IMF in a euromess?

3 February 2012

The IMF responds to calls from European leaders to get more involved in the region’s debt crisis through greater lending, while the austerity policies being demanded stoke further criticism from civil society organisations.

New deals, no solutions

In early December 2011, European Union (EU) countries met yet again to discuss new efforts to bring the region’s financial crisis to an end. With the exception of the UK and the Czech Republic, the rest of the EU agreed to prioritise work on a new “fiscal compact” to hard-wire fiscal policy limits into the constitutions of European countries. The IMF was present in the negotiations and eurozone countries are looking for IMF support, both rhetorical and monetary, as a means of restoring credibility to their fiscal policies (see Update 78, 77).

Rather than use the European Central Bank, the central bank for the eurozone, to lend directly to governments in distress, the major European national central banks would prefer to provide more resources to the IMF. They expect the IMF to then lend the money back to eurozone governments who are facing difficulty borrowing from capital markets (see box). If accepted, this plan would bring the IMF closer into the region’s acrimonious internal debates about the crisis.

IMF resources boost?

In an early December EU summit, European leaders agreed “the provision of additional resources for the IMF of up to €200 billion ($270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis.” Media reported that eurozone countries would give €150 billion, with the rest contributed by other EU member states, including the UK.

With these commitments in hand, IMF head Christine Lagarde sought a mandate to try to raise more money for the Fund at a mid January IMF executive board discussion on the adequacy of the Fund’s resources. Despite a carefully worded statement that did not specifically endorse raising more money for loans to Europe, Lagarde stated that “Fund management and staff will explore options for increasing the Fund’s firepower”, She briefed the press that she wanted to see an additional $500 billion in resources made available, including the money from Europe. The US, the largest provider of funds to the IMF (see Update 79), has repeatedly balked at this idea, with a US Treasury spokeswoman saying after the board meeting: “We have told our international partners that we have no intention to seek additional resources for the IMF.” Europe and the US had blocked more resources for the IMF during the 2010 quota reform, when large developing countries wanted to contribute more money in exchange for greater voting rights (see Update 73).

By the end of 2011, 61 per cent of the IMF’s outstanding credits were for EU countries, with a further 15 per cent outstanding to European countries not in the EU. At end November 2011, the most recent figures available, the IMF reported that it had $388 billion it could commit, much less than Spanish or Italian debt needing refinancing this year.

At the same time IMF internal governance related to the eurozone is in flux. In mid November 2011, the head of the IMF’s European division Antonio Borges (see Update 73) quit after just one year in the job citing “personal reasons”. He was replaced immediately by Reza Moghadam, a UK citizen, who served previously as the head of strategy and policy department. This year the European executive directors of the Fund must reorganise themselves into fewer chairs, freeing up two spaces for developing countries. While the European Commission has suggested that there should be either  a single EU or a single eurozone chair (see Update 61), no proposals have yet been debated in public, nor has there been consideration of enhanced accountability mechanisms for European representatives at the IMF.

A December paper on the IMF’s role in Europe by US think tank the Brookings Institution, co-written by former IMF executive director for Italy Domenico Lombardi, argues that “the difficulties that the Europeans are experiencing in handling the euro-area crisis highlight a potentially great­er role that the IMF can play”, including “a stabilising role by increasing its financial size but also by broadening its range of instruments.” However, commentator Wolfgang Münchau of the Financial Times argued that “the eurozone should change its rules before crawling to others, cap in hand.” Münchau goes on: “Considering that the eurozone is economically unconstrained, and among the richest regions in the world, the request to involve the IMF in hypothetical future rescue operations is morally reprehensible.” Aside from the moral issues, Münchau believes that eurozone policies are to blame: “The eurozone’s cumulative policy errors are turning a liquidity squeeze into a solvency crisis.”

