IMF plays “second fiddle” as governments fall in the eurozone

18 November 2011

As the eurozone debt crisis escalates and protests multiply, the IMF increasingly appears side-lined. Italy’s calling in of the Fund for “verification” of implementation of its EU-agreed austerity package symbolises the limits of its influence and resources.

In September, former IMF chief economist Raghuram Rajan claimed “the world has to recognise that the eurozone’s problems are too big to leave to eurozone countries alone to deal with.” He suggested that “the IMF should start taking the lead in managing the crisis rather than playing second fiddle.” While the IMF participated in many of the October negotiations and summits in Europe, it has always bowed to the priorities of the political leaders of the eurozone’s most powerful members Germany and France.

The end-October European deal asked Greece’s private sector creditors to take a 50 per cent cut in the face value of their debt, up from the 21 per cent agreed in July (see Update 77, 76, 75). Greece was required to deepen its privatisation programme with a further €15 billion ($20 billion) worth of public asset sales on top of the new tax increases, fresh cuts to pensions and wages and plans to dismiss 30,000 state workers that were approved just before the European Union (EU) summit that reached the debt restructuring agreement.

calling in the IMF is like playing with fire

The IMF has still not indicated if it will participate in a second loan package to Greece, even though the EU has been asking it to since July (see Update 77). Several media outlets reported that IMF negotiators were pressing for private sector write-offs of up to 60 per cent over fears that Greek debt will still be unsustainably large. Echoing the results of negotiations in Ireland last year – the IMF reportedly proposed a 66 per cent write off on Irish unguaranteed bank bonds – the Fund was overruled.

The Greek Debt Audit Campaign was also unhappy about the deal, saying: “The selective haircut, which leaves the illegal loans of the troika untouched and leads the pension funds to catastrophe, shows how necessary both cessation of payments and a democratic, worker-led debt audit is. … Debt cancellation should be led by the sovereignty of the Greek people.”

Major protests have been ongoing in Greece throughout the autumn with strikes, and occupations of the main squares in many towns. Civil servants blockaded their ministries, preventing ministers from accessing their departments in September and October. The early November surprise announcement of a popular referendum in Greece on the EU-IMF loan terms and conditions would have marked the first time an IMF lending package was subjected to a test of popular ownership. In the end the political pressure heaped on the Greek prime minister by other European countries, the Greek political opposition and factions from within his own government forced him to back down and resign as prime minister. German and French leaders were clearly in the driving seat, leaving the IMF little role in the debate.

After the resulting collapse of the Greek government, Elena Papadopoulou of the Athens-based Nicos Poulantzas Institute said: “Despite the proclaimed enthusiasm, there is no realistic reason to believe that the new coalition government – with the participation of the extreme right – will follow anything other than the socially destructive policies applied according to IMF recipes with the agreement of the European elites.”

IMF to survey, not lend to Italy

An early November G20 summit showed clearly that the IMF cannot and will not be a major player in any future European crisis loans simply because it is too small. Financial market actors had targeted Italy, the third largest debtor in the world, pushing the interest rates Italy would pay on new borrowing over 6 per cent before the early November G20 summit. The IMF has insufficient resources to cover the €300 billion Italy is estimated to need to refinance in 2012. Instead, just before being forced to resign, Italian prime minister Silvio Berlusconi agreed with EU leaders to deeper austerity policies and then “invite[d] the IMF to carry out a public verification of its policy implementation on a quarterly basis.”

It is not clear whether the Fund’s monitoring of Italy will be treated as technical assistance, for which Italy would have to pay, or something akin to bilateral surveillance, which the IMF normally conducts only annually. The main precedent the Fund has is its Staff-Monitored Program, which is generally used for low-income countries emerging from fragile situations. Either way, civil society organisations in Italy were sceptical. Antonio Tricarico of NGO CRBM said “calling in the IMF is like playing with fire. While the Berlusconi era has ended, his legacy will still be there through an IMF-European Central Bank-European Commission adjustment programme.”

