IMF’s Christine Lagarde shows tough love to Greece over bailout

26/2/2015

By Shawn Donnan

When Christine Lagarde offered a sceptical view this week on the new Greek government’s reform plan, the International Monetary Fund chief highlighted just how uncomfortable her institution has become about one of the biggest bailouts in its history.

The IMF’s experience in Greece has been painful, exposing fault lines between its traditional US and European paymasters and emerging powers keen for greater influence over global finance.

“Greece so far has not been a brilliant chapter in the IMF’s history,” says Paulo Nogueira Batista, who represents Brazil and 10 other countries on the fund’s board. “Rules were bent and broken to suit the needs of the euro area.”

The result, he argues, has been damage to the institution’s credibility.

The IMF joined the EU’s financial rescue of Greece in 2010 and its board since then has approved two separate programmes, each worth approximately €30bn and greatly exceeding the fund’s normal lending limits.

Under the tutelage of the IMF — which has been overseeing the bailout alongside the European Commission and the European Central Bank, the other members of the “troika” — Greece has turned a yawning fiscal deficit into a surplus and returned to growth after a devastating five-year depression.

Successive Greek governments, however, have made little headway with privatisation or economic reform, and eurozone governments have resisted IMF pleas for help to reduce Greece’s mountainous sovereign debt.

The overall result has been a public backlash in Greece and the election of a radical anti-austerity government in a repudiation of the IMF’s drive to modernise the Greek economy and state and its role as part of the hated troika.

However, as Ms Lagarde underlined this week, that is doing nothing to weaken the IMF’s inclination towards tough love.

The former French finance minister on Tuesday made clear the new Greek government’s reform plans, submitted to win a four-month extension of a eurozone bailout, were insufficient. She queried the absence of “clear commitments” on reform of tax, pensions and labour markets or to privatisation.

But if Ms Lagarde and her staff were keen to appear tough on Greece this week it was also at least partly, analysts argue, because she had to be mindful of complaints from some big emerging economies that the fund has given special treatment to Greece and other crisis-stricken eurozone members over five years.

“Lagarde now needs to create consensus within the IMF,” said Andrea Montanino, a former IMF executive director for Italy now based at the Atlantic Council in Washington.

The fund’s initial €30bn bailout in 2010, which was replaced by a four-year programme of roughly the same size in 2012, was the subject of a critical internal review in 2013. But the self-examination has only intensified since then.

The IMF has also been criticised for taking a subsidiary role in the EU’s Greek bailout in 2010 and lending too much to Athens. Under normal circumstances it is limited to lending a cumulative 600 per cent of a member’s quotas during bailouts and it must prove that a member’s debt is sustainable if it goes beyond that. But in 2010 the IMF made an exception for Greece on the grounds that a Greek default and exit from the euro posed a “systemic” threat to the global economy.

In May last year a staff paper looking at the IMF’s response to sovereign debt crises was critical of the “systemic” exception made for Athens. In November the fund’s internal watchdog, the Independent Evaluation Office, launched a broader review of the IMF’s role in the eurozone crisis, which should be released later this year.

Some critics question whether the IMF is repeating its mistakes with Ukraine, where the fund is preparing to consider a new $17.5bn bailout. As with Greece, critics say the IMF was initially too optimistic about the scope for recovery of Ukraine’s war-torn economy.

But Greece remains an exceptional case, mainly because of the IMF’s remaining exposure. Its part of the international bailout runs until March 2016. The cash-strapped Greek government has to find €9.3bn to repay IMF debts over the next 10 months.

“They keep maintaining the fiction that nobody has really defaulted on the IMF before and that therefore it won’t happen here,” said Desmond Lachman, a former fund official now at the American Enterprise Institute in Washington. “But the fund has never lent to anyone like this before.”

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