Saturday, May 11, 2024

No free lunches for anyone


It’s reported that the International Monetary Fund is concerned that global capitalism is becoming ‘fragmented’ and threatens a ‘rules-based global trading system.’ Keynes forbid that anything should interfere with capitalism’s raison d’etre which is the exploitation of the majority labour power selling class.

‘Growing fragmentation into US-led Western and China-aligned economic blocs threatens trade cooperation and overall global growth, the International Monetary Fund (IMF) has warned.

According to IMF Deputy Managing Director Gita Gopinath, events such as the pandemic and the Ukraine conflict have hindered world trade in ways not seen since the end of the Cold War.

“Increasingly, countries around the world are guided by economic security and national security concerns in determining who they trade with and invest in,” Gopinath stated, adding that this has resulted in countries increasingly picking sides between China and the US.

While strengthening economic resilience is “not necessarily bad,” the trend of fragmentation threatens a move away from a “rules-based global trading system” and a “significant reversal of the gains from economic integration,” Gopinath cautioned.

According to the IMF, the growing tension between the world’s two biggest economies has been reflected globally, with over 3,000 trade restrictions imposed by countries worldwide in 2022 and 2023, more than triple compared with 2019.

The impact of the economic fragmentation is expected to be much greater than during the Cold War era due to the global economy’s higher dependence on trade, according to Gopinath.

The IMF estimated that the economic cost to global GDP could be as high as 7% in an extreme fragmentation scenario. If things play out more mildly, the hit could be as low as 0.2%.

Low-income countries are likely to be hit the hardest due to their greater reliance on agricultural imports and foreign investment from more advanced economies, the IMF concluded.’

In other news, it is reported that the Wall Street Journal is pointing out to Ukraine that there’s no such thing as a free lunch under capitalism. Can we expect the bailiffs to be sent to Kiev very soon? Perhaps someone should tell Ukraine about The Socialist Party’s offers of a free three month subscription to the Socialist Standard? The transition to socialism would benefit everyone.

‘A group of foreign bondholders have taken steps to force Ukraine to begin repaying its debts as soon as next year, the Wall Street Journal reported. If they succeed, Kiev could haemorrhage $500 million every year on interest payments alone.

The group, which includes investment giants Blackrock and Pimco, granted Kiev a two-year debt holiday in 2022, gambling that the conflict with Russia would have concluded by now.

With no end to the fighting in sight, the lenders have now hired lawyers at Weil Gotshal & Manges and bankers from PJT Partners to meet with Ukrainian officials and strike a deal whereby Ukraine would resume making interest payments next year in exchange for having a significant chunk of its debt written off, anonymous sources told the Wall Street Journal.

The group holds around a fifth of Ukraine’s $20 billion in outstanding Eurobonds, the newspaper reported. While this figure represents a fraction of Ukraine’s total external debt of $161.5 billion, servicing the interest on these bonds would cost the country $500 million annually, the bondholders said.

Should the bondholders fail to strike a deal with Kiev by August, Ukraine could default. This would damage the country’s credit rating and restrict its ability to borrow even more money in the future.

According to the newspaper, Ukrainian officials are hoping that the US and other Western governments will take its side during talks with the bondholders. However, a group of these countries have already offered Ukraine a debt holiday on around $4 billion worth of loans until 2027, and are reportedly concerned that any deal with the bondholders would see private lenders being repaid before them.

Ukraine already relies on foreign aid to keep government departments open and state employees paid. The country’s military is almost entirely dependent on foreign funding; officials in Kiev and the West were predicting imminent defeat until the US Congress approved a foreign aid bill last month which included $61 billion for Ukraine and US government agencies involved in the conflict.

The bill provides almost $14 billion to Ukraine for the purchase of weapons, and includes $9 billion in new “forgivable loans.”

According to the Wall Street Journal, some bondholders have suggested that the US and EU could use frozen Russian assets to pay off Ukraine’s debts. While around $300 billion in assets belonging to the Russian central bank have been frozen in American and European banks since 2022, the US only passed legislation allowing for their seizure last month, and no similar legal mechanism exists in Europe, where the vast majority of these assets are held.

The International Monetary Fund (IMF) and European Central Bank (ECB) have both urged governments not to steal this money, with ECB chief Christine Lagarde warning last month that doing so would risk “breaking the international order that you want to protect.”

Ukraine could go bankrupt as early as next year unless Western countries agree to write off or restructure its debts, an official from the World Bank told TASS on Saturday.

Kiev is reliant on financial aid from its Western backers but foreign support has dwindled in recent months, while a $60 billion US aid package remains stalled in Congress.

The official, who spoke on condition of anonymity, was commenting on the latest $1.5 billion tranche of funding which Kiev received last week under a World Bank program. According to the source, the World Bank’s division representing Russia voted against the loan, citing the organization’s charter.

The draft document on the allocation of the funds “openly” points to the “catastrophic” state of Ukraine’s public finances due to an economic downturn and a reduction in foreign aid, the official told the outlet.

“If in 2025 Western creditors refuse to write off Kiev’s debts, including the debts of private companies and banks, the country could face bankruptcy,” he warned.

The official added that the senior management of the Washington-based financial institution has acknowledged the “extremely high” risks of cooperating with Ukraine, and noted that as with previous transactions, it has not provided its own funds for Kiev. In the latest tranche, the World Bank “once again took advantage” of guarantees from two of Ukraine’s donors – Japan and the UK – the source said.

According to Ukrainian Prime Minister Denis Shmigal, the loan will be spent on social and humanitarian needs as well as on reconstruction. The Ukrainian government expects a record budget deficit of $43.9 billion this year and plans to cover the bulk of it with financial aid from its Western backers.’

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