Washington out Time For IMF to Quit Greece

The International Monetary Fund cast aside its own rules in its loan dealings with Greece and as a result has seriously jeopardized its credibility. Europe should pay it off before it's too late.
Has the IMF become more of a hindrance than a help to Greece?

The management of the International Monetary Fund was trying to revamp its battered image by participating in the Greek bailout. Dominique Strauss-Kahn, Christine Lagarde's predecessor as managing director of the IMF, practically begged European governments to accept his help, and it was German Chancellor Angela Merkel who brought the IMF on board in 2010, despite significant opposition.

But now the fund's involvement in Greece could prove to be a career setback for Ms. Lagarde. Her re-election as head of the IMF is apparently in the balance – and justifiably so. The IMF has overstretched itself with Greece.

According to its statutes, the IMF's job is to provide emergency loans to countries that are confronted with serious foreign currency and balance-of-payments problems. This is also intended to guarantee the stability of the international financial system.

However, Greece never had a foreign currency problem. Ever since the "whatever it takes" to save the euro speech by European Central Bank President Mario Draghi in July 2012, the threat to the global financial and currency system posed by Greece virtually disappeared.

At the time, the German central bank, the Bundesbank, rightfully warned that the IMF's involvement in Greece was not based on any mandate, and that the fund's objective was not to finance budget deficits.

Now that the credit risk is so obvious, Ms. Lagarde is vehemently pushing for debt forgiveness for Greece – except, of course, in the case of the IMF loans.

Nevertheless, the IMF's current commitments in Greece amount to about €30 billion, or $34 billion, equal to approximately 17 percent of the country's gross domestic product. As long as Athens was making its payments on time, it was not a bad deal for the IMF, since Greece was paying a respectable 3.6 percent in interest on its IMF loans.

But ever since Greece stopped making payments on time, the alarm bells have been ringing in Washington, where the IMF is based. The institution, with assets of about €370 billion, has taken on a cluster risk in Greece. Many of its 188 member states are much poorer than Greece and must now vouch for this substantial risk.

Greece received more money than any other country before it, and the previous upper aid limit was suspended without any significant protest. Both the contributions a country is required to pay to the IMF and its maximum claims to emergency loans are determined by its economic output.

The upper limit for the aid a country was entitled to receive – which, of course, applies only if a country is not significantly in debt – was six times the quota applicable to the country. At the time of the first aid package, Greece's quota was about €1 billion, or one-thirtieth of the volume of loans it received.

Greece was given highly exclusive treatment, and as head of the IMF during this period, Ms. Lagarde jeopardized the IMF's most important possession: Its credibility.

Now that the credit risk is so obvious, Ms. Lagarde is vehemently pushing for debt forgiveness for Greece – except, of course, in the case of the IMF loans. This would substantially increase the likelihood of Greece paying off the IMF loans.

Europe ought to manage the Greek bailout alone, dissolving the IMF loans and replacing them with European Stability Mechanism funds at a lower interest rate. The ESM is essentially a European monetary fund, and as such, it can ignore the interests of the United States and the major emerging economies, China, Brazil, India and Indonesia.

If the governments and parliaments of euro-zone countries still believe that they cannot solve the problems of member states – most notably Greece – without the IMF's help, the idea of Europe growing together politically can be considered a failure.

After repayment of the IMF loans, the countries in the euro zone could address the issue of a debt haircut much more honestly. Greece will only gain capital market viability when its debt-to-GDP ratio drops below 100 percent – or half of what it is today.

This goal will not be achieved in the foreseeable future with the current strategy, which is to turn loans into virtual transfers by lengthening their terms to an extreme extent.

The IMF specializes in solving fiscal problems as quickly as possible through income and expenditure consolidations. In the last five years, European institutions have learned a lot from the IMF when it comes to consolidation, not least from its grandiosely incorrect prognoses. However, there will be no quick solution.

Besides, the upcoming third aid program delves more deeply into a reorientation of Greece in terms of regulatory policy. Expecting the IMF to be involved in this would be a pathetic display of political inadequacy.

For this reason, thank you IMF, and goodbye!


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