G20 must protect the IMF from Europe
Mohamed El-Erian
February 24, 2012
Permalink
At this weekend’s G20 meeting, European countries are likely to press for an increase in the International Monetary Fund’s resources as a means to bolster the firewalls against the eurozone debt crisis. The other G20 members must resist such pressure until Europe starts showing more signs that it’s getting its act together.
The balance sheet of the IMF – an organisation with 187 member countries – is already heavily exposed to the eurozone crisis. Greece, Ireland and Portugal combined account for almost 60 per cent of outstanding loans. And this is before the fund participates in the new bail-out for Greece that was announced earlier this week.
Europe is attracted to IMF financing for four reasons. It is a very cheap source of funding, especially for countries that are essentially shut out of private markets. It can act as a catalyst to unlocking other public and private financing. It is accompanied by a set of policy conditions, including both quantitative and qualitative performance targets. And it can come with technical assistance to strengthen the borrowing country’s administrative capabilities.
It should come as no surprise that over the last couple of years Europe has pressed the IMF very hard to make exception after exception - and it has succeeded. This has resulted in a number of firsts by an organisation that prided itself on the “uniformity of treatment” for member countries.
This went well beyond an easing in the maximum limits on loan amounts. More worrisome, it also involved supporting programmes that were inadequately designed when it comes to three core IMF criteria: they had little chance of restoring medium-term debt viability, they were not fully financed, and they risked the ‘preferred creditor’ status of the institution.
All this has understandably raised concerns among the other members, most acutely in Asia and Latin America where people still have vivid memories of what they were made to go through before receiving what now seem like relatively small loans compared to Europe. It has also damaged the standing of the IMF in the private sector.
There is some evidence to suggest that, in recent months, the IMF seems more willing to stand up to pressure from Europe. This is certainly commendable. Yet, as widely acknowledged, Europe is still significantly over-represented on the institution’s executive board and, therefore, retains a considerable influence.
The continued pressure on the IMF is also unfortunate given that Europe does not lack financial resources. The eurozone as a whole is a net creditor, with a tiny current account deficit. Its core countries, such as Germany, and regional institutions, such as the European Investment Bank, can borrow at very low interest rates.
Europe’s problem is not a lack of financing, but deep divisions about how the eurozone should operate in the presence of very different initial economic, financial and socio-political conditions among its member countries.
This is an internal issue that the IMF cannot, and should not be expected to, solve. It is up to the eurozone to decide whether to go forward in its current configuration towards a fiscal union or whether to first slim down to a more coherent and stable configuration. This would provide a better basis for a larger European-financed firewall.
As tempting as it is, Europe should not seek to obfuscate this critical decision by using IMF financing to give the appearance of sustaining the unsustainable. It must start making the necessary, albeit very difficult, decisions. Until this happens, the G20 has a global responsibility to protect the IMF from further damage to its credibility and legitimacy.
The writer is the chief executive and co-chief investment officer of Pimco
At this weekend’s G20 meeting, European countries are likely to press for an increase in the International Monetary Fund’s resources as a means to bolster the firewalls against the eurozone debt crisis. The other G20 members must resist such pressure until Europe starts showing more signs that it’s getting its act together.
The balance sheet of the IMF – an organisation with 187 member countries – is already heavily exposed to the eurozone crisis. Greece, Ireland and Portugal combined account for almost 60 per cent of outstanding loans. And this is before the fund participates in the new bail-out for Greece that was announced earlier this week.
Europe is attracted to IMF financing for four reasons. It is a very cheap source of funding, especially for countries that are essentially shut out of private markets. It can act as a catalyst to unlocking other public and private financing. It is accompanied by a set of policy conditions, including both quantitative and qualitative performance targets. And it can come with technical assistance to strengthen the borrowing country’s administrative capabilities.
It should come as no surprise that over the last couple of years Europe has pressed the IMF very hard to make exception after exception - and it has succeeded. This has resulted in a number of firsts by an organisation that prided itself on the “uniformity of treatment” for member countries.
This went well beyond an easing in the maximum limits on loan amounts. More worrisome, it also involved supporting programmes that were inadequately designed when it comes to three core IMF criteria: they had little chance of restoring medium-term debt viability, they were not fully financed, and they risked the ‘preferred creditor’ status of the institution.
All this has understandably raised concerns among the other members, most acutely in Asia and Latin America where people still have vivid memories of what they were made to go through before receiving what now seem like relatively small loans compared to Europe. It has also damaged the standing of the IMF in the private sector.
There is some evidence to suggest that, in recent months, the IMF seems more willing to stand up to pressure from Europe. This is certainly commendable. Yet, as widely acknowledged, Europe is still significantly over-represented on the institution’s executive board and, therefore, retains a considerable influence.
The continued pressure on the IMF is also unfortunate given that Europe does not lack financial resources. The eurozone as a whole is a net creditor, with a tiny current account deficit. Its core countries, such as Germany, and regional institutions, such as the European Investment Bank, can borrow at very low interest rates.
Europe’s problem is not a lack of financing, but deep divisions about how the eurozone should operate in the presence of very different initial economic, financial and socio-political conditions among its member countries.
This is an internal issue that the IMF cannot, and should not be expected to, solve. It is up to the eurozone to decide whether to go forward in its current configuration towards a fiscal union or whether to first slim down to a more coherent and stable configuration. This would provide a better basis for a larger European-financed firewall.
As tempting as it is, Europe should not seek to obfuscate this critical decision by using IMF financing to give the appearance of sustaining the unsustainable. It must start making the necessary, albeit very difficult, decisions. Until this happens, the G20 has a global responsibility to protect the IMF from further damage to its credibility and legitimacy.
The writer is the chief executive and co-chief investment officer of Pimco
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