Greek PM Tsipras

Tharman

Christine Lagarde IMF Head

On 30 June 2015 Greece missed a payment of Euros 1.5 billion due to the International Monetary Fund. This was under a Euro 28 billion extended Stand-by Arrangement agreed between the IMF and Greece in March 2012 to support Greece’s economic reform programme. Currently Greece has Euro 21.2 billion in outstanding obligations to the IMF. This should now be considered in default and a provision made for all or part of Greece’s obligations. Given the Greek electorate’s increasing unwillingness to put up with further austerity in order to service its enormous debt, it is unlikely that much, if any, of Greece’s outstanding obligations will ever be repaid.

Greece’s default is especially significant because it is the first time a developed country has defaulted on its obligations to the IMF.

On their website the IMF play down the significance of the default or its implications for creditors of the IMF. In “Nine Key Questions on Greece” the IMF states that its balance sheet is strong and this default will not affect its ability to repay its shareholders. However, as I pointed out in “An Open Letter to the Minister of Finance” in May 2012, the IMF is only rated AAA because its member governments have agreed to stand behind it in the event of a default and lend the IMF more money to cover any shortfall.

This is exactly akin to the PAP Government telling us that our CPF money is safe because it is invested in AAA securities issued by the Government. However if that money is on-lent to GIC, and indirectly Temasek, and these two funds lose a substantial proportion of their assets in risky investments, then the Singapore taxpayer will be called upon to repay the money owed to CPF holders. Singaporeans are in effect guaranteeing themselves just as the IMF member governments guarantee their own money lent to the IMF.

What are the Implications for Singapore of the Greek Default?

In April 2012 Singapore provided a US$4 billion loan commitment to the IMF as part of a general increase in IMF resources to deal with the Euro crisis and in particular the risk of contagion arising from a possible Greek default.

The PAP Government did this without getting Parliamentary and Presidential approval as it should have done under Article 144(1) of the Constitution. In fact the commitment would have passed unnoticed if I had not picked up on it and written about it in “Tharman joins the King of Spain in a Royal Elephant Shoot.”

In response to this article one of the Finance Minister’s colleagues tabled a question in Parliament which allowed Tharman to state that the loan, when drawn, would form part of the Official Foreign Reserves and be  an asset. Tharman also stated that lending to the IMF carried little risk and that default on IMF loans, which must be repaid ahead of all other lending, was almost unheard of.

As many of you may be aware I took the Government to court over its failure to seek Parliamentary approval. I argued that even if a loan was accounted for as an asset, this was a loan commitment and therefore a contingent liability. Classifying a contingent liability as an asset flew in the face of standard accounting practice in most developed countries, including the US Financial Accounting Standards Board, the Federal Reserve, the International Accounting Standards Board, the Bank of England and J P Morgan. Even MAS classified the loan commitment on its balance sheet under “Commitments” as an off-balance sheet liability along with capital expenditure and a guarantee to Singapore Deposit Insurance Corporation of $20 billion. If the loan commitment was treated similarly to a guarantee by MAS then surely it was caught as an increase in the government’s financial liabilities under Article 144 and should have received Parliamentary approval?

Despite overwhelming evidence my arguments were not really answered by either the High Court or the Court of Appeal which agreed with the Attorney General that I had no locus standii to sue the Government for a constitutional breach. My appeal was dismissed with costs.

Subsequently in 2014 the Finance Minister completely contradicted his and the AG’s arguments that Singapore’s loan commitment was an asset by stating in Parliament that the increase in our callable capital commitment to the International Bank for Reconstruction and Development (IBRD) would be fully provided for:

To date, the IBRD has never had to call on the callable capital.  It is an AAA-rated institution with a sound balance sheet for over 50 years.  Nevertheless, the full increase in Singapore’s subscription to IBRD’s capital will be charged to the Consolidated Fund, as the callable capital represents an increase in the Government’s financial liabilities.

I went on to point out:

As the Finance Minister and head of the International Financial and Monetary Committee of the IMF, who regularly meets with the US Treasury Secretary, you will know that the US treats commitments to the IMF as contingent liabilities requiring approval by Congress (seehere). Furthermore as required under the US Federal Credit Reform Act of 1990 loans made by the US Government are scored to reflect the degree of subsidy or risk of loss. In 2009 the US Congress appropriated US$5 billion to cover the risk of loss on the US commitment to the IMF.

Would you not agree that the government should establish a similar reserve in respect both of our subscriptions (whether called or not) and our loans (whether made or commitments)?

If the IMF loan commitment increases the financial liabilities of the Government  (including within the Government the assets and liabilities of the MAS as defined by Article 142 of the Constitution) then you have clearly breached Article 144(1). This follows from former AG Chan Sek Kheong’s opinion in 1998 that “transactions captured by Article 144(1) are those that, logically, increase the financial liability of the Government.”

 There can therefore be no doubt that our loan commitment to the IMF should have received Parliamentary and Presidential approval. It further follows that by representing a liability as an asset to the Appeal Court you led the Court to rule that it was an asset and to dismiss my appeal.

The Greek default demonstrates the very real risks of Singapore’s loan commitment to the IMF: that it may be called upon to offset losses sustained by the IMF due to default by borrowers. In those circumstances there would be a high possibility of loss on new lending to the IMF and the IMF itself may no longer be rated AAA. In fact if lenders were to withdraw their support the IMF would be insolvent.

What Should Be Done?

In the light of the Greek default, the PAP Government and the Finance Minister need to stop pretending to Parliament and the people that a loan commitment to the IMF is an asset and carries no risks.

The Government needs to rectify the Constitutional breach created by their failure to abide by Article 144(1) and retrospectively apply for Parliamentary approval. They should also make a provision against the loan commitment by charging part of it to the Consolidated Fund, or to the Official Reserves, as Tharman did with the callable capital provided to the IBRD, and as required by the US Congress for America’s own commitments.

The IMF loan commitment saga illustrates compellingly the problem with our “natural aristocracy”, as Lee Hsien Loong revealed in court that he considers himself to be. Just like medieval monarchs, they believe in the divine right of kings (or in their case the Lee family and the Executive) to do as they please untrammelled by such democratic niceties as Parliamentary approval. Our aristocrats believe firmly in austerity for Singaporean peasants, but demand the right to give away your money, without any accountability, to win prestige and friends on the international stage.

No wonder PAP Singapore is loved by undemocratic elites everywhere, whether it is the IMF, the European Union bureaucracy or the Governments of Russia, China and other authoritarian regimes. We can only hope that Singaporeans will finally see sense so that we can open the books and get a full accounting of the country’s assets.

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam