European IMF directors protected the banks, but hit the Greeks

Confidential document about IMF support to Greek aid program

MO* Magazine could seize a confidential document that shows the number of questions about the approach of the Greece debt crisis that lived within the IMF Executive Board.

  • CC Apostolos Demonstration in Greece against IMF austerity, 2010. CC Apostolos

The European Union has succeeded in dragging the IMF into the consecutive bailout programs of Greece. As such, the IMF was asked stand-by arrangement of thirty billion euro’s in the spring of 2010. However, many non-European countries questioned this approach, as says the office memorandum (of May 10, 2010) on the Executive Board’s meeting dealing with the Greek aid request.

But because seven of the twenty-four executive directors (ED’s) are EU-members, plus the managing director who presides the meeting, the EU is very influential in the decision-making process. As it turns out, the EDs from Germany, Belgium, Spain, the Netherlands, France en Denmark delivered a joint statement pro IMF-support to Greece at the board meeting.

Banks evade responsibility

The other EDs had many questions, though. At the Board’s meeting five (Argentina, Brazil, India, Russia and Switzerland) of twenty-four directors complained about a missing element in the programme: they found the private sector needed to be involved. The programme had to include a debt rescheduling and so a partial reduction of Greek debt by the banks. The Brazilian executive director stated that was necessary ‘to avoid a bailout of Greece’s private sector bondholders, mainly European financial institutions.’ That would constitute a kind of moral hazard since the governments would actually save the banks from the consequences of their imprudent lending.

The Argentinian director was very critical about the program, because it made the same mistakes – unsustainable fiscal tightening – as in the run-up to the Argentine crisis of 2001. The Swiss ED repeated, much to the astonishment of the other European IMF directors, the above concern about the lack of debt rescheduling in the program.

The intra-European “solution” to safeguard (mainly French and German) banks from debt restructuring was undoubtedly advocated by the European directors in the IMF Executive Board. Such debt rescheduling that also includes the private banks is usually an integral part of IMF programs in developing countries. There’s logic in that: a debt crisis is usually a shared responsibility of debtors who borrowed too much and creditors who imprudently provided credit.

Earlier on, former IMF chief economist Simon Johnson noted in his book, “13 Bankers”, that the U.S., after the collapse of Lehman Brothers, refused to address their own banks in the same way as the IMF usually - under U.S. pressure - does with banks in developing countries in financial crisis.

Because a debt reduction was not required, Greece had to pay off even more, save more and cut even more in its social and public services. Thereby contributing to a bigger rise in poverty and unemployment
However, this is not just a matter of two sizes and two weights. Because no debt reduction was required, Greece had to pay off more, save more and cut more in its social and public services. Thereby contributing to a bigger a rise in poverty and unemployment.

‘Immense risks’

The Australian director found the program contained too much structural conditions, as during the Asian crisis in 1997-98. The experience at the time was that the imposition of dozens of conditions worked actually counterproductive. ‘The conditions imposed by the European Commission look like a shopping list’, said the Australian executive director.

Under the heading “optimistic growth assumptions”, we read that the Chinese and Swiss EDs emphasized that the rate of economic growth will determine whether Greece can handle its debt. ‘Even a small deviation from the baseline scenario can bring the tolerability of debt at risk’, both stated.

Argentina, Australia, Canada, Brazil and Russia indicated the ‘immense risks of the program and hence the potential reputational damage to the IMF - risks that were mainly due to the more than ten percent fiscal tightening. Ten percent is, after all, historically extreme.

“Silent” adaptation of the rules

Furthermore, the Swiss ED had, supported by his Brazilian, Iranian and Australian colleagues, established that the IMF-staff that worked on the IMF’s support for the Greek aid program had “silently” - and thus without approval by the board! - changed criterion number two of the exceptional access policy, by extending it to cases where there is “a high risk of international systemic spillover effects”. That silent change was justified by the need to proceed expeditiously, on the assumption that the Board would approve it later.

The IMF staff implemented that silent change in policy was necessary ‘because Greece could not be an exception, because IMF policies have to be uniformly applicable to the whole membership (of the IMF, jvd)’. To respect that principle, rules had to be adjusted quickly and silently.

The incident shows concretely how the European influence - even without explicit coverage of the Board – was able to bend the IMF policy a little so that the Fund could assist Greece. And that is another illustration of the profound impact that the Europeans still have in the Fund, although several small European countries lost their permanent seat at the Board.

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