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.”]
READER COMMENTS
Yancey Ward
May 5 2010 at 6:05pm
When is “earlier”? To date, Greece has been able to roll over its debts, though that appears to have to have reached an end. What, exactly, could the IMF have done earlier?
Yancey Ward
May 5 2010 at 6:07pm
The party that should have acted earlier was the ECB, but then they wouldn’t have been able to ignore the flouting of the rules of the monetary union by countries like France and Germany.
Ed Hanson
May 5 2010 at 8:25pm
The only action that truly would have made Greece better off, would have been that ECU to have strictly followed their entry rules and not allowed Greece in. Two things would have happened. Interest rates would have been higher for the country of Greece, so less national dept would have been denominated in external currency. And as a result, Greece could have had the ability to devalue its own currency to inflate out of part of its debt. Illusion for its civil servant class as well of other citizens, in keeping nominal compensation would have been enough to keep destructive reaction from occurring.
Matthew Gunn
May 5 2010 at 11:52pm
Backing up a step!, is true that IMF intervention is necessary or even helpful?!
For example, John Taylor of Stanford has written extensively on how the IMF bailouts increased (rather than decreased) instability.
http://johnbtaylorsblog.blogspot.com/2010/03/why-did-macro-policy-in-emerging-market.html
Taylor’s idea, as he worked to have implemented as Undersecretary of International Affairs at Treasury, was to “add new clauses to the sovereign bonds—collective action clauses—which allowed for orderly workouts of sovereign debt problems between a country and its creditors.”
Let private markets work instead of resorting to bailouts, and make it credible that private markets will be allowed to work.
Nick
May 6 2010 at 12:28am
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.
You may want to listen to the Taleb podcast again 🙂
Tom Grey
May 6 2010 at 5:37am
The Greek gov’t should pay its pensioners, and those on salary, with Greek Bonds, or at least 50-100% of the amount owed that is greater than some 400 Euro / month (Portgual’s avg pension is 354, Slovakia’s is 351). These would be 0 interest, mature in a year (or 5?).
The Greek gov’t should also accept such Greek bonds in payment of taxes. Such bonds should be available in 5, 10, 20, 50, 100, 200, 500 denominations. (They could even be called “Drachma bonds”!)
Greeks could then choose to use such bonds instead of Euros, but not be required to accept them as payment — allowing a discount market to develop.
The IMF couldn’t have acted much sooner because of dishonest accounting by the Greek gov’t(s).
Marc
May 6 2010 at 6:01am
The possibility of the IMF talking sense into the Greeks 5 years ago sounds like wishful thinking. Governments are primarily reactive. They dont change until necessity forces change.
Maleva
May 6 2010 at 8:15am
EU should not have let Greek in until they have fixed their tax system. It would appear that the Greek Tax office does not have a computerised tax system. Shame on Greece!
mattmc
May 6 2010 at 10:29am
I found this article…seem prescient.
“GREECE: The European Union has warned Greece that within five years it will face a problem due to increased aging of its population. With one of the lowest birthrates in the EU, its population of 10 million is rapidly aging. Experts say Greece must begin dealing with the problem before 2010, when costs for pension are expected to skyrocket.”
AP, Nov 2005
Philo
May 6 2010 at 12:32pm
Your “earlier intervention” turns out to be nothing more than some harsh talk. And five years ago it wasn’t clear that Greece was headed for such trouble, because the financial crisis was not foreseen. Indeed, if the ECB had been more effective in dealing with the crisis Greece would probably still be sliding by.
Jim Glass
May 6 2010 at 2:15pm
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…
So the Greeks say to the IMF, “Bugger off.”
They were saying that to the IMF just a couple months ago.
“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…
And the Greeks say, “Ha! If a crisis comes five years from now your masters, the govts that run you, are going to let the Euro be destroyed just because we didn’t listen to a warning from you five years earlier? LOL! Now bugger off.”
The real problem is that the EU knowingly let Greece defy and cheat its fiscal responsibility rules for years, for political reasons. If they’d actually held Greece to 3% deficits, like their treaty mandated, none of this would be happening today.
So how were they supposed to, at the same time, (1) let Greece defy every fiscal responsibility requirement, and (2) sick the IMF, which they control, on Greece like an angry attack dog to enforce fiscal responsibility?
Tracy W
May 6 2010 at 3:44pm
I’m with Jim Glass on this one. IMF isn’t set up to make credible threats.
Comments are closed.