The Strange New Old World

By Inya Ivkovic, MA — The Financial World According to Inya columnThese days, it seems that all the International Monetary Fund (IMF) is called upon to do is act as a lender of last resort to countries that have ripped their finances to shreds. The only thing that has changed from previous IMF interventions are the destinations.
That is, instead of going to third-world countries to sort things out for them, the IMF went to Brussels, Belgium, earlier this week to discuss what is to be done about Greece with European Union (EU) representatives.The arrival of the IMF as a knight in shining armor at the heart of Europe is still regarded as something too inconceivable — too humiliating — to happen. After all, Europe is the Old World, the one that used to decree how the rest of the planet was supposed to live, the one that used to be the leader and the one that used to be influential. Ah, how things have changed after the global financial meltdown.The Old World is getting stranger and stranger these days, as global debt woes are shifting from developing economies to developed ones because the latter appears to have exited the crisis bearing much heavier debt loads than the former. Dealing with those debt loads,
some already claiming significant amounts of future outputs, will take years, regardless of whether the IMF decides to jump in to help.So, what was decided on Greece’s debt front this week? We should all be quite used to the word “bailout” by now. The IMF and more fiscally sound members of the EU have offered Greece a loan worth 15 billion euros. Greece’s bailout would be the second time in recent
history that the IMF had to infuse funds into a developed economy, with Iceland being the first one. If anyone wanted to track it further into recent history, the last time that a developed country needed the IMF to bail it out was the U.K. in 1976, when it needed to borrow
billions of pounds to address the Labour Party’s fiscal irresponsibility, shattering its reputation along the way and ushering in the long reign of Tory leader Margaret Thatcher three years later.Many economists agree that even a loan of 15 billion euros may not be enough to plug the leaking dam. Making things exponentially worse is the expectation that the IMF’s help may be needed to tackle the finances of other developed nations. In fact, the more bearish among the bears believe that Greece’s woes are only a preview of the challenges that are before other developed economies.

To illustrate, according to the IMF, by 2014, overall government debt as a percentage of the GDP of developed economies is expected reach 118%, compared to 78% reported in 2007. In stark contrast, that same percentage for developing economies will likely represent
only 36% of their total GDP by 2014, which is an even slightly lower figure than what it was before the financial crisis.

Anyone who has ever taken a loan out knows that with debt comes the cost of borrowing. In just four years’ time, the biggest developed economies will have to pay more in interest payments than the biggest developing economies, such as those of China, India or Brazil. Obviously, the developed world has learned the hard way from the many mistakes that it has made in the past — and during the 1990s, more recently — and has been hell bent on not repeating them ever again. How much, if anything, will the world’s developed economies have learned from their current predicament? The answer to that, of course, remains to be seen.

What is clear to everyone is that fixing worldwide deficits and paying off huge loans will take time and considerable amount of pain, including cutting spending for popular social programs and hiking taxes. Clawing out of the debt abyss is possible, but it is usually labored under the cloud of looming social unrest. Moreover, this time around, the situation has been made worse than ever before, so any debt and deficit countermeasures are likely to impact wide demographics and slow down global economic growth.