IMF asks for the decisions declared after the summit on July 21st to be ratified completely.

The world is faced with two major risks, one related to Europe and the other to the US. Some recommendations are made as to how avoid the realization of these risks. I want to focus on two of them. The first one was addressed in the IMF’s World Economic Outlook report announced last week. The second one was featured on the Internet last Monday. The recommendation on the problems of Europe was highlighted by an academician renowned for his studies on the issue.

Here are the recommendations by the IMF: The decisions declared after the summit on July 21^st must be ratified completely. If these decisions are implemented, debt buybacks and bank recapitalization will be enabled via the European Financial Stability Fund. After this process, three main steps are recommended. First is to continue interventions of the European Central Bank (ECB) to prevent new challenges in the state bond markets. The IMF says, “Do not hesitate to withdraw liquidity from the market by purchasing bonds, when necessary.” The second recommendation is for peripheral countries to take steps devoted to secure fiscal discipline on the one hand and to carry out structural reforms on the other. The third recommendation was for the ECB to reduce policy rate.

The IMF states two main recommendations for the solution of the US-oriented problems. First, the IMF asks the Federal Reserve (FED) to be ready to use non-conventional policy tools, that is, to introduce a quantitative easing, when necessary. Second, the IMF recommends the US to introduce the fiscal policy measures that will reduce the public debt in the short term with the aim to relieve markets concerning the sustainability of public debt on the one hand and initiate measures which will stimulate domestic demand in the short term on the other. The IMF particularly advices the US to increase unemployment benefits and reduce tax ratios for population groups with a higher propensity to consume.

Another remarkable recommendation for Europe came from Prof. Wyplosz (the article dated September 26^th can be accessed www.voxeu.org). Wyplosz proposes three steps. First is about public debt: he recommends the ECB set a floor price on public debt by offering a guarantee, which will be partial covering country’s debt up to 60% of GDP, for instance. In that case, he claims, markets will promptly re-price debts. For example, the value of the 1-Euro bond of Greece will fall automatically to 50 cents while the bonds of other countries will become more valuable. States will be able to restructure their debt on the basis of the new market prices.

At the second step, Wyplosz proposes that the ECB guarantees all future public debts to allow governments to borrow again. The guarantee will be conditional: countries should adopt new domestic institutional regulations (such as fiscal rules, independent counsels etc.) so that the guarantee does not give way to fiscal policy loosening. He recommends these measures to be approved by both the ECB and the European Commission. He also states that the enforcement of these institutional arrangements must be strict for each country. If any of these conditions are not met, the guarantee must be revoked, he says. The third step he proposes is the recapitalization of banks that are to fail (since some countries will default).

This commentary was published in Radikal daily on 01.10.2011