IFI governance


IMF lending in Europe unprecedented, programmes failing

Letter to the Economist

18 October 2012 | Letters

8 October 2012


The contradictions revealed by IMF involvement in eurozone bailouts, identified in your article (“Less Cash, More Impact“, The Economist, October 5th), reflect a crisis of legitimacy at the Fund. Its out-dated governance must of course be reformed to reduce the disproportionate voice of European and other wealthy nations that are at the heart of its seemingly open-ended entanglement in the Eurozone crisis, however policy reform is equally needed.

Your article is correct to argue that the IMF should steer well clear of further involvement as a ‘junior’ partner in Troika lending, in particular in Spain, given these contradictions and the scale of potential bailout required. However, it downplayed the unprecedented scale of the Fund’s current lending and the Fund’s predicament in Europe.

Taking the lending as a percentage of a country’s IMF quota at the time of the loan, a yardstick to gauge the level of Fund commitment, the programmes in Ireland (2,322 per cent of quota), Portugal (2,306 per cent) and Greece (3,751 per cent) are far beyond the previous record (1,938 per cent of quota for South Korea in 1997). The IMF loans to these three countries were also well above a mere “10 per cent” of total lending capacity. At the time of commitment they represented 36 per cent of IMF forward commitment capacity before any loans were made. Including other loans to European Union countries, these now account for nearly three quarters of the IMF’s credit outstanding.

The Troika’s programmes are also failing on several fronts. The supposed Irish success story neglects that unemployment sits at 14.8 per cent, and combined with under-employment reaches 25 per cent. The ratio of income of the top 20 per cent to the bottom 20 per cent grew by a whopping 28 per cent in 2010 alone. Growth figures are distorted by activities of multinational firms that locate headquarters in Ireland for tax efficiency purposes. Across Europe, Troika demands for reducing labour-market protections have been shown by the World Bank’s recent World Development Report to be counterproductive.

Instead of being the junior Troika member, beholden to the austerity mania of Northern Europe, the Fund must accelerate reforms to ensure it is democratically legitimate and economically representative. This would allow the Fund to deal even-handedly with persistent surpluses and deficits, facilitate a system of cross-border capital flow management, and of course serve as an impartial lender of last resort.

Peter Chowla & Sargon Nissan
Bretton Woods Project
London, UK