The Greek, left, and EU flag flap in the wind outside the Greek embassy in Brussels. (AP Photo/Virginia Mayo)
The Greek, left, and EU flag flap in the wind outside the Greek embassy in Brussels. (AP Photo/Virginia Mayo)

On the eve of the IMF Spring Meetings in Washington, beginning April 12, with the euro crisis anticipated to sit front and centre in the discussion, it’s necessary to reflect on the role the IMF has — and hasn't — played in this catastrophe.

The Greek crisis of 2010–15 is one of the most severe post WWII crises, with real GDP down by 25% over six years and unemployment up to 27%. The Greek debt restructuring of March 2012 was the largest in history, yet it failed to restore debt sustainability. The IMF is often blamed for this outcome, but critics overlook some important facts.

In the decade preceding the global financial crisis we can discern the following trends in the Euro area periphery: Greece’s per capita income growth was among the highest in 1997-2007, second only to Ireland’s growth (Ireland 54%, Greece 43%, Spain 27%, Portugal 17%, Italy 14%, based on the IMF’s WEO data). However, Greece’s public debt service ratio rose by ten percentage points of GDP over this period compared with large declines elsewhere (-38% in Ireland, -30% in Spain, -14% in Italy vs. an increase in Portugal from very low levels). Greece’s higher living standard was fueled by a debt-financed consumer boom, sowing the seeds of today’s debt crisis. Instead of focusing on past profligacies, the Greek media —driven by special interest groups — often portray the current crisis as being the result of IMF policies. The IMF needs to strike back when such distorted views are voiced in the media, threatening to take hold in public opinion.

From the outset, the Fund recognized the risks in the program agreed to in May 2010. The reluctance of the Europeans to accept a debt restructuring forced the Fund to decide whether to lend to a country whose debt sustainability was in doubt (which would have violated the exceptional access framework), or refusing to lend to a country that posed a systemic threat (which would have gone against the Fund’s mandate). In response to this dilemma, the Fund resorted to introducing a “systemic exemption” to the exceptional access framework that lowered the bar on debt sustainability. The Fund is now proposing ditching the systemic exemption in favor of a new approach to addressing spillover risks in exceptional access programs. The new approach involves “re-profiling” operations to avoid using Fund resources to bail out private creditors in cases where the debt proves to be unsustainable. This proposal tries to strike a difficult balance between a framework that provides sufficient discretion to deal with severe debt crises on a case-by-case basis, and one that is sufficiently rules-based to prevent undue political influence in IMF decisions.

If this policy had been in effect in May 2010, Greece’s debt would definitely be lower today, though unlikely to be sustainable given the successive Greek governments’ reluctance to embrace structural reforms aiming at fiscal balance and improved competitiveness. Without program ownership, even the best designed IMF program is bound to fail. 

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.
  • Miranda Xafa is a CIGI senior fellow. Miranda focuses on sovereign debt crises and drawing lessons from the Greek debt restructuring for future debt crises. Previously she served as a member of the executive board of the IMF in Washington, DC.