IMF and Europe Part Ways Over Bailouts

The euro zone and the International Monetary Fund were thrown into each other’s arms when Greece’s debt crisis began early in 2010. Now, officials say, they could be heading for a divorce.

As representatives from both sides meet at the end of this week in Washington to discuss Greece’s need for extra cash and a lighter debt load, the clashes that have built up over the past three years are coming to a head.


Antonio Borges in a 2011 photo. Bloomberg News

“The divorce between Europe and the IMF is real,” Antonio Borges , a former European director at the IMF, said in an interview in June, just months before he died of cancer at the age of 63. “The fund is going back to its normal way of business. It is an institution used to being alone in calling the shots,” Mr. Borges said.

Mr. Borges arrived at the fund in November 2010, six months after the first Greek bailout was agreed. He left 12 months later citing ill health—but said in the interview that the real reason was his marginalization over the design of the €73 billion (roughly $99 billion) Greek program.

The Washington-based IMF joined the European Commission and the European Central Bank as a “troika” of institutions in handling the Greek, and subsequently the Irish, Portuguese and Cypriot bailouts.

It started well. When the IMF team arrived in Athens in April 2010, one European official there described it as “almost like the U.S. Marine Corps arriving in a war zone.” The fund and its expertise, he said, were “indispensable.”

But it wasn’t long before tensions emerged. The fund, Mr. Borges said, pulled a template program from the shelf, failing to consider that Greece’s policy options were severely limited by its membership of the euro. “Greece is the saddest case of all,” Mr. Borges said. “The program was wrong from the start.”

Three years on, troika staffers now recount how they were involved in shouting matches over Greek growth projections, bank restructurings and public debt-to-output ratios.

“We had to negotiate the figures…That’s not how it is supposed to work,” a European official said, referring to hourslong debates about projecting Greece’s 2013 growth rate.

A big source of tension has been the IMF’s Debt Sustainability Analysis, which is heavily based on projections of the ratio of government debt to economic output. IMF rules prevent the fund from giving aid to states unable to repay their debts, so this analysis has been critical in ensuring the fund continues lending.

But the analysis wasn’t well regarded by some officials. One IMF official called it “a joke,” a commission official described it “a fairy tale to put children to sleep” and a Greek finance ministry official said it was “scientifically ridiculous.” Mr. Borges politely said the exercise was “highly subjective.”

An IMF review in June of Greece’s first bailout contained a scathing critique of the commission’s role in the troika. It also admitted that the fund had bent its own rules to lend to Greece.

The report was received badly in Brussels. Olli Rehn , the commission’s economics chief, reacted angrily. “It isn’t fair and just for the IMF to wash its hands and throw the dirty water on Europe’s shoulders,” he said. He later dismissed the controversy as “a storm in a teacup.”

Mr. Rehn supports the idea of an independent European crisis mechanism to tackle future crises, without IMF involvement, as do top officials such as the ECB’s powerful German executive-board member, Jörg Asmussen, and Germany’s Finance Minister Wolfgang Schäuble.

For its part, the fund is reluctant to see its credibility continue to erode in Europe, officials say. To prevent that, it has been contributing less and less over time to new bailouts, while retaining a de facto veto over policies—much to the irritation of European officials.

European policy-making institutions are also emerging more confident as the crisis has waned, making them feel less dependent on the IMF. Klaus Regling , the head of the European Stability Mechanism, the euro zone’s permanent bailout fund, reflected this new boldness when he dismissed as “meaningless” the debt ratio used by the fund as a lending benchmark.

The ratio, he said in an interview with The Wall Street Journal, failed to account for the very low interest rates and long maturities on Greece’s debts to its Euro-zone neighbors. It was a none-too-subtle hint that Euro-zone governments are rethinking a late-2012 pledge to the fund that they will forgive some of that debt.

Christine Lagarde , the fund’s chief, pushed back Thursday, in comments at the IMF meeting in Washington. “I have no reason to doubt [the governments] will honor and, if needed, they will reiterate their commitments,” she said.

One thing that has kept the fund involved in Europe is its relationship with the German government. The German parliament has conditioned its support for bailouts on IMF involvement.

The Berlin-Washington axis held while their interests remained aligned, as in 2012 when the IMF pushed for Greece’s private creditors to take losses and Germany was seeking to minimize its contribution to the second Greek bailout.

Now, officials say Ms. Merkel is loath to go to her voters—even after being re-elected last month—and announce that the country’s loans to Greece won’t be repaid in full, as the IMF has urged.

“If the euro area doesn’t need the services of the IMF anymore, that is the best possible news,” Ms. Lagarde said in July.

That time may not be too far off.


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