Two Policy Updates

new united states

The IMF has been reluctant to participate the aid package to Greece that runs out the middle of next year.  It does not believe that Greek debt is sustainable.  Nevertheless, it did recently agree to provide a precautionary line of credit at the end of the program.   

The IMF decision required the approval of the board, and we thought there was a reasonable chance the US would block it.   That would have been significant, as the German and Dutch parliaments require the IMF participation, but there is no compelling reason for the IMF to participate.   The sustainability of Greece’s debt is such an open question that the ECB, which accepts Greek bonds as collateral (for weekly operations) will not include Greek bonds in its asset purchase program.  Moreover, Europe can take care of its own problems.  Isn’t that what the European Stabilization Mechanism is meant to do?

The Trump Administration has shown little sympathy for Europe.  The US President has been particularly critical of Germany.  The new sanctions that the US Senate has approved and is now before the House of Representatives would put make it more difficult to complete the Nord Stream 2 pipeline that is supposed to bring Russian gas to western Europe bypassing Ukraine.  The US commercial interest is clear too.  It wants to export more natural gas to Europe.  The US has been critical that not all European members of NATO are spending 2% of GDP on defense.

Nevertheless, US Treasury Secretary Mnuchin appears to have approved the IMF’s precautionary line of credit to Greece.  Mnuchin praised the IMF for helping stabilize the situation in Greece by working with Europe.  Mnuchin said that without the IMF’s help, Greece could have once again roiled the markets.

At the same time, the US Treasury Secretary played down the significance.  He noted that the IMF’s commitment was quite small and would likely not even be used.  Mnuchin seemed to suggest it was mostly for appearances, and that it would not cost US taxpayers a penny.    He expressed support for the IMF but noted that the US was reviewing all of its contributions.

On another front, findings of the investigation into US steel imports on national security grounds are still expected in the coming days.  Commerce Secretary Ross had indicated the results would be ready by the end of the month.  It appears that the investigation is over and the debate over the policy response is in high gear.

The President reportedly wants to impose tariffs and use them as the model for action on aluminum and other industries (reportedly including semiconductors, paper, and household appliances).  Reports suggest that most cabinet officials are opposed to the 20% tariff Trump is pushing.   One compromise would be a combination setting a quota on steel imports and a tariff on imports above the quota.

US steel imports have fallen for the past two years.  Setting a quota at the 2016 levels would guard against backtracking.    The prospects of a 20% tariff, however, appears to be underpinning the share prices of some of the largest US producers.  On the other hand, as consumers and producers wait for a decision, some reports suggest that it is dampening activity.