The continuing inability of the Eurozone economies to break out of their current impasse means that any optimistic projections of declining debt to GDP ratios are unlikely to be achieved. As long as European governments continue to raise funds in the financial markets on favorable terms, the current situation remains sustainable. But the IMF is thinking ahead to the day when there is a change in the financial climate, and is proposing a change in the rules governing its ability to lend to governments that may need its assistance if they are to continue repaying their debt.
The Fund’s rethinking has been prompted by its concerns over its lending to Greece. The IMF, as part of a “troika†with the European Commission and the European Central Bank, participated in a loan arrangement in May 2010. The IMF’s contribution consisted of a $40 billion Stand-By Arrangement. The Fund had a problem, however: this amount far exceeded the normal amount of credit that the IMF normally provided to its members. Exceptions were allowed, but there were criteria to govern when “exceptional access†was permitted. One of these was a high probability that a government’s public debt was sustainable in the medium term. It was difficult to claim that was true for Greece in 2010, so an alternative criterion was established: exceptional access could also be provided if there was a “high risk of international systemic spillover effects.†This was used as grounds to justify the lending arrangement to Greece.
A restructuring of the Greek debt did take place in 2012. The IMF subsequently issued a reviewof its own response to debt crises, and found that “debt restructurings have often been too little and too late, this failing to re-establish debt sustainability and market access in a durable way.†The IMF was concerned that its money was used to pay off creditors who would otherwise have been forced to negotiate changes in the debt’s conditions with the Greek government.
