UNITED NATIONS, August 28 -- As the International Monetary Fund, after haggling with the government in Riga, decided to release an additional $280 million to Latvia, the IMF's Dominique Strauss-Kahn offered canned praise that "authorities have made good progress in stabilizing the financial sector. Important measures include strengthened intervention capacity, an enhanced financial supervision and monitoring framework, and steps to contain risks in Parex Bank. Looking ahead, in light of binding fiscal constraints, the authorities should minimize contingent liabilities from domestic banks."
On an IMF press conference call that followed, Inner City Press asked for an explanation of Strauss-Kahn's directive on Latvian banking, whether the IMF expects more bank failures and merger in the country, and whether the measures taken are, at least indirectly, meant to benefit as well Sweden's banks, absolving them of exposure to the Latvian market.
Anne Marie Gulde, Senior Advisor in the IMF's European Department, began by saying, "That's a lot of questions." Then she proceeded to dodge most of them. She said, "we are looking at how the budget can be made consistent with the economic realities in the country. This will involve possible further structural reform in spending and possibly revenue measures." The "we" presumably means the IMF.
She went on, "the authorities are working on improving their bank resolution framework, so we are reasonably confident that any problems that will be emerging in this improved framework can be addressed." There was the matter of the Parex Bank; in the U.S., there was the sale by the FDIC of Colonial Bank to BB&T with very little transparency. The IMF opines on Latvia because they need the money. But does the IMF opine on the U.S.?
Mark Griffith, the IMF's Latvia mission chief, added that "a number of banks have taken measures to increase capital to strengthen their position in Latvia." Was this the response to the question of whether the IMF's demand in Latvia benefit Swedish banks?
Footnote: at least in this case the IMF provided notice to the Press of a conference call on the decision. In the more controversial case of Sri Lanka, where at least four countries abstained on human rights and / or war crimes grounds, no such notice was given. Afterwards the IMF told Inner City Press that the Sri Lanka call had been only for journalists in Colombo. Here, priority was given to questioners from Riga, and at the end it was said that the IMF wants to engage more about Latvia with the press, especially in Riga. Does the IMF play politics on how it provides notice of conference calls? Watch this site.
From the IMF's transcript:
Inner City Press: Mr. Strauss-Kahn's statement talked about additional fiscal consolidation. I was wondering if, one, you could explain that, and two, separately whether the IMF expects any further bailouts of banks or mergers of Latvian banks. Also the effect of this program on not only Latvian banks, but let's see the Swedish banks that are exposed there and whether the idea of the government helping consumers pay banks, is it a matter of the banks restructuring the debt of consumers or of funds going to consumers in order to have the banks receive 100 percent of what's owed to them.
MS. GULDE-WOLF: Those are a lot of questions. Let me start maybe on the fiscal consolidation. Clearly, this is a part of the program as we had explained before. The decline in economic output in Latvia following a boom has a severe impact on the way the budget has to be structured and in looking at the next budget we are looking at how the budget can be made consistent with the economic realities in the country. This will involve possible further structural reform in spending and possibly revenue measures.
Clearly the issue of banks and possible further banking problems is critical in the forward-looking strategy of where we are going to go. There has already been significant progress made in stabilizing the financial sector. At this stage, the sector as a whole is well capitalized and liquid. With the continuing economic problem it is very important to keep vigilance in the financial sector. Also it cannot be ruled out that there might be problems emerging. The authorities are working on improving their bank resolution framework, so we are reasonably confident that any problems that will be emerging in this improved framework can be addressed.
MR. GRIFFITHS: I think the financial sector has really stabilized since the end of last year, and a number of banks have taken measures to increase capital to strengthen their position in Latvia, so I think they are making a lot of progress there and I think the authorities have worked very hard there. So I think things are getting better there.
