How to save a sinking European ship?

October 12, 2012
CIGI Senior Fellow Bessma Momani chronicles the CIGI-UNESDA panel at the IMF-World Bank meetings in Tokyo (AP Microstock).

At the IMF and World Bank Group annual meetings in Tokyo, CIGI in cooperation with the UN Department of Economic and Social Affairs held an important session on “Facilitating International Adjustment through Timely Debt Resolution.” The panelists were a who's who of practitioners, academics and IMF representatives. While no consensus was reached on what is the right balance between austerity and growth in sovereign debt restructuring, the timing of the panel couldn't be more relevant.

The German finance minister today, according to the front page of the Financial Times, complained that Christine Lagarde's call for relative leniency on Greece and Spain was bad timing and sent the wrong message. The Fund is responding to the European streets and its governments' political challenges in both trying to repay its creditors while not squeezing a rock at the expense of economic growth.  While Lagarde may be applauded today on the streets of Athens, this is short-lived support for Fund positions. 

As one panelist at the CIGI event put it, in May 2010 the Fund knew the Greeks were insolvent and yet continued its support of debt restructuring, and passing on of debt to the public. The reality is that Greece cannot repay this debt ever, even under the best growth scenarios, which remain a fantasy. The fear is not just that Greece defaults, it is the fear of a domino effect that sucks in Spain, Italy and who knows who else the market might lose confidence in tomorrow.

We were in the same place in years past and the IMF, under the leadership of Anne Kreuger, had almost enacted rules to create an orderly debt restructuring mechanism and recognize the reality that some counties simply cannot repay their debts. Unfortunately, this was reportedly shot down by powerful countries and the idea was scrapped prematurely. This is a shame because this panel reminds us that we will continue to be repeating the same issues.

How do we know we won't hear the end of this? Well consider this piece of news today: a hedge fund firm has seized an Argentinian ship off the coast of Ghana in a quest to get repayment after a more than 10-year-old case of sovereign debt default. While Greek ships are notoriously bad, they may not want to make a German port of call.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

CIGI Senior Fellow Bessma Momani has a Ph.D. in political science with a focus on international political economy and is full professor and interim assistant vice‑president of international relations at the University of Waterloo.