In late November the IMF board approved a new IMF facility, the Precautionary Liquidity Line (see Update 78), which would provide “financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as insurance and help resolve crises.” In December and January, IMF managing director Christine Lagarde embarked on what the press called a global fundraising tour to help fund this new facility and an expected increase in lending in response to the deepening euro crisis. She visited, among others, Brazil, India, China, South Africa, and Nigeria.

IMF managing director Christine Lagarde continues to warn of the risks of spending cuts coming too quickly. Despite this, the Fund is still demanding deep cuts in countries it is lending to. In late January, Lagarde outlined her prescriptions for the eurozone: “There are three imperatives—stronger growth, larger firewalls, and deeper integration.” A mid January joint statement from Lagarde and the heads of other multilateral and regional institutions called for countries to “manage fiscal consolidation to promote rather than reduce prospects for growth and employment. It should be applied in a socially responsible manner.”

Programmes in trouble

However, fiscal consolidation programmes are proving contentious in European countries borrowing from the IMF precisely because of the negative social impacts. Massive street protests flared in Romania in mid January over attempts by the government to partially privatise the health service. Romanian deputy health minister Raed Arafat had resigned after criticising a draft healthcare reform bill that was a condition of the IMF programme (see Update 78, 74), prompting the protests. The government eventually backed down on the reform and reinstated the minister, but nightly protests calling on it to resign continued throughout the month.

In early December, Greek workers held their seventh general strike of 2011, and in January, the Greek people’s movement again occupied squares across the country in protest against government policies. The Greek IMF-EU programme continues to be stalled over the depth of new austerity measures and the failure to conclude negotiations on a ‘voluntary’ swap of Greek sovereign bonds that will impose losses on private creditors. In early February, negotiators from Greece’s unelected technocratic government refused IMF-EU demands for lowering the country’s minimum wage, saying they had no political backing for this. Lead IMF negotiator Poul Thomsen admitted that the social tensions created by austerity were undermining the economy and said the IMF wanted to “go a little slower as far as fiscal consolidation is concerned.”

The private sector losses on the bonds are a condition of a second European loan to Greece that was agreed last year (see Update 78, 77), but no deal has yet been reached with the creditors. As Greek sovereign debt has been trading in financial markets at prices much below the write-downs expected in the debt swap deal, University of Athens professor Yanis Varoufakis has called the debt swaps “an error in search of a rationale. It gives shadow banking a great new opportunity to profiteer at the expense of Greece and of Europe and escalated the latter’s crisis rather than help tame it.”

In Portugal a general strike also shut down the country. The late November movement by trade unions came after the IMF-EU mandated austerity programme deepened the country’s recession. In early September 2011 the IMF had expected a GDP decline of 1.2 per cent in 2012, but by mid November it projected a 3 per cent decline. Jorge Batiera of the University of Porto said that, given the recession and a shortfall in revenues, “new measures of impoverishment and dismantling of our fragile welfare state are in sight. Similar to what happened to Greece, it is all coming together so that a deflationary spiral will devastate the country making it more indebted, poor and desperate.”

Ireland is facing the same dilemma, with programme assumptions and projections that are not being met thanks to deeper recessions. Michael Taft of the Irish Congress of Trade Unions found that five-year GDP growth projections have been revised down from 10.75 per cent to 7.7 per cent and employment growth from 4.35 per cent to -0.1 per cent. Taft asked: “So did the EU and the IMF get it wrong?  There’s little doubt.” He says that the IMF-EU programme is not working and that Ireland needs a “Plan B”. In mid January, a new Irish network of local and global justice organisations, Debt Justice Action, called for the Irish government to stop paying the debt contracted by the Anglo Irish Bank, which was nationalised in January 2009, and the Irish Nationwide Building Society, which was nationalised in August 2010. Payments of these bonds is a condition of the IMF programme with Ireland.

Hungary was forced back into the arms of the IMF at end 2011 because of an inability to raise sufficient funding in capital markets. However, IMF programme negotiations have been inconclusive as Hungarian prime minister Victor Orban has tried to avoid IMF conditionality on fiscal policy.