Howard Davies: The downbeat IMF in deepest, darkest Peru

MT DIARY: In Lima, the IMF economists were in a gloomy mood. So which country will trigger the next global financial crisis?

by Howard Davies
Last Updated: 22 Feb 2016

Every three years the International Monetary Fund engages in a bit of public relations-driven outreach and holds its annual jamboree and prize-giving somewhere outside the Washington beltway. In 2012 the choice fell on Cairo. Cue: revolution. This year Peru seems to have remained peaceful, though as the moneyed hordes descended, the city ground to a halt. The government immediately ordered a two-day holiday, to allow the bankers to get to their dinners more quickly. That may be the first unambiguously good thing the IMF has done for the people of a developing country.

Lima is not the easiest place to get to from London. There are few direct flights from London to South America, so I was routed via Atlanta, where those helpful American rules oblige you to immigrate and emigrate to change planes, which makes anything less than a four-hour transfer hard to manage. So a 12-hour direct route turns into a 20-hour marathon.

That may partially explain why most of the bankers and officials looked disorientated and slightly depressed. But the IMF economists didn't help by issuing a gloomy prognosis on the global economic prospect. The Fund still feels burned by the memory of its excessively optimistic views just before the financial crisis. In 2006 it praised securitisation of mortgages and described the banking system as sounder than it had been for a long time. So now they seem determined to forecast at least five of the next three crises.

There are quite a few candidates for the role of crisis trigger. China is the most obvious one. Will the Chinese government be able to engineer a gentle slowdown or are they in for a hard landing? Brazil is in a mess, and is now big enough to matter. Russia's exciting foreign policy only confirms that their economic slowdown is serious and that Putin needs to create a diversion.

For once, Europe was not near the top of the agenda. The Greek tragedy is in one of its remission phases. But even in the heart of the Eurozone the prospect is clouded. Growth depends heavily on a rise in German domestic consumption. The Germans seemed to have come round to the view that wages needed to rise, but the China slowdown is causing a rethink. And the VW disaster doesn't help. If as a result wages don't increase and consumer spending does not rise, all bets are off. There is no chance of an expansionary fiscal policy in Germany, given their balanced budget law, and the other big countries are bumping up against their EC-imposed deficit ceilings. Since interest rates are already on the floor, it is not clear how the authorities could react to an incipient recession.

So even as we stood on the balcony of the Club Nacional on a balmy evening, pisco sours in hand, the mood was not upbeat. It improved a bit after the third one, I should faithfully report, but at the expense of an even more gloomy breakfast.

These days the UK economy does not figure largely in international discussions. The taxonomy of global forecasts now shows the US, China, the Eurozone and Japan. But Brexit has pushed us on to some agendas. Well done, Prime Minister.

Eurobankers are worried about what it will all mean for their operations in London, but they are also interested in the potential impact on their domestic political scenes. Most EU countries now have a Eurosceptic party or two. There is the National Front in France, the Alternative for Germany crowd across the Rhine, the True Finns, Jobbik in Hungary, Golden Dawn in Greece and other exotica elsewhere.They would undoubtedly get a boost from Brexit, which would reverse the presumptions of inevitability and irreversibility, which have so far kept the European train on the rails at difficult times.

Enough of a boost to change the political weather elsewhere? My interlocutors say not. Frexit - which sounds like a cholesterol-rich breakfast - is highly unlikely. The French remain in large majority convinced that Europe works for them. Since they designed it that may not be a surprise. The Swedes are a little more concerned. They think that our departure would tip the balance in the European Council away from Northern free-traders and towards Southern protectionists. But Swexit is still seen as a highly remote possibility. There is not much appetite either for Spexit or Pexit, and Iexit can't even be pronounced. So the consensus is that we will be marching off into the Northern sunset on our own, unless the Greeks stumble again.

I looked hard for Paddington Bear in Peru, but his homeland has forsaken him. His compatriots, though, have radically improved their English since I was last there, 20 years ago. At the time of the Shining Path, you needed to use whatever smattering of Spanish you could muster to get an empanada. Now they talk proper.

Great Western Railways could use a few Peruvians to help with their public announcements. They have gone in for a retro look in their new heritage signage, but their language is achingly modern. On the way to the Cheltenham Literary Festival, we bookworms were told to go to the front of the train to get off at the next station as only the first four carriages 'would be platformed'. Last time I looked platform was a noun, and it certainly still is in Lima. Then the next day a woman on the Today programme said she hoped her pet initiative - something to do with energy saving - would soon be greenlighted.

Maintaining a distinction between nouns and verbs seems to me like quite a useful organising principle for a language. Clearly I am way out of date, but I plan to stay that way. If I eventually have to emigrate to Peru, so be it.

Howard Davies is chairman of RBS. Follow him on Twitter: @howardjdavies

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