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In "The Lessons Greece's Lenders Forgot" (Wall Street Journal, July 10), John Taylor argued that the United States and the International Monetary Fund (IMF) erred in May 2010 by not abiding by the IMF's 2003 framework for exceptional (large scale) access to its financial support. I argued in a letter to the Wall Street Journal that Taylor did not have all of his facts right about the Greek case and about the IMF's framework for exceptional access. I also argued against his advice to the US Congress to condition its support of the 2010 IMF reforms on reinstatement of the 2003 framework. What follows is a longer version of my argument.
Taylor's argument contains four flaws.
First, the 2003 framework for exceptional access to IMF loans to which Taylor refers is long gone. The 2002 revised framework became effective in early 2003, but it was further modified in 2009 to cover a broader range of cases and to double the scope for normal access to IMF financial resources. Because the IMF staff could not attest that under the IMF supported program Greece's public debt would become sustainable with a high probability in the medium term, the 2003 framework would have required an immediate restructuring of that debt. The IMF chose, however, not to apply the framework. Instead it added a "systemic exception" in cases where there was uncertainty and a high risk of international systemic spillovers.
Second, contrary to what John Taylor implies about the success of the earlier exceptional access framework, neither the 2002–03 nor the 2009 framework has ever been used by the IMF to force a restructuring of a country's public debt as a condition for approval of an IMF program involving exceptional access. This would have been required for Greece without the change in the IMF's framework to which Taylor objects. In this respect, the pre-existing framework was an empty box.
Third, the restructuring of Greece's debt began in mid-2011, a year after the start of its first program. It was not completed until early 2012 and, as we now know, provided insufficient debt relief. If a restructuring had been a condition for IMF approval of the May 2010 Greek program, its size and scope would have been even smaller and with even less chance of putting Greek debt on a sustainable path. The use of the 2002–03 or 2009 framework would have failed to provide the intended result with respect to Greece's debt.
Fourth, the systemic exception also was employed in the more successful Irish and Portuguese cases. It is highly unlikely that those countries, Europe, or the global economy would have been better off if the systemic exception had not also been used in those cases. In economic policy, two successes out of three applications is a good track record.
An additional error in Taylor's argument on July 10 is that after the "no vote" by the Greek people on the July 5 referendum on the economic and financial package then proposed by Greece's creditors, he assumed the Greek government would default on the bulk of its debt obligations. The government had already failed to make several scheduled payments to the IMF. Those arrears have subsequently been cleared as part of a fresh attempt to rescue Greece that is expected to involve a further restructuring of Greece's public debt. Greece is not currently in default. However, Taylor is not alone in not anticipating the subsequent turn of events.
I agree with Taylor that exceptions to established policies should be rare. However, such cases should be transparently treated as exceptions, as with Greece, to limit arbitrary discretion. Given that the Greek authorities themselves did not favor a debt restructuring in May 2010, which we now know was their position, and given that Europe was unprepared for the economic and financial consequences of a Greek default, the use of a transparent modification of the IMF's policy was a wise course. The most likely alternative would have been to declare that the debt would be sustainable in the medium term based on fudged IMF staff estimates of the sustainability of Greece's public debt.
It is reasonable and appropriate to evaluate the Greek case and the available alternatives ex post. It is unwise and inappropriate to condition US formal approval of the 2010 IMF reform package on a specific outcome of such an evaluation. The IMF reform package requires US legislative approval because an 85 percent majority is needed for its implementation and the United States has a 16.7 percent share of IMF votes. US leadership has been severely damaged by the delay in approving a package that the United States largely designed. US leadership would be further weakened if the US Congress were to take John Taylor's advice and condition its approval of the IMF reform package on the reinstatement of the IMF's 2003 framework on exceptional access. That would be extortion, not global leadership.
