Euro-Area Bailout System Delayed Moves, IMF Staff Says
The International Monetary Fund’s cooperation with European institutions over bailouts in the euro region often delayed decision making and at times excluded measures that could have been discussed, according to a report by the fund’s 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 today 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.”
Compared with traditional IMF programs, having several stakeholders often resulted “in longer program discussions and less effective decision making,” IMF staff wrote.
The report, which looks at IMF programs from 2002 through September 2011, shows the tensions that exist within the so- called troika at a time the fund may be called on to help monitor countries as part of the ECB’s new bond-purchase program. 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 that are under way among the three institutions as they decide whether to disburse money to Greece under a second, 130 billion-euro ($171 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 ‘menage a trois’” is over, Costerg said in an e-mail. ‘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 criticized by officials including Canadian Finance Minister Jim Flaherty, who has said he’s worried that the fund’s room to maneuver is constrained.
“That’s not the traditional way the IMF operates,” 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 eased collaboration in crisis periods. It cited assurances by the central bank of the Eastern Caribbean Currency Union, also the banking supervisor, as an example of cooperation.
Directors on the IMF executive board, who discussed the report on Sept. 5, “expressed wide-ranging views on recent high-access programs with euro-area countries” and “encouraged staff to draw preliminary lessons from these cases in a timely manner, including on coordination with troika partners and the modalities of designing programs and conditionality.”
The staff also said that the number and the nature of the measures required for the loans in the euro region go against its recent efforts to keep conditions few and targeted.
The commission tried to induce sweeping changes in some countries, including in public administration, the judicial system and the labor market, according to the report.
“While the assessment of the fund’s parsimonious conditions is straightforward, the large set of European Commission measures calls for a broad-based assessment of implementation prior to authorizing a disbursement,” the authors wrote.
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