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Greece’s economic problems are far from solved, but the International Monetary Fund (IMF) deserves part of the credit for the glimmers of progress on official debt relief in the Eurogroup announcement on June 15. The IMF is expected to issue its “approval in principle” for Greek policy commitments under the European Stability Mechanism (ESM) program, but it will not contribute money until it gets more comfort on debt relief from European governments and institutions. On balance, this makes the IMF a force for good in Greece and in Europe. The Fund’s hard line may be an effort to compensate for past missteps; now it is doing the right thing. It should remain engaged in Europe, and the United States should support its engagement as an independent source of policy expertise and funding.
Europe wants the IMF involved in Greece primarily for political reasons. Its presence can validate the policy and financing package, and commit both sides to perform. The Fund’s reputational capital is pledged to the notion that Greece will recover if the government and its euro area creditors do as they say they will. The IMF has not lent to Greece since 2015. It would be a small part of the financing if it got back in. Paradoxically, the IMF has become more influential as its financial contribution to Greece has diminished. This is an achievement to build on in Europe and beyond.
The IMF Has Learned from Its Mistakes
The Fund had lost some of its reputational capital when it joined the European Commission and the European Central Bank (ECB) in 2010 to form the “troika” responding to the Greek crisis. The IMF endorsed unrealistic assumptions about growth, unemployment, and budget savings that Greece could achieve under its program, and waffled on the need for debt relief. After the Lehman Brothers failure in 2008, many in the euro area and at the IMF feared that contagion from a debt restructuring would spread to Spain and Italy, trigger losses at financial firms throughout Europe, and undercut the euro’s status as a reserve currency. Internal debates at the IMF lasted into 2011; it took until 2012 to get the rest of Europe on board with a deep restructuring of Greek debt to private creditors. In the meantime, foreign bondholders had been repaid more than €100 billion from funds lent to Greece by other governments.
IMF reforms since 2012, and its recent posture on Greece, have helped rebuild its standing. Multiple post-mortems of its programs in Greece and elsewhere in the euro area have prompted internal changes to align IMF analysis better with its lending policies, which reduces the chances of one tainting the other. Program assumptions and debt sustainability analyses have become more realistic. Institutional checks and balances introduced in response to past crises are working.
A reformed IMF can help Europe overcome internal divisions. European governments and institutions hold about €260 billion of the €293 billion Greek debt stock, which has been stuck at 180 percent of GDP. Even though it carries exceptionally low interest rates and, in some cases, need not be repaid for decades, the debt mountain on the horizon discourages investment essential for recovery. Government-to-government debt is also politically toxic. It divides European citizens into debtors and creditors, and sows distrust that could span generations, even after the debt is paid off. IMF and independent assessments indicate that even the new, improved mix of reform and relief announced on June 15 is not enough to put Greece on a sustainable footing—unless it brings about an unprecedented and highly improbable string of budget surpluses and growth far into the future.
IMF Money Is a Vital Commitment Tool
The IMF needs both financial and nonfinancial tools to influence the Greek program. Greece needs ESM money in July to avoid default on private and public debt payments. Europe chose to condition ESM disbursements on the IMF’s blessing, even though it is not required by treaty. Germany wants the IMF involved to secure predictable policy conditionality under ESM programs; it gives the Fund leverage to secure a sustainable package of relief and reform for Greece. The June 15 agreement got only a partial blessing from the IMF, just enough for the ESM to proceed. Adding IMF money would signal greater confidence in the Greek program success and more rigorous oversight, since the Fund would have “skin in the game.” It could help catalyze private investment.
The IMF must maintain this hard-won independence to do its job in Europe. It cannot do so without the backing of its largest shareholder, the United States. Yet some in the US Congress favor keeping the IMF permanently out of Europe, arguing that the Fund had done a poor job in Greece and that Europe has the money to manage its own crises. After the trauma of recent years, even thoughtful internationalists may agree. Some Fund staff might secretly welcome the prospect of shedding the European albatross. The House of Representatives has introduced a bill that seeks to block the IMF from joining programs as a minority funder.
