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January 25, 2012 7:16 pm
The often taciturn International Monetary Fund has had a lot to say this week about the eurozone debt crisis. Christine Lagarde, its managing director, urged the eurozone on Monday to create a much bigger rescue fund for its troubled governments, holding out the prospect that the fund might seek to increase its own firepower in return.
On Wednesday she argued that if Greece’s private creditors did not accept a big enough writedown, the European Central Bank might have to take a reduction in its own Greek debt holdings. “The balance between the participation of the private and the public sector is a concerning question,” Ms Lagarde said.
The IMF insists that it is not pushing for any particular combination of private and public financing. Although the IMF has to sign off on any new bail-out for Greece in which it takes part, fund officials say that, following its rules on lending to debt-laden countries, it takes largely a technocratic rather than a micromanaging role. Its task is to point out the size of Greece’s external financing gap and then invite the private sector and the European authorities to work out their own ways to fill it, in order to hit a target ratio of Greek public debt to gross domestic product of 120 per cent by 2020.
The IMF said yesterday: “The fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role.”
If it looks like the fund is getting more assertive with the eurozone over the bloc’s approach to the sovereign debt crisis, IMF experts say the real shift in the fund’s position is its increasing pessimism over Greece’s debt sustainability.
Initially, after the May 2010 Greek bail-out announcement, the IMF went out of its way to stick to the official line that no writedown of its external debt would be necessary.
In September 2010 a team led by Carlo Cottarelli, director of the IMF’s fiscal affairs department, wrote a policy note entitled Default in Today’s Advanced Economies: Unnecessary, Undesirable and Unlikely, which argued that even a negotiated voluntary restructuring was likely to do more harm than good. Noting that the difference between real interest rates and growth – a key determinant of a country’s ability to avoid default – was relatively low, even in Greece, the paper concluded that a 50 per cent writedown in Greek debt would only reduce by a fifth the fiscal tightening required to reach sustainability.
With the spreads on Greek bonds rising in 2011, and growth underperforming expectations, the IMF moved towards an increasingly pessimistic view of Greece’s ability to grow its way out of its debt burden.
“The fund has got harsher because reality has got harsher and they are responding to it,” said Ted Truman of the Peterson Institute think-tank in Washington. “Once you get into a debt restructuring situation, it pays to err on the side of doing too much rather than too little, because you don’t want to have to do it twice.”
The IMF’s most recent assessment of Greece’s debt sustainability, in December, was markedly downbeat. Officials involved in talks over Greece say the IMF has been taking a more pessimistic line on debt sustainability than the eurozone authorities, arguing that more official finance is needed to hit the 120 per cent debt to GDP target.
Gabriel Sterne, an economist at Exotix, a brokerage specialising in distressed debt, said the fund’s December analysis was an implicit admission that it had been too lenient. “Just like in Argentina [10 years ago to the month], the fund has discovered that . . . a commitment to the unsustainable is an unsustainable commitment,” he wrote in a research note. “The IMF is making a serious attempt to free itself from the shackles of significant past policy mistakes.”
Mr Sterne, a former IMF official, noted that the target ratio of 120 per cent of public debt to GDP by 2020 was a relatively recent development. In previous reviews of the bail-out, the fund was content to release funds even though the projected debt to GDP ratio was higher.
The future for the Greek rescue will depend on how much the IMF allows its debt sustainability calculations to be influenced by lobbying from the European authorities and private bondholders. But the signs this week are that it is at least taking a tougher line than before.
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