Greek Pay Relief Hopes Foreign To IMF

There’s a saying in international economics: “no government ever lost anything by lending money to the IMF."

It’s a saying David Cameron trotted out when Britain put money in the pot to support the Eurozone bailouts.

And, for the most part, it’s a saying which absolutely holds true.

Save (Milan: SAVE.MI - news) for a few small, war-torn developing countries (Zimbabwe, Somalia, Iraq, for instance) no-one has ever defaulted on an International Monetary Fund bailout.

As its managing director, Christine Lagarde, said in Washington, no advanced country had ever even asked to delay a payment to the Fund, let alone refuse to pay altogether (though Argentina, if you can call it advanced, came close).

The upshot is that when rich countries like Britain put a bit of cash into the IMF’s war chest, they can generally expect it back.

This isn’t merely happenstance. It is not simply about wise lending (though that is an important part of it). It is something even more important.

Think of it this way: the IMF serves an important function as lender of last resort to troubled governments. Its unique selling point, from this perspective, is not its pockets (deep as they are) but its reputation.

As a senior official once told me, “in many ways, first and foremost the Fund is lending ‘credibility’, so others feel confident they can lend, often much more than what the Fund puts on the table.”

Think about it: whenever the Fund lends money, it tends to do so in cahoots with other countries, who are also invariably shareholders (well, quota holders) in the Fund as well.

In the euro bailouts, the Fund was one of three lenders (alongside the European Central Bank and European Commission) who stepped in. What the Fund added to the pot was its technical expertise and its long-established reputation for getting its money back.

You can probably see where we’re heading. The fact that Greece is now considering delaying or even defaulting on its IMF bailout payments goes way beyond this small European country. It is a threat to the very heart of the way the international monetary system is configured.

Should Greece become the first advanced economy to default on an IMF loan in recent decades, it would not just make Athens a pariah in financial markets — it could seriously undermine, perhaps critically, the Fund itself.

Without the credibility that comes from being repaid every single time, the Fund’s very purpose comes under question.

The assumption that the IMF is the de facto senior creditor in every bailout goes out the window. And the lender of last resort for the global economy faces, well, serious problems.

All of this would be awkward enough for the Fund if the problems facing Greece were purely down to the country’s errant politicians and greedy bankers.

There is certainly a good deal of that; but there are also big, big question marks over the Fund’s own strategy when it bailed out the country.

The record has shown it flouted some of the normal tests and requirements it usually imposes on bailout cases: it initially stopped short of forcing Greece to restructure its debt (until the second bail-out, when avoiding this became impossible).

It refused to countenance a devaluation or departure from the Eurozone. It lent the country multiples of its quota that dwarf every other IMF programme before or since.

This is not merely a convenient hindsight view. Even (Taiwan OTC: 6436.TWO - news) at the time many people were worried about the prospect that the IMF programme could go bad — and that the Fund itself could find its reputation damaged.

When I interviewed Christine Lagarde three years ago, I asked her whether she would resign if the Fund lost money on the bailouts.

As you can see , the question took her a little bit by surprise.

But the fact remains: its involvement in Greece is not ending well. The likelihood is that finance minister Yanis Varoufakis will stop far short of an IMF default. This is not to say Greece will not default — but it may have to default to other of its creditors, or kick the can further down the road.

But what few appreciate is the extent to which Mr Varoufakis holds an important card — it is within his power to destroy, or at the very least undermine, the credibility of the lynchpin institution of the international monetary system.