IMF changing tack on Greece
With loans totaling approximately $25 billion, Greece is currently the International Monetary Fund’s (IMF) most important customer. “The IMF has crossed the ‘point of no return’,” says Rolf J. Langhammer from the Kiel Institute for the World Economy in northern Germany. “Basically, it should have walked away at an earlier point in time. Now, it’s too late.”
The economist from Kiel, who has advised organizations like the World Bank, the EU and German ministries, understands well why many of the 188 members of the IMF are not enthusiastic about the fund’s extraordinary attentiveness to Athens. Many developing countries feel that Greece is a rich, industrialized European country.
“Many developing countries think, ‘you have always been tough with us but you are always making exceptions for the rich Europeans,'” says Langhammer. They wonder why they should have to pay for a country in the eurozone. The professor feels there is a “great deal of logic” behind the question.
Change of direction in Washington?
It seems paradoxical: The term debt relief is a taboo in Latin America, Asia and Africa, but that is exactly what Greece asked the IMF for. On August 14, the head of the IMF, Christine Lagarde, made the organization’s position clear by saying, “It is crucial for Greece’s debt sustainability that its European partners commit themselves to significant debt relief, which goes far beyond the measures taken so far.”
The IMF’s concerns about the sustainability of Greek debt, however, actually reflect self-interest. “We know that from the Latin American debt crisis in the 1980s,” recalls the economist Langhammer. “Then they argued that a haircut would increase the chances serving the interest payable on the remaining debt.”
Does the fund simply defend the interests of its members by investing their money well? “The IMF is shouting as loud as it can so that no one gets the idea that it could possibly take part in a haircut,” says Jürgen Kaiser, the coordinator of Jubilee Germany, a German NGO that promotes fair and transparent bankruptcy rules.
Christine Lagarde lacks explanations
“Situations may arise in which other lenders may ask, ‘why are you not around when it comes to debt relief?'” he explains. In the end, there are no rules that say that the IMF is given priority ahead of other creditors.
Debt expert Kaiser finds the matter of distributing the debt burden after a haircut “quite intriguing.” If Greece were granted debt relief and the IMF were asked if it would partake in it, then Lagarde would have problems explaining, says Kaiser.
The IMF had problems explaining what happened in 2002 as well. At that time, more and more emerging and developing nations distanced themselves from the organization. Sustained growth rates allowed them to form foreign exchange reserves and enabled them to pay off their debts. The IMF lost its customers and was forced to look around for new business opportunities.
New fields of opportunities inadvertently opened up in 2009 during the world economic crisis. At that time, IMF chief Dominique Strauss-Kahn took a chance. “The IMF gained influence during the world economic crisis,” recounts Kaiser.
The IMF now has access to approximately $300 billion. “Even if crises erupt elsewhere, the IMF’s involvement in Greece would not prevent the IMF from awarding emergency loans elsewhere,” he says. “There is no competition for funds.”
What are sustainable debts?
Kaiser thinks a haircut for Greece is still possible, even though the IMF will be involved in the third bailout package. “They have bought themselves a little bit of time. Until the next deadline,” he reckons. The programs that Athens must now implement are based on the same “illusory figures that have been forced on the country the past five years.”
The IMF and the ESM, the European Stability Mechanism, came closer when the controversy over the definition of debt sustainability broke out this week. Now, the debt amount itself is not decisive, but the servicing of debt, instead. Europe’s lenders claim to have given Athens the best conditions possible to service its debt to the IMF, argues the ESM.
Langhammer considers the changed approach long overdue. “The sky may fall in on Greece, but Greece will continue to exist as a state. A country is an infinite investment object,” he says and adds, “Economically, it is complete nonsense to think that a country will pay back its debts. It is more important that a country is able to meet its interest payment obligations on a regular basis.”