It is well known that developing countries have been claiming a larger role in the World Bank and the IMF and that this has been resisted by the developed countries. The US has objected to dilution of its shareholding even though it could mean smaller financial obligations on its part and in the latest round of debates about appointments to head the IMF and the World Bank the presumption that their leaders would be drawn respectively from Europe and from the United States has been for the first time frontally and fiercely challenged. That such demands cannot forever be resisted has come to be increasingly recognized even in developed countries, and has been underlined by the creation of the Asian Infrastructure Bank and the ‘BRICS Bank’, which has demonstrated that China and other claimants to a larger role may increasingly bypass the received structure entirely.
This places IMF Managing Director Christine Lagarde in a difficult position as the organization is already perceived as having been permissive in lending to Greece as compared with other countries, perhaps because of the influence of European countries in the organisation. This complaint may in part reflect the zeal of the newly converted to fiscal propriety, but it also reflects genuine concerns about equitable treatment and economic justification. The IMF has now been exposed to a default (going into arrears, technically) by Greece: the first ever default by a ‘developed’ country and the largest in the IMF’s history. Although Greece has requested an extension of time to pay its recently due bill, it seems unlikely in this context that the organization will give Greece very much breathing room.
There is, however, a much deeper issue. The IMF is supposed to be treated as a super senior creditor which is to be repaid first in the event of payments difficulties. This treatment helps the IMF to charge lower interest rates than otherwise and to reassure the governments that have contributed its capital. However, it is only a practically relevant concept to the extent that the IMF is one lender among many. The role of the IMF has become in part to provide a perceived seal of approval and thus ‘crowd in’ other lenders. It is not typically economically attractive for a country to default to the IMF in part because it may lose future borrowing opportunities not only from the IMF but from many other potential lenders, who may freeze it out of the debt market for at least some time. Moreover, such a response by other lenders is ‘incentive compatible’ to the extent that IMF arrears must be cleared before any other lender can be repaid. Of course, the fact that Greece’s creditors are predominantly now other governments and the ECB as a result of an implicit bailout of private investors means that the calculations that they will make will not be narrowly financial (even if they will consider economic implications such as the impact on the wider stability of the Eurozone).
This institutional arrangement might be thought of as having when it ‘worked’ given rise to a repeated game in which social norms (implicit agreement among creditors to lend only when the IMF approves), signalling (the informational inferences attached, for good or for ill, to the IMF seal of good housekeeping) and legalities (IMF super seniority) all played a role in enforcing an equilibrium. Greece’s recent missed payment, as some have delicately referred to it, suggests not only that its relations with its creditors but the workings of the international financial system are rather far off an ‘equilibrium path’. That is in part the consequence of the seemingly political IMF decision to go along with demands by Germany and other Eurozone creditor countries that Greece should have a fiscal contraction without the elements of exchange rate adjustment — which in the Eurozone context would have to be supported by a still more expansionary monetary policy — or debt relief which have made IMF programs arguably successful in restoring financial balance in a number of cases, even though they may have led to otherwise socially undesirable results. There are of course arguments that standard IMF policies have been at times counterproductive even in these respects and even in the short term , for example by failing to note the microeconomic effects, e.g. on the banking system, of macroeconomic policies such as raised interest rates. The effect of the standard medicine on growth and development in the long run is still more controversial, and this is a crucial issue for attaining the creditors’ own goal of debt sustainability. The IMF has itself expressed concern about the effect of contraction resulting from austerity on debt sustainability in Greece. However, it has been silent on the need for changes in the flawed architecture of the Eurozone that has underpinned the crisis, and on the possible positive contribution of a more expansionary posture in Eurozone surplus countries.
It is right that political considerations should enter decisions which affect people but the hypocrisy of claiming to prioritize technical considerations while selectively capitulating to political ones has been laid bare. In analyzing society it is always sensible to focus on rules, policies and politics rather than on individuals, but even from these perspectives it seems clear that the case for the next head of the IMF to be another European will be hard to make.
6 thoughts on “Greece, the IMF and the Developing World”
Great analysis — which leaves me even more worried than I was before. In essence you are arguing that the existing financial architectures — of the IMF, the Eurozone, and one could add the sovereign debt contracts — as written and practiced stands in the way of addressing our deepening problems of imbalances and inequalities. But why would anybody (least the US Congress) ever wish to revise them? The beauty of the rules that we have is that the creditor countries always appear as playing by the rules of the game and the debtors – led by countries like Argentina and Greece (and their not exactly diplomatically savvy governments) are the rule breakers. Why would the IMF or the creditor countries in the Eurozone ever agree to a real change in the financial architecture? We know from history that the rules of the game sometimes need to be relaxed to prevent the system from self-destruction. But it usually suffices to relax the rules for those at the core of the system while continuing to enforce them on the periphery — and these incidences are quickly cast aside as minor exceptions necessitated by exogenous shocks.
I think you are quite right to sound a note of realism, Prof. Pistor. From the point of view of your own ‘legal theory of finance’ exceptions are made only where they serve ‘core’ economic interests. That is why today’s news that the IMF does not see a realistic pathway for Greece that does not involve debt relief and moreover will apparently not support another lending program that does not involve it, is so interesting. Should we interpret this as a case in which the IMF recommends that an exception to ‘pacta sund servanda’ should be made, at the cost of the creditor countries, because the stability of the core is in fact at stake? Or should we interpret this as a case in which the principles of realistic financial analysis are being applied against the will of the European creditor countries because they have overplayed their hand and failed to appreciate the extent to which existing (US and other advanced country) or emerging (e.g. China) constituencies of the IMF may not permit European creditor countries to pursue their follies, not only in the interests of a good outcome in the specific case at hand but in order to safeguard the workings and credibility of an institution they may have need of in other cases?
It seems to me that the IMF will put greater pressure on Europe only, if the markets show a stronger reaction to events than they currently do (also an aspect of global governance worthy of discussion). As long as contagion is under control, the key players who could act (IMF, US, China) will not and instead leave the game to the creditor countries. Their minds, as I have argued elsewhere, are focused on forging a Eurozone that is capable of playing by their rules — a “small” Europe in parallel to the “small German solution”, Bismarck forged in the late 19th century http://www.project-syndicate.org/commentary/problem-with-small-europe-by-katharina-pistor-2015-06. Not good news for Greece — which may have to face life as a forgotten state on Europe’s periphery. And most likely bad news for all of us as more countries fall by the wayside of a system that imposes rules only few can live by.
You may well be right. On your account the ‘small Europe’ model is not in the interests of Europe itself, or at least not of Europeans. This inevitably raises the question of who stands to benefit from the approach being pursued. Evidently, it is not the German workers who have experienced wage repression and deteriorating social benefits. In the end, German export-oriented industry in the ‘real economy’ may also be harmed by the appreciation of the Euro that will follow the adoption of the ‘small Europe’ model. It is time for a debate in the creditor countries on the different interests within them. If the German taxpayer will incur losses it could be described as being because of the already completed bailout of private bondholders (aka financial interests) just as well as it could be described as being because of failure to pay by Greece.
Gee wislekirl, that’s such a great post!