Walking Away from Europe Would End the IMF as a Global Institution
An IMF that abandons Europe and rejects cofinancing would ill-serve the United States. It would hurt Europe and would turn the IMF into a rich country club lording over a handful of the world’s poorest countries. It would echo the embarrassing words attributed to French President Nicolas Sarkozy—“The IMF is not for Europe. It’s for Africa—it’s for Burkina Faso!” Such talk diminishes IMF legitimacy among borrowers, amplifies the stigma associated with seeking IMF help, and encourages governments to postpone reckoning with their problems. It sounds especially perverse now that the Greek debt stock looks so much like that of a heavily indebted poor country—sky-high, concessional, and owed to other governments—and after Greece became the first (cue the cymbals) “advanced” country to miss a payment to the IMF in 2015.
The incentive to repay would only weaken if the IMF were to leave for good.[1] With the euro area left to its own can-kicking devices, the Greek debt stock could keep growing as political recriminations mount, poisoning the European project from within. The chances of Grexit, Italexit, Frexit, and associated contagion would go up, as would the risks to financial and political stability beyond Europe. IMF involvement is a cost-effective safeguard against such risks, with tangible benefits for the United States, which mobilizes about four dollars from other countries for every dollar it invests in the Fund.
More IMF Cofinancing Is Inevitable
In 1999, the IMF could backstop 35 percent of the gross capital outflows from developing countries, despite record-high crisis programs in Asia, Russia, and Brazil. By 2006, that number had dropped to 11 percent, even though most of the big borrowers had repaid. In 2014, firms in the emerging markets borrowed trillions of dollars abroad. In 2015, when the IMF’s new commitment capacity stood at approximately $425 billion, capital outflows from China exceeded $100 billion per month. There is a puzzling inconsistency between the view that the IMF puts too much taxpayer money at risk and the view that it must contribute the most money to be effective. Unless the United States is prepared to increase its financial participation dramatically or to give up its influence to other countries that will, IMF cofinancing with other governments and multilaterals is inevitable in all but the smallest and poorest countries.
The IMF has participated in large-scale cofinanced programs in the past, most notably in the Asian financial crisis in the late 1990s, and had to manage differences with other governments and regional institutions. Regional crisis-fighting arrangements have grown since, with the €500 billion ESM as only the latest example. Mindful of these trends, the IMF should continually elaborate and publicize its policies on cofinancing, with emphasis on safeguarding its funds and the integrity of its advice. IMF staff took a constructive step in this direction as part of its 2016 reviews of the international monetary system and the global safety net. Advancing this work program might help to assuage congressional concerns.
The IMF’s involvement in countries that are part of a monetary union, where policymaking happens both at national and regional levels, presents special challenges distinct from cofinancing, although the two are often conflated with Europe in mind. It would be a mistake to carve monetary unions out of the Fund’s remit. The latest ESM program for Greece shows the IMF’s political utility to national and regional authorities alike. The IMF’s euro area–wide surveillance process gives it unparalleled insight into the complex decision-making ecosystem of a monetary union. Armed with political leverage and institutional knowledge, the IMF can secure policy commitments from the relevant actors at all levels.
In sum, the world needs a stronger IMF that can stand its ground under pressure from powerful shareholders and interest groups, while engaging with the complex problems of rich and poor countries, monetary unions, and large-scale global capital flows. The United States should use its still-dominant position to press for continued reform, so that the Fund can live up to its stated purpose of promoting growth, employment, and monetary and financial stability in a fast-changing world. The IMF knows how to adapt to new circumstances. It began as the keeper of the gold exchange standard and a large lender to postwar Europe. It has since evolved into a global institution, more transparent, more accountable, and more willing to learn from its mistakes. It would be easy to squander, and awfully hard to replace.
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[1] For this reason, disengagement could do more harm than good for the IMF’s informal seniority, or “preferred creditor status” it enjoys by custom.
