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Global Briefing

Restructuring the Rules


Global debt has increased by $57 trillion and no major economy has decreased its debt-to-GDP ratio since 2007, raising concerns about international economic stability and the very real possibility of another financial crisis. 

The International Monetary Fund (IMF) was established to come to the aid of developing nations, helping them attain macroeconomic stability, so its involvement in a European country caused unrest with global leaders from the offset.

However, the German Chancellor at the time, Angela Merkel, devised a ‘troika’, including the European Commission, the European Central Bank and the IMF, to prevent the Greek economic crisis from putting the European Commission under too much pressure. This move raised immediate anxieties about the Funds lack of independence and prompt disagreements over debt restructuring. Ultimately, with Europe refusing to entertain the notion of debt restructuring, fearing it could spread even more economic chaos, the IMF changed its rule on loans to problem countries, making Greece accountable for all the money it borrowed.   

Even from the offset, some involved in the IMF had their concerns, and a review of IMF board records illustrate the split within the fund, both then and now. The IMF acknowledged that there were errors in the handling of Greece’s first international bailout which included an 110bn euro aid in May 2010. Greece’s independent debt had already soared to 133% of GDP the same year and should, on hindsight, have been recorded, forcing the debt holders to accept huge costs. Germany’s Angela Merkel and France’s Nicolas Sarkozy were wary that German and French banks held a generous portion of Greece’s sovereign debt on their books and a write-down would have required those banks to admit giant losses.

“Currently, Greece owes the IMF approximately 20 billion euros to be repaid over the next nine years.”

 In 2011, the MD of the IMF, Dominique Strauss-Kahn, was supposedly on his way to finally push for restructuring when he was arrested, stopping any potential debt amendments in their tracks. So, the disquiet inside the organisation about lending to countries without an assurance of long-term debt sustainability continued, but an additional 130bn euro pay-out followed in February 2012. Fears about the impact this might have on the Greek economy was mirrored by another fear in Greece – that the country’s economic crisis would be worse off with the IMF involvement – as the organisation is known for asking countries to make deep cutbacks in popular government spending initiatives.

Fast forward three years to June 2015, and Greece was added to a list that includes some of the world’s poorest nations, including Iraq, Sudan and Zimbabwe, when the deadline for repaying approximately 1.5 billion euros to the IMF, came and went. For Greece, to be compared to such economically inadequate countries was another humiliating blow.  Having changed its specifications on debt levels in order to bail out Greece while overplaying the country’s economic growth prospects, the IMF stated that Greece’s substantial debt, estimated to inflate over twice its yearly economic output next year, is not manageable and financial relief will allow for the necessary ‘breathing space’.

Currently, Greece owes the IMF approximately 20 billion euros to be repaid over the next nine years. It is largely agreed that the IMF’s harsh dose of pension cuts, wage freezes and tax increases left the Greek economy in an abysmal state. This economic nightmare continues to haunt Greece, creating an overbearing burden on the small European country. The disappointment of the earlier Greek bailouts has generated some deliberation and reflection inside the IMF, prompting a review of its style and any future tactics; especially as a third Greek bailout gets the green light.

An enquiry into the IMF’s management over the past five years reveals a series of mistakes, largely concentrated on the issue of debt restructuring, or lack of it, and it will take a long time before the IMF’s reputation is cleared of its role in this Greek tragedy. Greece’s future remains unclear but while greater unemployment, a deeper recession and increased political instability seem inevitable, the 3rd bailout brings some hope of repair and should help the country escape total financial ruin.

The IMF intervention into Greece may have prevented financial chaos further afield but did Greece become the unfortunate scapegoat? After five years of bailouts and failed financial policies that has left an economy in tatters, where can Greece go from here?

You just have to hope for Greece’s sake, it will be third time lucky.

Memorandum of Understanding (MoU) – The latest bailout in short 
 Greece must:
– Streamline the pension scheme and grow the tax return from goods and services
– End fuel tax benefits for farmers
– Overhaul social welfare, to achieve annual savings of 0.5% of GDP
-Create a more accountable job market
– Privatise the electricity market
– Display no backtracking on the reforms
– The bailout will in turn release 82 – 86 billion euro


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