Kind of says it all.

Photographer: Yorgos Karahalis/Bloomberg

IMF Gets Smart About Greece

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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By hesitating to play a full financing role in the latest bailout program for Greece, the International Monetary Fund risks alienating both the Greek government and its European partners. Yet the institution’s approach isn't just warranted; it could well hold the key to the success of the challenging task of restoring Greece's growth and financial viability within the euro zone. 

The IMF, although willing to join in the creditor negotiations with Greece, has indicated that its willingness (indeed, ability) to participate in a new funding arrangement depends on progress on some important and long-standing unfinished business. It wants to see a comprehensive pro-growth economic reform program for Greece; progress in its implementation; guarantees for the country’s financing needs; and debt relief. 

QuickTake Greece Financial Odyssey

The IMF is right to insist on these four conditions. Without them, the latest bailout agreement would face the same fate as the previous two, which bought some time for Greece and its euro-zone partners but at a high cost. Those bailouts neither reversed the damage to the country’s languishing economy nor relieved the great hardship for Greece's long-suffering citizens. 

Although Greece and its European partners like different parts of the IMF’s conditionality, neither is happy with the whole; and all worry that a less-than-fully committed IMF spells huge trouble for the third bailout. 

Without the IMF, some creditors (such as Germany, the European Central Bank and other European financial institutions) would face trouble getting their leaders to back giving large amounts of new funding to Greece. And without the IMF, Greek Prime Minister Alexis Tsipras would find it hard to mobilize the internal unity needed for the successful implementation of unpopular domestic economic reforms, including those that cross the his party's “red lines.” 

These are risks worth taking for the IMF. 

In the two earlier bailouts, the IMF was forced by political pressures (mainly from Europe but also from the U.S.) to participate in programs that, in addition to facing design flaws and considerable implementation uncertainties, violated two of its long-standing conditions: first, “financial assurances” that underpin domestic implementation with sufficient external funding; and “debt sustainability” to ensure that growth isn't undermined by the persistence of excessive debt. In the process, the IMF risked its own credibility and effectiveness while exposing its members’ funding to considerable Greek default risk down the road. 

This time the IMF is insisting on better analytical and operational anchors for a new arrangement for Greece. And it is right to do so, since it isn't only the integrity of the institution that is at stake. Its brave stance, including the four conditions that it is insisting on, is critical for the success of this expensive third bailout. 

Almost 14 years ago, the IMF was bullied into lending yet again to Argentina when it was clear to many that the best its involvement could do is buy a few months for the country -- concerns that painfully played out when, just three months later, Argentina defaulted and its economy imploded. 

This time around, the IMF is seeking to abide by the harsh lessons of its own past and avoid making yet another costly mistake. In the process, it is pointing to one of the very few ways that this third Greek bailout can succeed. 

Others should follow the IMF’s lead, especially if Greece is to avoid a fate similar to Argentina’s.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net