng and Bank of England Governor Andrew Bailey Wednesday. “I had a very constructive meeting,” she said. “We discussed the importance of policy coherence and communicating clearly,” Georgieva said, adding “so in this jittery environment, there could be no reasons for more jitter.”

Treasury Secretary Janet Yellen said the Group of 20 should expand its plan to help vulnerable nations restructure their debt amid a “sharp rise in risks of debt distress among developing and emerging-market economies.”

“I am concerned by the slow progress in resolving the first cases under the Common Framework,” she said in a joint statement with the International Monetary and Financial Committee, the main steering panel of the IMF’s member countries. The framework is the G-20 initiative that brings the Paris Club of traditional rich debtor countries together with China to try to restructure the debts of low-income countries on a case-by-case basis.

Three nations have signed up, and none have reached resolution. Yellen asked creditors to conclude debt treatments for Chad and Zambia by year-end, and expand the framework to include middle-income countries.

Yellen repeated calls for an end of Russia’s war in Ukraine, which has shocked food, fertilizer and energy prices globally. She called for “collective action to address food insecurity by increasing the supply of food worldwide and committing to its free movement across the globe.”

Calling for broad reform of the World Bank, she said the lender should more effectively deploy its convening and financing role to advance climate goals and integrate adaptation and resilience across all its lines of effort, while also making progress to align its operations to the Paris Agreement.

The European Union is ready to engage in ad-hoc talks with the US to prevent its concerns over President Joe Biden’s stimulus package spiraling into a trade dispute, the bloc’s trade commissioner said.

Speaking on the sidelines of the International Monetary Fund meetings in Washington, European Commission Vice President Valdis Dombrovskis said the EU is concerned that several provisions in the recently passed Inflation Reduction Act discriminate against European companies. Provisions related to tax credits for American-made electric vehicles are the thorniest issue, since many EU nations have set up subsidies and tax credits that have no requirements for local production.

“Bilaterally, we may consider some kind of ad-hoc work stream given the urgency and major implications of this issue,” Dombrovskis said at a media briefing. “We hope to resolve these issues before they become disputes.”

The European Central Bank should enact another “robust” interest-rate increase at this month’s meeting to ensure price expectations don’t become unmoored, according to Governing Council member Joachim Nagel.

“Permanently higher inflation is the biggest growth decelerator and damper of prosperity,” Nagel said at a briefing in Washington that included German Finance Minister Christian Lindner.

He also said there’s “agreement” within the 25-member Governing Council that officials will next year tackle the issue of shrinking the trillions of euros of bonds the ECB accumulated during recent crises.

The US central bank has to pursue its mandate of controlling inflation because not doing so would have spillover effects for the rest of the world, International Monetary Fund Managing Director Kristalina Georgieva said.

Both Treasury Secretary Janet Yellen and Federal Reserve Bank Chair Jerome Powell are mindful of the impact their policies may have on other nations’ economies, Georgieva told reporters in Washington Thursday.

“Think of the the scenario in which inflation in the United States doesn’t get under control for a long period of time -- bad for the US, but it also has spillover impacts for the rest of the world,” she said. Her comments came just as the US Labor Department released data showing the core consumer price index for September rose by more than forecast to a 40-year high of 6.6%. That pressures the Fed to keep raising interest rates aggressively.

The IMF is endorsing a strong focus on price pressures because the risk of higher inflation expectations becoming de-anchored has become more visible, Georgieva said.

“We cannot possibly allow inflation to become a runaway train -- it’s bad for growth and bad for people,” she said. “Bad especially for poor people.”

With debt for a growing number of countries becoming unsustainable, policymakers meeting in Washington this week are talking about finding ways to reduce those debt burdens, World Bank President David Malpass said.

Arranging help for low-income nations in debt distress through the institutions such as the International Monetary Fund “means that you’re under the gun,” Malpass said in an interview with Tom Keene on Bloomberg Television Thursday. “A better way to do it is to find a way to get to actual debt reduction so that you can you have light at the end of the tunnel, get out from under the debt,” he said, adding that this is “under discussion.”

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