Greek default: IMF has a lot at stake than just its image

  • AFP, Washington
  • Updated: Jun 30, 2015 07:53 IST

Nobody in the halls of the International Monetary Fund in Washington has any illusion: Greece is going to default on Tuesday, delivering a new blow to the global crisis bank's credibility.

Just weeks ago, the Fund refused to accept the idea that Athens, which has received some 32 billion euros from the IMF to rescue its economy since 2010, would be unable to make the 1.5-billion-euro ($1.7 billion) payment.

At the beginning of June, managing director Christine Lagarde insisted she had the assurance of Greek leader Alexis Tsipras.

"The Prime Minister (Greek) said 'do not worry,'" she said confidently. A Fund spokesperson reiterated that confidence again last week.

But Tsipras's announcement of a referendum on an adjusted bailout plan -- which he urged his people to reject -- made clear that the country is not going to reach a deal with official creditors in time to finance any new debt payment.

How "is it possible the creditors are waiting for the IMF payment while our banks are being suffocated?" Tsipras asked.

Greece will be the first country to default on the IMF since Zimbabwe in 2001, and in terms of standards of living, the wealthiest.

The IMF will undoubtedly wait to the final minute before declaring Athens "in arrears", but then the country will be immediately cut off from any further IMF aid, including disbursements planned on the existing bailout program.

Reputation, Resources at stake

The IMF has less at stake than Greece in that scenario but still stands to lose, experts told AFP.

"A default by Greece, even if a short-lived one, would stain the reputation of the IMF and make it less likely that future IMF programmes would trigger private (capital) inflows into troubled countries," said Eswar Prasad, a former Fund official.

It is not the first time that the IMF, traditionally called on by economically troubled governments to help when they run short of liquidity, faces the breakdown of a bailout programme.

And it has already confessed errors in prescribing austerity as a cure when that ended up stifling economic growth.

The institution has been criticised from internal and external sources. Some member states have objected to the way rules have been bent to keep supporting Greece.
They note that the Fund can only lend to a country if its debts are judged sustainable, and Greece's clearly are not. A default by Athens will only aggravate that open wound.

"Non-payment would signal in a way that is clear to the person in the street worldwide that IMF engagement with the euro and Greece has gone very badly wrong," said Peter Doyle, who used to work for the IMF European Department.

What happens with Greece could also impact the IMF's likewise high-risk loan programme for Ukraine, said Doyle.

In March, Kiev obtained a new lifeline from the IMF amid huge questions over whether its debt load is sustainable.

The fund has more to guard than its image; it needs to protect the hundreds of billions of dollars provided to it by its 188 members.

It has been able to, without much controversy, write off loans made to certain countries, mainly those in the most dire circumstances.

That includes Haiti, whose $268 million in debt was forgiven after the devastating 2010 earthquake, and $100 million written off for the west African countries hit by Ebola last year.

But the Greek case is different. The size of the loans is many times larger and the losses would impact the IMF's financial integrity.

The Fund needs Greece to keep going and eventually pay up, but "has few cards left to play", Prasad said.

"It's in no one's interest to escalate the implications of this missed payment," said Domenico Lombardi, a former board member of the IMF.

"They're going to play that down in the hope that this is not going to jeopardise the start of future negotiations." Lagarde clearly understands that.

Over the weekend, with Greece's default in motion, she took a measured approach, withholding criticism and saying the Fund "stands ready to provide assistance as needed".

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