Strange Encounter: The IMF and Athens

"I'd ask to be transferred to the IMF team in Iceland"

Greece has inched closer to seeking a $61 billion bailout from the European Union and the International Monetary Fund. Things got more complicated when the EU told Athens to accept IMF conditions for a rescue. Bloomberg Businessweek asked three former IMF officers, all prominent economists, what they would do if they were put in charge of managing the crisis for the Fund. Below, the comments of Simon Johnson, Kenneth Rogoff, and Michael Mussa.

Simon Johnson, MIT

If the IMF offered me the Greece portfolio, I'd ask to be transferred to the IMF team in Iceland. The Fund faces an incredibly difficult job in Greece. The IMF won't have control over Greek monetary policy; that's in the hands of the European Central Bank. The Fund can't steer Greece toward a devaluation; Greece is in the euro zone and can't leave. So it's an emerging-market economy locked inside an exchange rate it can't afford. IMF chief Dominique Strauss-Kahn should impose tough policies on Greece. But DSK also wants to run for President in France. I think there's a conflict of interest here and that he should step down from the Fund.

Kenneth Rogoff, Harvard

What the IMF can do for Greece is buy time by extending bridge loans and lay a framework for paying the debt that gives the market confidence. The Greeks can also blame the IMF when Athens has to get tough. The funny thing is, the IMF has gotten very soft on its conditions since the 2008 crisis started. The G-20 has basically told the IMF to give money now and ask questions later. This could be a problem, since if the Greeks don't close up their deficits, it's game over. The Greeks face an extraordinary tightening. They're like someone who's 75 pounds overweight and must go on a multiyear diet—yet the dieter wants his reward after only losing four pounds. The IMF has to play it straight and give them a normal program, like those for Brazil or Korea. Not to play it straight would be foolish. The Asians still get angry if they think the IMF is treating a country more leniently than it treated them. Michael Mussa Peterson Institute for International Economics

The Greeks face a very big adjustment. The credit markets won't buy their bonds forever, and if you can't finance what you want, you can't have it. On the other hand, an outright sovereign default is a very nasty affair. If you can, you want to avoid that—especially with the European recovery so weak and Portugal and Spain so fragile. The IMF can help here. The Fund has dealt with countries that essentially don't have their own currency. The Argentines had pegged to the dollar, and French Africa to the franc. With the Greeks, the IMF can help fashion a restructuring plan. Then, if fiscal adjustment is not working, the Greeks may be in a better position to default in an orderly way that doesn't roil markets. That's what happened with GM. Bush kept it afloat, and later Obama allowed it to go bankrupt when the markets could deal with it. Sometimes kicking the can down the road has its attractions.

The bottom line: The IMF will have to set tough conditions on Athens or risk weakening Europe and alienating Asia.

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