Should the IMF Have Intervened Sooner in Greece?
By Arnold Kling
I’ll say right away that I don’t know squat about the theory or the practice of the IMF.
But the IMF seems to have the power to negotiate deals of the sort that say, “We’ll lend you the money, but you really have to fix your budget.” This is what I think of when I see the term “conditional” lending.
For conditional lending to work, it seems to me that you have to hit the right credibility target and the right pain threshold. If your target is for the country to reduce its ratio of debt to GDP by 20 percentage points in five years, and the market risk premium stays high, then your credibility target is too modest. On the other hand, if your target is for the country to reduce its ratio of debt to GDP by 20 percentage points in five years, and the fiscal cuts required are beyond the country’s pain threshold, meaning that they cannot be implemented politically, then your target is too aggressive. If your target is too modest to establish credibility with lenders and too aggressive to fall within the pain threshold, then you should have intervened sooner, rather than waiting until the situation got so out of hand.
I guess you could argue that by waiting you helped to raise the pain threshold, by putting Greece on the brink of default. Now you can tell them that if they don’t want their credit card cut in pieces, they need to cut their deficit. However, the Greeks don’t seem to be able to understand logic as well as they did back in the day.
[Update: a comment asks what I mean by “intervene sooner.” What I have in mind is something the IMF has probably never done. I was thinking that five years ago they might have said, “Look, Greeks. You need to cut your fiscal deficit starting now. If you do, then we can help you out if there is an adverse shock of some sort. But if you don’t, then don’t come looking for us for a bailout. If you go beyond this point, you’ll be past the point where we can help.”]