GROUP 20 : IMF: Responsibilities and intervention in Europe

Let start by a video defining what is the IMF ! 

The Role of the IMF in Europe and Beyond : (Responsibilities) 

Is the role of the IMF in the Greek crisis and elsewhere in Europe consistent with the IMF’s mission? My answer is yes for four reasons.

First, the IMF is a cooperative international organization with near-universal membership. Its mission is to promote sustainable global growth and financial stability.

Second, all members of the Fund should be eligible to borrow from the institution under appropriate conditions. The availability of IMF financial assistance along with advice on reform or adjustment programs is in the interests of all countries because all countries benefit from sustained, balanced growth and global financial stability.

Third, the Fund carries out its mission through its surveillance, policy advice, and lending programs. Those three mechanisms are, and should be, available to all members even if the wealthiest IMF members have not availed themselves of IMF lending facilities since the 1970s.

Fourth, IMF lending operations have not been limited to developing countries in recent years. In November 2008, Iceland embarked on an IMF-supported economic reform program. Its estimated per capita GDP on a purchasing power parity basis in 2010 is estimated still to be 25 percent more than Korea’s, which borrowed from the IMF in 1997 and was the world’s 11th largest economy at that time.5 Moreover, the IMF, in cooperation with the European Union, is already supporting economic reform programs in Hungary, Latvia, and Romania. The wealthiest of those countries, Hungary, has an estimated GDP per capita that is less than half the GDP per capita of Korea. True, these countries are members of the European Union but are not part of the euro area. In retrospect, the euro area versus non-euro area distinction diverted the Europeans from acting promptly in Greece. The distinction primarily reflects the pride of the political elite in the countries using the euro as their currency. For reference, within the euro area, Greece’s per capita GDP is approximately the same as Korea’s, as is Spain’s, but Portugal’s is 25 percent lower.

IMF threatens to pull out of Greek rescue : (Intervention) 

Hopes of an end to the impasse between Greece and its creditors have appeared to evaporate after asurprise intervention from the International Monetary Fund.

In a letter – leaked three days before eurozone finance ministers are scheduled to discuss how best to put the crisis-plagued country back on its feet – IMF chief Christine Lagarde issued her most explicit warning yet: either foreign lenders agree to restructure Greece’s runaway debt or the Washington-based organisation will pull out of rescue plans altogether.

“For us to support Greece with a new IMF arrangement, it is essential that the financing and debt relief from Greece’s European partners are based on fiscal targets that are realistic because they are supported by credible measures to reachthem,” she wrote, lamenting the lack of structural reforms underlying Athens’ abortive adjustment programme so far.

Six years have elapsed since Greece, revealing a deficit that was four times higher than previously thought, received its first loans from a bailout programme that has since exceeded more than €240bn (£190bn) in emergency funding. Since a third €86bn bailout last summer, talks have been largely deadlocked.

Laying bare the differences of view prevailing among those consigned to keep the insolvent nation afloat, Lagarde said it was imperative that a lower primary surplus goal was achieved.

“We do not believe it will be possible to reach a 3.5% of GDP primary surplus [in 2018] by relying on hiking already high taxes levied on a narrow base, cutting excessively discretionary spending and counting on one-off measures as has been proposed in recent weeks.”

The IMF managing director’s intervention came after the surprise decision of the leftist-led government in Athens to put unpopular pension and tax changes to a vote on Sunday.

The prospect of such controversial measures being passed so urgently unleashed a wave of civil unrest with a 48-hour general strike by private and public sector unions bringing Greece to a standstill. Unionists said the measures were a “barbaric” eradication of hard-won rights and would be “the last nail in the coffin” for workers whose salaries have already been savaged by relentless rounds of gruelling austerity.

“They are the worst so far,” said Odysseus Trivalas, president of the public sector union ADEDY. “At some point, Greeks won’t be able to take anymore and there will be a social explosion.”

Rallies are planned to protest against measures that include instituting a national pension of €384 a month, raising social security contributions and increasing income tax for high earners. The overhaul of the pension system is among the most contentious reforms to date.

In a repeat of the drama that dominated the eurozone last year, Athens faces the spectre of default if its fails to honour maturing European Central Bank bonds and IMF loans in July.

Long overdue rescue loans worth €5bn are at stake. Receipt of the funds depends on completion of a first progress report, or evaluation, of the economy that has been drawn out for the past nine months and has stalled over lender disagreement. With discord over Athens’ ability to achieve fiscal targets, creditors recently upped the ante, demanding an additional contingency package of €3.6bn, the equivalent of 2% of GDP.

“While creditors fight this out, the political and social situation in Athens will deteriorate,” said Mujtaba Rahman, head of European analysis at risk consultancy Eurasia Group. “Time is running out for creditors to come to an agreement.”

The Greek prime minister, Alexis Tsipras, unexpectedly called Sunday’s vote before the conclusion of the negotiations in order to placate creditors and increase his bargaining power at Monday’s meeting of eurozone finance ministers.

In a first, the ministers are to discuss Greece’s debt load – which at more than 180% of GDP by far the highest in Europe – in addition to fiscal adjustment measures that could amount to 5% of GDP if contingency reforms are taken. The extra policies, as yet unspecified, will only be enacted if targets are not reached but, with its narrow three-seat majority, the Greek government has argued they will never get through parliament.

“Tsipras is looking to demonstrate to Greek voters that he and his government have done their part, and that the ball, namely that of debt relief, now lies squarely with the Europeans,” said Rahman.

“The subliminal message to creditors [in Sunday’s ballot] is therefore this: if you insist on contingency measures, you will end up with the collapse of my government and early elections.”

Along with Britain’s 23 June referendum on EU membership, that could end up being a “big headache” for Europe, he added.