Tags: Greece | Lending | Dilemma | IMF

Greece Poses Lending Dilemma for IMF

Wednesday, 31 Mar 2010 02:53 PM

 

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As the European Union and International Monetary Fund fine-tune possible roles in a Greek financial rescue, a big question remains over how hard the IMF can push for reforms to fix the euro zone country's economy.

If Greece approached the IMF for help, any lending role it might undertake would be complicated by the country's membership of the euro zone and the European Union.

The multilateral lender often attaches fiscal and monetary reform goals to loans. It faces difficulties tying such strings to Greece. The country's fiscal targets are governed by the EU, the European Central Bank sets monetary policy for the euro zone and member states have no direct control of the currency's exchange rate.

The IMF has in the past been attacked for demanding drastic austerity measures in return for financial lifelines. With Greece, it runs the risk of being accused of asking for too little.

"Greece is more complicated for the IMF because it is unusual to go into a situation where you can't advise them on exchange rate policy or monetary policy, and that is a very tough assignment," said Simon Johnson, a former chief IMF economist now at the Peterson Institute in Washington.

Confidence in Greece as a borrower has been badly shaken by a 300 billion euro ($405.52 billion) debt pile that exceeds the country's 240 billion euro annual economic output. It has about 23 billion euros worth of bonds — equivalent to almost 10 percent of its gross domestic product — maturing between now and end-May.

Euro zone leaders last week agreed to a joint financial safety net with the IMF to ease Greece's debt crisis and restore confidence in the euro which has lost 5.5 percent of its value against the U.S. dollar this year.

IMF officials, speaking on condition of anonymity, said any financial aid for Greece would have to be a "substantial amount" and include both the IMF and euro zone countries. Beyond that their respective roles in Greece remain unclear.

The IMF has already said Greece's 2010 austerity measures, drawn up to meet EU budget rules, are strong enough. Greece and the EU are unlikely to want to revisit those targets in an IMF program, an IMF official noted.

"There are other areas we could envisage a settlement between the EU and the IMF in the areas of structural measures needed to overcome the economic difficulties in Greece," the IMF official said.

These are likely to include tax, pension and health reforms and measures to make the Greek economy more competitive.

Johnson said the IMF could do Greece a disservice by not attaching exchange rate conditions that could help the country's economy recover.

"There is a real danger of repeating the experience of Argentina in the 1990s where for various reasons the IMF felt the exchange rate was off limits ...and that was a mistake," he said.

In the case of Argentina, the IMF was criticized for failing to push the country to break from its dollar peg sooner. Some analysts said that led to the collapse of stabilization efforts and an historic $100 billion debt default in 2002.

While Greece has not requested IMF aid, and it is unclear whether it will, IMF Managing Director Dominique Strauss-Kahn last week assured IMF member countries that Greece would be treated like any other country asking for IMF aid.

So far, the IMF has kept its possible involvement in Greece very vague, with Strauss-Kahn saying only: "We will move and we will say something only when Greece asks us."

But under Strauss-Kahn, a former French economy minister, the IMF has doled out larger sums of money than in the past without many strings attached to help countries deal with the effects of the global financial crisis.

For countries struggling under chronic fiscal problems, the IMF has pushed for deficit targets to make the country live more within its means.

In recent rescue packages for EU members such as Hungary, the IMF and the EU coordinated financial assistance and the conditions for the support fell under an IMF lending framework that was overseen by the global lender.

None of those countries are in the euro zone, unlike Greece, which makes less confrontation over such issues as monetary policy.

Johnson pointed out that one area of difficulty is while the IMF might have lending experience it does not have clear procedures of structural reform to help Greece restructure its economy in the fundamental manner that would be needed to avert continued growth in its debts.

"The IMF's forte is fiscal policy and of course monetary policy, and when allowed exchange rate policy. The structural issue should be something that the Europeans themselves are practicing with IMF support," he added.

The Fund may face internal pressure to make sure any aid to Athens comes with conditions that address its fiscal problems.

The IMF answers to a 24-member executive board that is dominated by European countries but also includes the United States, Japan, and large and small developing countries. Any lending arrangement with Greece would require the consensus of the entire board.

Above all, Greece is politically sensitive for the IMF.

The involvement of the IMF, a condition imposed by German Chancellor Angela Merkel in return for EU money, was agreed over the objections of the European Central Bank and in the face of reluctance from other EU states including France.

Greece has been adamant it wants to first try and raise funding on the financial markets before it must turn to the IMF and EU for aid. On Monday it returned to capital markets for the first time since euro zone leaders agreed to give it a financial safety net but its borrowing costs remain high.

© 2014 Thomson/Reuters. All rights reserved.

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