The IMF will be facing questions of its own after the Greek referendum

July 3, 2015
International Monetary Fund Managing Director Christine Lagarde. (IMF Staff Photo/Stephen Jaffe)

The good cop returned to negotiations between Greece and its creditors after a hiatus.

Christine Lagarde and the International Monetary Fund — despite what some of the graffiti on the streets of Athens suggests — had often come across as the more sympathetic member of the three institutions behind Greece’s bailout. In mid-June, Olivier Blanchard, the fund’s chief economist, endorsed the Greek government's plea for additional debt relief in a blog post on the IMF's website. Blanchard also called on Prime Minister Alexis Tsipras to do his part, but the endorsement of debt restructuring was significant. The European Commission and the European Central Bank were less willing to broach the subject.

But as negotiations intensified, the IMF became less sympathetic. Lagarde grew strident, saying there would be no give on the fund’s deadline for payment on June 30. Tsipras’s response was to call a referendum for July 5 that will ask Greeks to say “yes” or “no” to the lenders’ offer. If it was a tactic to force the institutions’ hand, it didn’t work. The deadline to pay the IMF passed and Greece now is in arrears. A last-minute counteroffer from Tsipras that included a commitment to debt relief was rejected. European leaders said they were done talking until after the referendum.

The scene in Greece is reportedly grim. Banks and financial markets have been closed since Monday and depositors are allowed to withdraw a maximum of 60 euros from ATMs per day. With this as the backdrop, the IMF emerged to once again support Greece’s plea for debt relief. The fund on Friday released an analysis that called on Greece's European partners to support "comprehensive" debt relief, while estimating the country would require additional financial support of as much as 60 billion euros.

Lagarde and the IMF have a lot at stake in the referendum. The missed payment of about $1.5 billion (US) would be only the beginning. The IMF’s share of the Greek bailout is about $25 billion (US), the largest loan the institution ever has given. The chaos that would follow a “no” vote in the referendum would raise questions about when the IMF would be repaid. Non-European members would be displeased, especially since the fund rewrote its rules to lend to Greece in the first place.

Desmond Lachman, a resident fellow at the American Enterprise Institute and a former IMF official, was struggling to come up with an upside for Lagarde and his former employer. Lachman even wondered if the Greek episode would jeopardize the current managing director’s chances at a second term. It’s an intriguing question, given the nature of the former French finance minister’s selection. It was a coronation, orchestrated by German Chancellor Angela Merkel and endorsed by the Obama administration. Lagarde’s challenger, Mexican central bank chief Agustin Carstens, was arguably more qualified, but he was trampled as European capitals combined forces to select their candidate.

Greece was one of the reasons Lagarde got the job. With the European debt crisis raging, Merkel and other European leaders were emboldened to ensure one of their own continued to run the IMF, as per tradition. The convention of a European automatically running the fund was one that some were getting ready to challenge, but the middle of a crisis would have been the wrong time.

Europe got what it wanted, but Lagarde was compromised from the start. As finance minister, she was intimately involved in the early efforts to contain the European debt crisis. Suddenly, she was thrust into the role of honest broker. It is too soon to judge how well she has performed in that role. But she has appeared conflicted from the start. It was unavoidable given her past and how she got the job.

One wonders how Carstens would have handled the Greek crisis? Perhaps no differently than Lagarde. However, no one would be questioning his neutrality.

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

Kevin Carmichael is a senior fellow at CIGI and the national business columnist at the Financial Post.