With Greece once again teetering on the brink of default, a recent paper from the Centre for International Governance Innovation explores one episode in the amazing saga of how this tiny country came to threaten the viability of the euro, and left a damaging legacy for procedures and governance at the IMF.
When the Greek crisis emerged late in 2009, many European leaders believed the problems should be resolved within the eurozone, just as a financial crisis in one of Australia's states would be resolved by Australian authorities without calling in the IMF to assist.
But the IMF, after a decade without any major call on its services, was anxious to affirm its raison d'etre. Its then Managing Director, Dominique Strauss-Kahn, perhaps with some personal political motivations, was eager to take a substantive role. The outcome, orchestrated by the powerful European voting faction in the IMF Board, was a key role for the Fund, but also a failure to restructure Greece's unsustainable foreign debt burden (much of it owed to German and French banks). The IMF's participation required it to depart from its own principles, under which it provided assistance only where there was a 'high probability' that foreign creditors would be repaid.
The Greek story is, of course, still unfolding. Despite the 2012 debt restructuring, the current level of debt is unsustainable and will require further restructuring – a central element of the current impasse.
Meanwhile, the IMF has acknowledged some of the mistakes made in 2010, but the unhappy legacy remains. Having established the precedent of lending to countries which have an unsustainable debt level, Ukraine has also been given substantial assistance. The broad issue of rescheduling sovereign debt, which the Fund has struggled to resolve for more than a decade, remains. Perhaps most important all, this story is a reminder of why governance reform is so vital for the Fund's credibility.
Photo courtesy of Flickr user Theophilos Papadopoulos.