The IMF, Trying to Lend Europe Credibility for a Greek Bailout, Risks Losing Some of Its Own

By Ian Talley

Protesters take part in a demonstration against the reform package in front of the Greek Parliament in Athens this week. Greece struck a deal Wednesday to unlock desperately-needed bailout funds for the debt-ridden nation. Photo: Angelos Tzortzinis/Agence France-Presse

The International Monetary Fund acted tough on Greek debt relief. But it appears to have caved under pressure by its largest shareholders, the U.S. and Europe.

That means Greece’s economic crisis will likely continue to simmer. It also means the fund may again forfeit some of its credibility for the sake of the eurozone.

“The agreement does little to address the underlying problems the Greek economy is currently suffering,” IHS Global Insight economists Diego Iscaro and Blanka Kolenikova said of Europe’s fresh bailout deal. “The promises of debt relief are, in our view, too distant and vague to make a material impact on confidence.”

Facing German resistance to upfront debt relief, European, U.S. and IMF officials worried another Greek standoff could fuel global economic and geopolitical instability by giving leverage to proponents of a U.K. exit from the European Union.

“There will be no repeat of last year’s drama,” said Marc Chandler, global head of currency strategy at investment bank Brown Brothers Harriman.

But the bailout isn’t for Greece, it’s for Europe, he said. “Greece’s creditors, mostly official, are being kept whole through this paper charade.”

Ahead of the latest meeting, the IMF said upfront, unconditional debt relief would be required and that Europe should agree to implement a detailed, concrete restructuring by the end of 2018.

By Wednesday, eurozone officials repeated the devil-in-the-details fine print it used (and the IMF approved) in 2012 to sidestep debt relief at the time: The current deal offers restructuring only “if necessary.”

To be sure, whether the IMF will participate remains an open question. IMF European Department chief Poul Thomsen, architect of the emergency lender’s bailout, said the fund would recommend a bailout deal at the end of the year only if Europe commits to detailed debt relief that makes the country’s obligations sustainable.

Putting its imprimatur on the deal—saying the fund intends to contribute more cash—the IMF is lending Europe the credibility German voters required to approve more financing for Greece. Endorsing a deal many economists view as a charade that perpetuates Greece’s crisis undermines the fund’s credibility among its members.

From the start of the bailout, emerging markets questioned the IMF role in the rescue as a quintessential example of the Washington-based institution primarily serving the interests of its founding U.S. and European members. It wasn’t credible without debt relief, they argued, and showed the IMF was giving preferential treatment to its largest shareholders.

That’s why the IMF’s tougher stance on debt relief last year, and then again this year, appeared to be an effort to salvage that lost credibility.

As the IMF’s top spokesman, Gerry Rice, put it last week: Credible policies and substantial debt relief “ensure the uniformity of treatment among our member states, which is, you know, of paramount importance to us. We represent 189 countries.”

The senior IMF official on Wednesday said the fund conceded one important point in the talks: not requiring upfront debt relief. But the official said the fact that the IMF hasn’t yet approved new cash and is still requiring debt relief to participate in the bailout preserves the fund’s integrity. “I cannot see how, in any way, it undermines the credibility of the IMF.”

The real test of the fund’s credibility may come later this year: All eyes will be watching to see if, and under what debt-relief conditions, the IMF finances a third bailout for Greece.

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