IMF caught in delicate position between Greece and EU

AFP , Tuesday 7 Jul 2015

Christine Lagarde
IMF managing director Christine Lagarde (Photo: Reuters)

Hated in Athens and brushed off by the Europeans, the International Monetary Fund approaches the next round of negotiations with Greece in a delicate position.

The global crisis bank is anxious to craft a compromise, but also under pressure to recover the billions it has lent to the country.

In a sign of its caution, the IMF waited nearly 24 hours to react to Greece's referendum Sunday -- in which the people strongly rejected another reform-heavy bailout plan from the EU creditors.

In addition, the fund will not send a representative to Tuesday's meeting of the Eurogroup, the zone's finance ministers, to discuss their next steps in the Greece crisis.

"The IMF has taken note of yesterday's referendum held in Greece. We are monitoring the situation closely and stand ready to assist Greece if requested to do so," the Fund's Managing Director Christine Lagarde said in a terse statement Monday.

"If requested" is the issue. It is not clear the Europeans still want the IMF by their sides at the table to negotiate a new deal with the nearly bankrupt Greek government.

The two bailout programs crafted by the IMF, the European Commission and European Central Bank came with tough reforms and austerity policies that forced the government to slash spending.

One unpredicted result is that, despite all the bailout funding, the Greek economy has contracted 25 percent over five years.

Last month, Greek Prime Minister Alexis Tsipras said the IMF had "criminal responsibility" for Greece's debt crisis.

Last Thursday, the IMF released its study of Greece's economy and finances that predicted zero growth again this year, and recommended that, to stabilize the country through 2018, the Europeans would need to put another 36 billion euros ($40 billion) into the rescue operation.

That proposal was enough to irritate the Fund's closest allies on the continent, especially Germany.

"As long as they were doing what the Europeans wanted to hear, which is asking for tougher measures to Greece, then their voice was being heard," said Ashoka Mody, who was the architect behind the IMF bailout of Ireland.

"But presumably when they were saying things that the Europeans didn't want to hear, it doesn't work," he told AFP.

The IMF's ability to pressure Athens now is limited since Greece defaulted last week on a 1.5-billion-euro payment, said Susan Schadler, the former deputy director of the IMF's European Department.

"Having not received the payment lask week, it means that its role is constrained, because it can't right now lend to Greece," Schadler said.

Moreover, she noted, it is in part an issue of "political will" among the Europeans: as long as they don't free up more funds for Greece, the IMF cannot get paid.

The EU could then decide to reimburse the IMF on behalf of Greece themselves, or provide the country special credits to that end.

The Fund though is not likely opposed to such a solution, since it needs to answer to its member states who provide the money for its rescue programs.

Such a move would transfer the responsibility for Greece to the Europeans.

"The IMF is in a awkward position," said Ken Rogoff, who formerly was the Fund's head economist.

"They're dealing with the fact that this could be a record debt writedown for the IMF if they don't get it off their hands.

"They're trying to navigate and trying to steer things as much as possible into the court of the Europeans."

Criticized on all sides, the IMF could ultimately serve as the default "peacemaker" between Brussels and Athens.

"The IMF may not be the right institution, but it's the only institution," said Schadler.

To strengthen its role in negotiations, the IMF could set an example for the Europeans by easing the terms of its own outstanding loans to Athens.

"The IMF cannot have its cake and eat it too, by telling the Europeans to provide debt relief to Greece and leaving them deal with the consequences after that," Mody said.

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