Interaction has stalled decisions, says IMF


CO-OPERATION WITH European institutions over bailouts in the euro zone has often delayed decision-making and excluded measures that could have been discussed, according to a report by International Monetary Fund staff.

While the IMF’s work with the European Commission and the European Central Bank on joint rescue packages for Greece, Ireland and Portugal has been useful and has improved over time, it also added “a layer of complexity” to the design and monitoring of conditions attached to the loans, IMF staff wrote in the report released yesterday in Washington.

“Institutional constraints in the euro area occasionally limited alternative policy options that could otherwise have been considered – notably, debt restructuring to strengthen debt sustainability,” according to the report, “particularly for bank debt in Ireland and sovereign debt in Greece”.

The report, which looks at IMF programmes from 2002 to September 2011, shows the tensions that exist within the troika at a time the fund may be called on to help monitor countries as part of the ECB’s new bond-purchase programme. The troika of international creditors is made up of the Brussels-based European Commission, the ECB and the IMF.

The fund’s report echoes the dynamics in the talks under way among the three institutions as they decide whether to disburse money to Greece under a second, €130 billion loan, said Thomas Costerg, a European economist with Standard Chartered Bank in London. The second bailout is beyond the report’s scope.

The report suggests “the honeymoon of the European ménage à trois” is over, Mr Costerg said in an email. “It is difficult not to relate this staff note to the broader context, which is one of escalating tension as the deadline regarding Greece’s next tranche approaches, while the on-the-ground inspection mission seems to make little progress.”

The system, which has the ECB sit alongside the IMF to review implementation of the policies agreed, has been criticised by officials including Canadian finance minister Jim Flaherty, who has said he is worried the fund’s room to manoeuvre is constrained.

“That’s not the traditional way the IMF operates,” Mr Flaherty told reporters in Washington in April. “Traditionally, the IMF would direct what needed to be done.”

In past crises, including in Asia in the late 1990s, the IMF and central banks sat on opposite sides of the negotiating table.

According to the report, the size and duration of the ECB’s liquidity support was among “sensitive items” that resulted in “lengthy discussions”.

The report recommended that the fund build relationships and mutual understanding with other institutions in good times to ease collaboration in crisis periods. – (Bloomberg)