Strauss-Kahn to Greece: Don't Fear the IMF

♠ Posted by Emmanuel in ,,, at 5/12/2010 05:14:00 PM
Running over the same old ground
What have we found? The same old fears
Wish you were here

It seems the old adage that time goes around in circles is correct. I suddenly received a whole bunch of hits to an older post I made, when the world was still young it seems, featuring the signature image of then-IMF Managing-Director Michel Camdessus hunching over former Indonesian President Suharto in arranging yet another bailout package with the IMF in 1998. The famously strict conditionalities imposed on Indoesia are widely believed to have fomented the race riots that helped bring down the Suharto regime--in power for 21 years.

Although the riots in Greece are pretty vehement this time around, I have mentioned that they pale in comparison if your yardstick is the human toll extracted as the IMF is called in. Estimates place the fatalities in Indonesia of 1998 at 1,500. Greece, on the other hand, has suffered 3 to date. Nevertheless, we are running over the same old fears as Pink floyd once sang as the Greek government fears domestic pressures may lead to a similar overthrow of the current government.

It turns out that I was linked to by none other than our old friends at Bloomberg--still in my topmost rung of news sources. What's more, the context they write in is that of current IMF conditionalities being imposed on Greece by the IMF and to a lesser extent the EU. Already, IMF First Managing Director John Lipsky has been quick to point out Greek "ownership" of these conditionalities. That is, they should be up to meeting them since the government helped draw them up in the first place.

Without further ado, here is what Bloomberg has to add on how the IMF is keen on shooting down Indonesia 1998 (Camdessus) - Greece 2010 (Strauss-Kahn) analogies this early in the game:
International Monetary Fund Managing Director Dominique Strauss-Kahn told Greeks last month not to fear his institution. As money begins to flow, it may be the IMF that starts worrying about lending to Greece. That’s the view of some former IMF and government officials on the Washington-based fund’s $38 billion contribution to a $139 billion loan package by nations sharing the euro. With no say on monetary or currency policy and investors doubting the rescue will prevent a Greek debt restructuring, the IMF’s credibility is riding on the second-largest program in the fund’s 65-year history.

“If not mission impossible, it’s certainly mission highly improbable,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington and a former IMF deputy research director. “If the thing doesn’t work, then their reputation will be hurt.”

Since 2008, the IMF has committed more than $122 billion to nations from Hungary to Pakistan to contain the global financial crisis. The Greek loan is the first to a euro member, and Strauss-Kahn must share control with European Union officials, who will help decide whether Greece is meeting its targets for spending cuts and tax increases...

Allan Meltzer, an economist at Carnegie Mellon University in Pittsburgh who wrote a congressional report in 2000 that examined the fund’s role as a lender of last resort to governments since 1945, called Greece “a basket case” that will default on its debt.

IMF officials have said debt restructuring has never been part of negotiations and that the Greek program will result in a budget surplus, excluding debt payments, and a more competitive economy. “This program is going to be very successful, and we are going to achieve a gradual reduction in debt,” the IMF’s Greek mission chief, Poul Thomsen, told reporters May 2.

Stepping into the euro area is raising the IMF’s profile and risking Strauss-Kahn’s legacy, said Domenico Lombardi, a former IMF board member. Strauss-Kahn, 61, was the French Finance Minister when the European currency was launched in 1999. “It’s not just an economic crisis, and therefore this entails a much higher risk,” Lombardi said.

The risks were highlighted by street protests in Athens against austerity measures required as a condition of the loan to Greece. Three bank employees died when their building was set afire by a group of self-styled anarchists. The measures, including wage cuts for public workers and a three-year freeze on pensions, aim to reduce Greece’s budget deficit to below 3 percent of its gross domestic product by the end of 2014, from 13.6 percent last year. The package was approved by a vote of 172-121, with Prime Minister George Papandreou ousting three deputies from his party after they cast blank ballots.

“It’s a very tough adjustment program which undoubtedly will demand sacrifice from the Greek people,” John Lipsky, the IMF’s first deputy managing director, said May 9 after the fund’s board voted to approve the program. “But at the same time it’s necessary, it’s credible and it’s achievable.”

IMF officials, criticized after the Asian financial crisis for imposing austerity measures on countries from South Korea to Indonesia as a condition of aid, are now stressing that Greece is making its own choices. A Jan. 15, 1998 photograph shows then-IMF Managing Director Michel Camdessus looking on with arms crossed as Indonesian dictator Suharto signed an agreement promising measures that included scrapping foreign ownership limits on banks and raising taxes on gasoline, tobacco and alcohol. Four months later, Suharto was ousted amid riots sparked by austerity measures.

“Greece needs to diligently examine whether the prescriptions have direct relations to the problems that it faces,” Ginandjar Kartasasmita, who served as Indonesia’s finance minister and coordinating minister of the economy in 1998, said in a May 5 interview.

Strauss-Kahn said he wants to protect the “most vulnerable” in Greece from hardship. Since taking over the IMF in November 2007, Strauss-Kahn has eased conditions for lending and has created a credit line that offers money upfront to nations deemed to have sound economic policies. Some observers are skeptical. “They’re trying to be nice guys, and nice guys lose money,” Meltzer said.
And here is an insightful point made by Bloomberg. Latvia has been able to cope with the demands placed on it while maintaining a peg between its currency and the euro. If a non-EMU country could cope without the blandishments being offered by the EU, what more Greece? The EU is giving it almost every lifeline available:
Latvia may offer a guide to the success or failure of the Greek program. The Baltic nation approved budget cuts equal to about 10 percent of its economy to comply with the terms of a 7.5 billion-euro ($9.5 billion) loan from a group led by the IMF and the EU. The program has helped restore investor confidence, though at the price of an 18 percent contraction last year. At the same time, Latvia kept its currency, the lats, pegged to the euro.

“We seem to be proving that we were able to manage something many thought was impossible -- an internal devaluation,” Latvian Prime Minister Valdis Dombrovskis said April 30 in Munich. He recommended euro countries facing “dramatically” rising debt push through similar measures.

One difference is that while the IMF expects Latvia’s debt to peak at 70 percent of GDP, it sees Greece’s burden reaching more than twice that level in 2013. “The question is: Are the Greeks like the Latvians,” Goldstein of the Peterson Institute said. “I don’t know if they are going to be willing to take the same amount of pain.”