The IMF is passing around the hat again, hoping to get an additional $500 billion in contributions, which would more than double its loanable resources. This request has not yet been formalised and it has certainly not been earmarked for the euro crisis, but the connection is clear: funds are not only needed for Europe, but to handle the collateral damage if the euro falls apart.
The IMF is already deeply involved in the euro crisis (contributing around one-third of the current support funds). But who is in charge of this rescue and what is their strategy?
At the time of the initial Greek support package back in May 2010, the Fund missed its opportunity to enforce the fundamental distinction between illiquidity and insolvency: support should be provided for illiquid countries, while insolvent countries should be required to restructure their debt. Greece was clearly insolvent. Budget austerity, while a necessary part of the reform, is not enough. The subsequent slow-motion Greek bankruptcy has worsened the risks of contagion to countries that really matter – Italy and Spain.
The Europeans have not yet come up with a viable strategy. Germany has focused on imposing a universal austerity regime while at the same time it continues to benefit from its own huge external trade surplus. This strategy addresses neither the immediate sovereign debt problem nor the longer-term competitiveness imbalances.
The European Central Bank has often played an unhelpful role, resisting a Greek debt restructure and being too ready to claim that its mandate prevents it from helping more. As the US Fed showed in 2008, central banks have to stretch their mandates and put their balance sheets on the line when the stakes are this high.
But it will be hard for the Fund to push the responsibility for the euro mess back where it belongs. The Europeans recently contributed an additional $200 billion to the IMF (which would be counted as their contribution towards the $500 billion), no doubt with some unspoken understanding that these funds, and more, would flow back to them as needed.
Part of the Fund's argument for additional resources is that if the euro founders, the collateral damage to all of us will be very substantial. Certainly it looks like a number of eastern European countries which have received very large capital inflows over the past decade will be in trouble, with Hungary as an example. But again there is a case for pushing the problem back where it belongs – in this case, to the Austrian banks which lent too much.
The Fund is hoping to tap Asian countries for this support fund, with the First Deputy Managing Director David Lipton going as far as acknowledging that 'the potential for collaboration is clouded by memories of the Asian financial crisis of 1997–98'.
In rejecting this IMF call for more funds, the US, Japan and Canada made it clear that they expected the Europeans to do most of the heavy lifting to save the euro. Australia might do well to join this side of the argument.
Photo by Flickr user Arnoooo.