By Brian Caplen
The International Monetary Fund could be hamstrung by new rules, leaving the European Commission and Central Bank to sort out further problems in Greece.
The long-awaited raising of rates by the US Federal Reserve is one of the few pieces of good news in a 2016 outlook that is otherwise gloomy. Most economists think that Greece’s problems, for example, are nowhere near to being solved, that another bail-out will be necessary and that there is a chance the country could still leave the euro.
What is more, if Greece does sail back into troubled waters, it will not be able to count on the assistance of the International Monetary Fund (IMF) in the same expansive way as last time.
For while the Fed’s historic rates decision occupied the front pages of the newspapers in late December, some highly relevant news for Greece was being reported on the inside pages on the same day.
In classic US political style, IMF reforms dating back to 2010 have been attached to the latest budget deal moving its way through Congress. The headline grabber of this story is that, if approved, China’s IMF quota would nearly double to 6% with European countries losing some of their quota to compensate. This would help make the IMF reflect the new realities of the global economy and is long overdue.
But the important stuff for Greece is buried further down – the removal of the “systemic exemption” under which the IMF was able to take part in the rescue of Greece, even when the fund’s sustainability criteria for debt repayment were not being met.
Under the new rules, the US administration would have to tell Congress a week before an IMF board voted on any future exemptions. Such a clause was necessary to get backing from conservative elements in Congress that have been resisting the quota changes.
This means that new problems in Greece might have to be sorted out entirely by the European Commission and the European Central Bank. The difficulty with this is the process becomes political – driven by the fear that German taxpayers will pay for Greek profligacy – rather than purely economic, involving substantial write-downs of un-payable debt. This way Greece never gets back on a sustainable footing.
So while the raising of interest rates in the US is cause for optimism that the world’s largest economy is recovering, the bureaucratic changes at the IMF are a reminder that things are a long way from being healthy in Europe.
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