Indeed, us folks from the third world can rightfully question if poor countries who've contributed to the IMF are funding crisis-fighting efforts in rich countries when the IMF's mandate doesn't extend past balance-of-payments woes. In what follows, Swaminathan Aiyar makes precisely these points. Aiyar contributes to the Economic Times, a fine Indian business publication that perhaps apes the Financial Times too slavishly (see for yourselves). I will go through the IMF's documents more closely, but for now, see what you make of his op-ed:
The proposed International Monetary Fund loan of $15 billion to Greece is wrong on two grounds. First, it violates the IMF's charter. Second, it is an unwarranted favor to Europe that developing countries will perceive as being at their expense. The IMF suffers from mission creep. Although created for balance of payments rescues, it now wants to stage fiscal rescues too--that means bigger budgets and more staff, the two unwritten goals of any bureaucracy.OK, I've taken a quick look at the IMF's Articles of Agreement. Again, it's a matter of interpretation. If we consider the fifth clause under the first article, then Aiyar is correct:
The articles of association of the IMF state clearly its aim to provide loans for balance of payments support. Greece has a huge fiscal need but no balance of payments need. Greek importers can get all the euros they wants from Greek banks, which get euros from the European Central Bank. The IMF is by definition a monetary authority, and Greece has no monetary issues--it surrendered its monetary powers to the ECB Bank on joining the eurozone. Some eurozone countries have fiscal crises, but these are Europe's problem, not the IMF's.
The IMF's funds proved wholly inadequate to meet balance of payments needs during the Great Recession of 2007-09. So member countries tripled its lending resources to meet future balance of payments crises, which presumably did not include fiscal crises. If Greece gets an IMF lifeline, bond speculators will logically attack the other eurozone countries with large deficits--Portugal, Spain and maybe Italy. Rescuing them would empty the coffers of the IMF. Yet it would be politically difficult to say no to Spain or Italy after saying yes to Greece.
Historically, there was a clear division of work between the World Bank and IMF. The Bank provided fiscal support for development, so its loans entered the budgets of borrowers. The IMF provided hard currency for balance of payments support. This hard currency was purchased by the central bank of the borrower, and went into the borrower's foreign exchange reserves, not its budget. Indeed, loans from the IMF were technically called "purchases" of hard currency, and repayments were called "repurchases."
This Bank-IMF division of labor has blurred since 1991. Ex-communist countries needed massive support, and it was politically expedient to use the full resources of the Bank and IMF. The blurring was rationalized by arguing that the IMF always sought fiscal stringency when lending. Further, even when such loans went to central banks, they enabled central banks to give more budget support to their governments. This blurring also facilitated emergency loans during the Asian Financial crisis. IMF loans to Russia and Argentina were formally allowed to enter the budgets of the borrowers.
By the same logic, say Europeans, the IMF should give fiscal support to Greece. They are wrong. Argentina, Russia and all the other IMF borrowers had serious balance of payments problems. The IMF gave loans to tackle these balance of payments problems--in accordance with its charter--and the fiscal support was just a supplementary benefit. Greece, however, has no balance of payments problem. Any IMF rescue would be straightforward fiscal support, violating the IMF's charter. Why would it do this? To bestow a special favor on Europeans, its dominant shareholders.
To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.So far, so good for the op-ed. However, the preceding second clause might give us pause if defined loosely. After all, major disruptions in the use of the world's second most widely used currency cannot fail to have ripple effects on the world economy as we're noticing right about now:
To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.And here's the part for those wishing to kick Greece out and solve its problems prior to re-entering the Eurozone at some time in the future. Read clause 3:
To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.Yes, the latter clause reflects a pre-1971 order, but still. It would certainly make matters more interesting if developing countries make disbursal of funds to Greece an issue, but I tend to think most aren't as militant on this point as Swaminathan Aiyar. The threshold for a veto on the IMF's decision to lend to Greece is 15% not going along. Is anyone up for campaigning against IMF Greek lending?
