In a previous post, here, I introduced you to a newly declassified IMF document — official minutes of the IMF’s executive board meeting that approved the rescue of Greece on May 9, 2010. The document reveals the depth of misgivings among the Fund’s directors about whether Greece would end up saddled with a hopelessly massive debt burden.
Approval of the Greek rescue was a matter of urgency, because without the bailout funds Athens would default on an €8.5 billion payment due to bondholders on May 19.
Moreover, unbeknownst to board members, a battle had raged in the days leading up to the meeting among members of the IMF management and staff over how to handle the “exceptional access policy” — or, as I prefer to call it, the “No More Argentinas rule.” Several departments, including the powerful Strategy, Policy and Review department, argued that the probability of Greece’s debt sustainability was not “high” by any reasonable definition, so it would be improper to assure the board that the proposed aid to Greece met the rule’s requirements. Others furiously denounced this view as potentially obstructing a rescue essential to safeguard the global economy. Strauss-Kahn did not want to order the staff to certify that Greece’s debt situation met the rule’s standards but he was determined for the rescue to go forward. A last-minute compromise emerged: the IMF would create a new exception to the rule for “systemic spillover” cases, provided the same approach would apply in the future, not just in Greece’s case, because the Fund cannot make exceptions to its rules for individual countries without applying the same rules to others.
Thomas Hockin, the executive director from Canada who represented a 12-country constituency, was the first to raise concerns on this issue:
[W]e note under the [existing rule] that the staff cannot with ease state categorically that there is a “high probability” that [Greece’s] public debt is sustainable in the medium-term. While we agree that this is an exceptional circumstance given the relative importance of this package in promoting confidence and avoiding international systemic spillover risks, we are not prepared to make this a blanket policy change…. we can treat [future countries in similar situations] on a case-by-case basis.
More pointed remarks came from Rene Weber, the executive director from Switzerland who represented a constituency of eight countries:
In paragraph 33, page 19 [of the staff report]…We had some difficulties finding that spot and realizing that this is a proposed policy change. We would have expected at least a separate paragraph on what is going on, what is proposed. A policy change should be made deliberately with adequate discussion of it, and this is clearly not the case here.
It was hardly surprising that Weber would be perplexed, given how obtuse the passage in question was. After explaining that “the high risk of international systemic spillover effects” meant that the Greek rescue should not be bound by the No More Argentinas rule, the staff document said: “Going forward, such an approach to this aspect of the exceptional access policy would also be available in similar cases where systemic spillover risks are pronounced.”
Weber proposed to delete that sentence from the report, lest the Fund “raise future expectations in other countries that may face similar, comparable troubles” to Greece. His suggestion raised alarm among the staff, one of whose members, Martin Mühleisen, responded that the altered policy “has to be applied generally.” The general counsel, Sean Hagan elaborated further:
One of the purposes of establishing general policies is to ensure uniformity of treatment among [IMF member countries]. In order for that objective to be met, when a general policy is established, it must be applied in all cases to all countries. If in fact a situation arises where a country does not meet that policy, the Board has no authority to make an ad hoc exception to the application of that general decision. It either must make a determination that in this case the criteria has been met — for instance, in the present case, that there is a high probability of debt sustainability — or alternatively, it must change the policy and, as a result of the principle of uniformity of treatment, those changes would be applicable to future cases.
This triggered a frustrated reaction from Brazil’s Nogueira Batista, who noted that the board would have misunderstood what it was doing had Weber not pressed the issue.
[S]hould we not have a separate decision altering the exceptional access criteria, instead of just a sentence on page 19 of the staff report, which would then be used as a precedent?
Klaus Stein, the executive director for Germany, echoed the argument raised by others, according to the minutes. Stein “wondered whether it was possible to keep the current policy unchanged,” even while giving it a different interpretation in Greece’s case. But Hagan said no:
It is a limited change, but it is a change to the policy that would be applicable in future cases where such [major contagion] risks exist…
In response to Mr. Nogueira Batista’s question, I think it would have been ideal to have a policy discussion on these issues in advance of a specific case. It is always better to have these discussions in the abstract, but that is not possible here.
This is my last intervention on this issue. My only quarrel was about the transparency of it all, that it was kind of hidden, one sentence.
The United States executive director, Meg Lundsager, chimed in with an acknowledgement that she had been unaware of the full ramifications:
I am fully prepared to support the staff proposal today, and I sense the whole Board is supportive as well. I did not realize we needed a policy amendment to do that, to be perfectly honest. I admit that I did not pick this up either in my quick read of the documents. Maybe we can come back to it.
Soon thereafter, as the meeting was drawing to a close, Lipsky engaged in some verbal jousting with Nogueira Batista. The IMF’s No. 2 said:
With regard to the policy on exceptional access, ideally it would have been better to have held a discussion separately. That point should be self- evident. We are meeting on Sunday, because of the need for urgent action. So, we have dealt with it as best as we can. As Mr. Hagan has explained, a measure like this has to apply uniformly, but the Board always has the right to review policies at its choice.
Just one point on debt restructuring that perhaps was not emphasized as much as it might have been. Not only were the Greek authorities very much set against that policy… but the reasons were not trivial. Greece has a very large — very large — primary [budget] deficit that would have remained even if all debt payments were suspended. Such an action would have had immediate and devastating implications for the Greek banking system, not to mention the broader spillover effects. The notion that this somehow would have represented a credibility-boosting effort is not at all obvious.
I have been a little disturbed by the suggestion that the Fund program should obviously have involved debt restructuring or even default…
That elicited the following from Nogueira Batista:
I think [Lipsky’s] comments are quite useful, and they reveal what we suspected — that management had been looking carefully at the issue of debt restructuring in the Greek case.
The observation about officials being aware of details is not applicable to the Board, because this issue of debt restructuring, perhaps an eventual Plan B, was not at all shared with us.
But Lipsky had the last word that day — which, with benefit of hindsight, doesn’t reflect gloriously on him or the institution he served:
Let me be clear… There is no Plan B. There is Plan A and a determination to make Plan A succeed; and this is it.