Saturday, 1 May 2010

Britain, Greece and the IMF

We are less than a week away from the UK election and the evidence is mounting that Gordon Brown's next project appears to be either waiting for a large hedge fund to engage him as an economic adviser or to accept the customary peerage which is offered to ex-Prime Ministers. Indeed, for him to become a Lord would be a fitting end for a man who was unelected as PM and whose party systematically avoided any meaningful reform of the archaic British constitution which has seen the continuation of an institution - the House of Lords - which is totally undemocratic.

With the election over, it then becomes extremely urgent for the incoming government to tackle the developing crisis in the UK's public finances and determine the magnitude of the mess which it will have inherited. Anecdotally, it has been revealed that the Governor of the Bank of England, Mervyn King, recently expressed the view that the steps the next government will have to take, to resolve one of the most out of control deficits in the developed world, will be so unpopular that the next government could then see itself out of power for a generation.

Surfacing amongst media pundits is the meme - which the new PM and Chancellor might think to be politically expedient - that the new UK administration should immediately engage the International Monetary Fund (IMF) to undertake a proper analysis of the shambolic state of the public balance sheet (including all unfunded liabilities) and get all of the bad news out on the table. This would then allow them to put distance between the task ahead and the legacy of the past, and establish cover for the new government that the reason why draconian measures are called for is entirely due to Gordon Brown's mishandling of the economy over 13 years.

This would be tactically a smart move and somewhat analagous to the manner in which companies, will often during recessionary environments or after a change in top management, want to get all of the bad news "behind them".

There is one problem with this strategy however. It may be that the IMF would find such a mess that the government would no longer be in the position of having engaged a respected body to conduct an analysis of the problem, it could find that the skeletons which fall out of the closet are so serious that the government is then forced - by reticence from the capital markets about continuing to support gilts/sterling - into negotiating a support package from the IMF, similar to that which is now being finalized with respect to Greece.

The UK's public sector is more bloated than that in Greece - although the latter does have its own very undisciplined arrangements which provide extraordinarily generous benefits to Greek public sector workers.

It is conceivable that the IMF's stance on the need for large scale reductions in the UK civil service would be just as swingeing as those now being proposed for Greece. Needless to say this would not go down well with a large section of the UK electorate, although the notion that UK civil servants might take to the streets in the same way as those in Athens are, requires quite a stretch for my imagination.

So the IMF analysis option could backfire on the new government and as such it will probably be deemed more prudent that the skeletons are best inspected by a UK based research body where the full extent of the black hole can be carefully disguised with the repertoire of weasel words that are so much a part of the Westminster mindset.

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