Italy, Ireland, Portugal and Spain all saw mass protests against austerity in mid October, and those austerity policies seem to be undermining their economic prospects. In mid October the Portuguese government announced a new batch of cuts and said that it would miss fiscal deficit targets in its EU-IMF programme because of failure to hit growth forecasts (see Update 77, 76, 75). While the mid October EU-IMF review of Ireland pronounced the government on-track in terms of the fiscal deficit, in early November the unemployment rate was still at 14.4 per cent and the government slashed the growth forecast for 2012 from 2.5 per cent to 1.6 per cent, necessitating another €200 million in spending cuts in order to meet next year’s targets.

An early November report on the eurocrisis from the University of London’s Research on Money and Finance group warns that “resolving the crisis is not just a matter of devising ingenious methods of borrowing and effecting fiscal transfers, but one of radical political and social change across Europe.” Whichever options Greece and Europe choose, the IMF has been unable to intervene effectively when it comes to discussions of the structure of the euro.

Too few resources

Because the IMF would not have sufficient resources for a crisis in a large country like Spain or Italy, IMF head Christine Lagarde hinted in late September that it might need more money. Just one week later, after the US treasury secretary vetoed the idea, Lagarde did a U-turn, saying that the IMF had enough resources.

In October, China, Brazil, Russia and India said they would be willing to provide additional resources through the IMF for loans to Europe,but did not propose a precise mechanism. In 2010, all these countries were willing to put more resources into the IMF in exchange for greater voting rights, but this was blocked by Europe (see Update 73). In mid October, Brazilian president Dilma Rousseff reiterated that Brazil could put more money into the Fund in exchange for more voting rights, while criticising IMF conditionality: “we will never accept, as participants of the IMF, that certain conditions that were imposed on us, be imposed on other countries.”

Debt audits needed

The pressure for debt audits as a way to deal with the eurozone crisis is gathering pace. In mid September a citizens’ audit of Ireland’s debt reported its findings (see Update 77), with particular focus on the anonymity of bondholders and the impacts this has on policy decisions. In late September a seminar in Madrid called for an audit of Spanish debt, and Portuguese civil society groups have also launched an audit call. NGO Jubilee Australia issued a report, Alternatives to Debtors’ Prison, on international insolvency frameworks in October. It concludes that “An international insolvency regime, along the lines of an independent arbitration mechanism, would give priority to governments’ obligations to meet the essential needs of its citizens, introduce a modicum of accountability to financing decisions, and elevate debt renegotiation decisions to a neutral and legitimate forum. It would have the added benefit of downgrading the often harmful role played by the Bretton Woods institutions.”

Debt sustainability frameworks reviewed

The IMF reviewed its methodology for assessing debt sustainability in advanced and middle-income countries in late August, admitting that its past analyses have been too optimistic. It confirmed the complaints of critics (see Update 56) when it found that “GDP growth forecasts showed a tendency to systematically exceed outcomes. This phenomenon was particularly relevant in countries with an IMF-supported programme.” The IMF executive board agreed that the Fund should have broader coverage of debt risks including contingent liabilities such as private bank bond guarantees, better analyse debt structure and debt liquidity, and better plan for shocks with simulations. However, the G20 meetings also agreed that the Fund and the World Bank should give more flexibility in the analysis for a specific type of contingent liability, debt used to finance public private partnership infrastructure investments.

Tim Jones of UK NGO Jubilee Debt campaign, noting that Japan has much higher levels of debt than other countries but does not face debt crises, complains that the review paper “makes little distinction between debt owed domestically and that owed externally.” He argues that “if debt is owed domestically … it does not cause an imbalance with the rest of the world, and so can be high without precipitating a financial crisis.” The IMF and the Bank are also conducting a review of debt sustainability analysis for low-income countries and an initial paper is expected soon.