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Was the IMF right to come to the rescue of Greece in 2010?
Back in 2010, the Eurozone countries insisted a lot that the IMF provides exceptional financing to Greece. They will be duly reminded when the reckoning moment has come.
By Christophe Destais
Post
While Greece is about to default on a 1.6 billion euros payment which it owes to the IMF, the question arises again of the relevance of the commitment of the IMF, at the side of the European governments and the ECB, in the rescue of the peripheral countries of the Eurozone and, in particular, Greece.
Indeed, the IMF contribution to the Greek rescue package was exceptional in three respects.
First, by the scale of the amounts committed and disbursed with regards to the overall exposure borne by the Fund. An exceptional concentration of risks ensued, much beyond the one that inevitably results from the normal working of an institution that brings short-term funding to a limited number of countries in crisis. Thus, as of 31 May 2015, Greece accounted for 31% of the IMF’s outstanding loans [1] and, with Portugal and Ireland, 72% of the total was due by Eurozone countries.
Then, because of the borrower own currency. The Fund normally provides international liquidities to countries that have lost their access to international financial markets. Yet, the currency in Greece was precisely an international reserve currency : the Euro. Greece’s problem was accessing its own currency! For the emerging countries, which do not issue international reserve currencies and often cannot borrow overseas in their own currencies, especially in times of crisis, the problem of Greece was considered as a Eurozone internal issue.
Finally, because the analysis the Fund made of the borrower’s creditworthiness. Normally, the IMF agrees to lend only on condition that the beneficiaries engage in an economic policy which its economists believe will generate the resources needed to repay the debt owed to it and will restore access to international financing. But in 2010, it was not possible for the Fund‘s staff to forge such inner conviction. It was therefore necessary to grant Greece a waiver on the ground that a Greek default would trigger a systemic crisis in the entire Eurozone and, beyond, in the global economy. The Eurozone had not yet put in place mechanisms that would allow it to handle such emergency and it did not have the expertise of IMF teams.
The conditionality of IMF’s financing to Greece was less stringent than the one that had been imposed on emerging Asia in 1997-1998 and Latin America and Turkey in 1999-2001.Present from the beginning, the bitterness of non-European IMF members only grew as the Greek drama unfolded.
In the difficult negotiations ahead, the Eurozone countries are going to be in a very difficult position. True, the legal borrower of the IMF loans is the Greek government but the very reason that such a large and derogatory funding was granted to Greece was its membership to a monetary area which included much larger and stronger economies, at the insistence of the latter and although the Eurozone, as a whole, had failed to develop crisis resilient institutions.
No doubt that the pressure will be strong so that the rest of the Eurozone stands by the Greek debtor. It will be difficult for European countries to resist it while asserting that they remain attached to the mission and to the future of the IMF.
[1] Calculated on the total outstanding of the "General Resources Account".
Indeed, the IMF contribution to the Greek rescue package was exceptional in three respects.
First, by the scale of the amounts committed and disbursed with regards to the overall exposure borne by the Fund. An exceptional concentration of risks ensued, much beyond the one that inevitably results from the normal working of an institution that brings short-term funding to a limited number of countries in crisis. Thus, as of 31 May 2015, Greece accounted for 31% of the IMF’s outstanding loans [1] and, with Portugal and Ireland, 72% of the total was due by Eurozone countries.
Then, because of the borrower own currency. The Fund normally provides international liquidities to countries that have lost their access to international financial markets. Yet, the currency in Greece was precisely an international reserve currency : the Euro. Greece’s problem was accessing its own currency! For the emerging countries, which do not issue international reserve currencies and often cannot borrow overseas in their own currencies, especially in times of crisis, the problem of Greece was considered as a Eurozone internal issue.
Finally, because the analysis the Fund made of the borrower’s creditworthiness. Normally, the IMF agrees to lend only on condition that the beneficiaries engage in an economic policy which its economists believe will generate the resources needed to repay the debt owed to it and will restore access to international financing. But in 2010, it was not possible for the Fund‘s staff to forge such inner conviction. It was therefore necessary to grant Greece a waiver on the ground that a Greek default would trigger a systemic crisis in the entire Eurozone and, beyond, in the global economy. The Eurozone had not yet put in place mechanisms that would allow it to handle such emergency and it did not have the expertise of IMF teams.
The conditionality of IMF’s financing to Greece was less stringent than the one that had been imposed on emerging Asia in 1997-1998 and Latin America and Turkey in 1999-2001.Present from the beginning, the bitterness of non-European IMF members only grew as the Greek drama unfolded.
In the difficult negotiations ahead, the Eurozone countries are going to be in a very difficult position. True, the legal borrower of the IMF loans is the Greek government but the very reason that such a large and derogatory funding was granted to Greece was its membership to a monetary area which included much larger and stronger economies, at the insistence of the latter and although the Eurozone, as a whole, had failed to develop crisis resilient institutions.
No doubt that the pressure will be strong so that the rest of the Eurozone stands by the Greek debtor. It will be difficult for European countries to resist it while asserting that they remain attached to the mission and to the future of the IMF.
[1] Calculated on the total outstanding of the "General Resources Account".
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