The International Monetary Fund has gradually found its voice in the years since its participation in the Greek bail-out of 2010. Now it must go further.

Since its participation in the first international bail-out of Greece in 2010, the International Monetary Fund (IMF) has gradually found its voice. Although European governments wanted the credibility of the IMF onside during the first two bail-outs, the majority of the financial burden was carried by Greece’s eurozone partners.

Key to the IMF’s participation in any financial assistance package is its debt sustainability analysis. This process approved support for Greece in 2010 without any restructuring of its debt burden, despite misgivings among many commentators, including former IMF economist Gabriel Sterne, who contributes this month’s Viewpoint column (see page 16). By 2011, the IMF acknowledged the need for a write-down on Greece’s sovereign debt, which was borne entirely by the private sector in 2012.

In its Greece country report in mid-July, the IMF has gone further still, stressing that Greece’s debt can now only be “made sustainable” through debt relief measures that go “far beyond what Europe has been willing to consider so far”. This comes as the IMF expects Greece’s debt to peak at close to 200% of gross domestic product in the next two years, even assuming an early agreement on a programme.

The dependence of Greece on other member states of the eurozone and their goodwill puts the eurogroup in a situation almost as precarious as for Greece itself. Politicians in the 18 other member states would face their own domestic headache if Greece’s debt were cut, having to explain to the population why taxpayers’ money lent to Greece will not be paid back. On the other hand, a ‘no’ to haircuts leaves the eurozone partly responsible for any prolonged recession in Greece, without resolving the long-term debt sustainability question.

But the IMF must also look at its own policies. The second of four criteria for its Exceptional Access Policy allowing nations to access its funds is that “rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term”. This criterion was evidently not met in Greece’s first two bail-out rounds.

Given the difficulties of 18 eurozone member states agreeing on any topic while navigating domestic electoral timetables, the IMF needs to hold firm on Greece. The IMF is arguably a neutral force, which does not have a national electorate to convince. And its unequivocal mandate is to make Greece’s sovereign debt more sustainable. By offering debt relief on IMF loans and further, more significant support for Greece, the IMF might also persuade the eurozone to follow suit. Politicians need a strong example to follow.


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