IMF lax on Europe? Past rescue efforts elsewhere hit private investors harder
By Howard Schneider,
As a financial crisis spread through Asia in the late 1990s, the International Monetary Fund prescribed some harsh medicine for countries such as Indonesia and South Korea. Private banks took losses, and there were dozens of bank closures, nationalizations and mergers.
But now that Europe faces a crisis, the approach has been different. The IMF and others have tried to ensure that banks and insurance companies get repaid for their numerous loans to indebted countries such as Greece, Portugal and Ireland.
The slow pace of confronting problems involving hundreds of billions of dollars in government loans that may or may not be worth their face value has been blamed for dragging out the crisis, and has drawn complaints of a double-standard from Asian officials.
Kaushik Basu, an Indian economist, said the IMF’s approach to the crisis buffeting Europe is “not quite what it would be for an emerging country getting into trouble.” Basu, who is vice chairman of a group that represents major emerging nations and advises the IMF, added that in “similar situations you take similar stands, and we are not quite there.”
Basu’s criticism is shared by some other Asian officials, who say they wonder whether Europe’s heavy representation on the IMF board and among top management has allowed the developed world to escape the tough medicine forced on developing countries. IMF Managing Director Christine Lagarde is the former finance minister of France, whose banks are among the largest holders of risky bonds issued by the Greek government.
The IMF is involved in negotiating a rescue plan for Greece that would include modest losses for investors in Greek bonds. Some officials in Germany, which is bearing most of the cost of bailing out its weaker neighbors, are pushing for a proposal in which bondholders bear larger losses. Bank executives and many European leaders are opposed to the proposal, arguing that it will complicate already-tangled negotiations over Greece’s rescue program.
Struggling European governments, meanwhile, are getting sums of money from the IMF that are disproportionately larger than what the agency made available for crisis-stricken developing countries. The terms of the Greek rescue program are being made more favorable to Greece after efforts by the IMF and European leaders over the past year and a half failed to stabilize the economy.
Some economists and analysts say Europe’s spreading crisis might have been snuffed out faster if losses would have been imposed on Greek bondholders when the debt problems surfaced early last year. Even if that approach had put some banks out of business, the strategy could have prevented Greece’s slide into a deepening recession, these analysts say.
In countries such as Uruguay in 1993, several Asian nations later in the 1990s, and recently on the periphery of Europe in Iceland, the decision to make private investors rapidly absorb large losses helped return the governments to a sound financial footing and lay the groundwork for the creation of smaller but stronger banking systems.
The Greek program is expected to be stretched out over at least four years. And the IMF and the European Central Bank, among others, have put a premium on seeing that Greece repay its more than $300 billion in outstanding bonds.
The IMF’s work in Europe is “uncharted territory” for the agency, said Gerd Haeusler, chief executive of Germany’s Bayern LB bank and a former top agency official, speaking at an Institute of International Finance (IIF) conference last weekend.
The IMF has become involved in the financial and political intricacies of the world’s largest currency union, the euro zone, which is led by its own set of influential figures. The IMF is funding only about a fourth of the current emergency programs. So instead of its usual practice of conducting bilateral negotiations with a country, the fund is but one member in a troika whose other members, the European Commission and the European Central Bank, don’t always see eye to eye with each other or the IMF.
The Lehman Brothers effect
In addition, IMF officials say the world has changed since the failure of the Wall Street investment bank Lehman Brothers in 2008. There’s now much greater concern, they say, about how an expected setback in one country can undermine confidence, lending and economic growth around the world.
“The scale of interconnection between crises that emerge in one part of the world and another are altogether different from what we faced a decade ago,” said Tharman Shanmugaratnam, finance minister of Singapore and chairman of the IMF’s chief oversight body. “Everything is on a larger scale, and everything is far more connected than it used to be.”
Many European leaders are wary of imposing losses on the private sector, especially since banks were encouraged in recent years to buy government bonds by European financial regulations.
Some powerful figures, most notably ECB President Jean-Claude Trichet, have fought to ensure that the bonds will be repaid. Trichet and others worry that a default or even a steep devaluation of Greek bonds would wreck the euro zone’s credibility and make it harder for countries, banks and companies to raise money.
Over the summer, when the IMF and European officials reached agreement with Greece over an enlarged bailout, there was also a deal that investors would be asked to bear losses by swapping their bonds for new ones to be paid off over a longer time. But the details were left in the hands of top European bankers and the IIF to negotiate, effectively giving the European financial industry a way to limit losses.
According to the IIF’s estimates, the proposed bond swap would reduce the value of Greece’s existing bonds by 21 percent. Other analysts, including Barclays Capital, estimate the losses at perhaps half of that — and close to zero for some bondholders.
The bond swap, supported by major European banks that represent much of Greece’s outstanding debt, “is a sound business decision,” said Jean Lemierre, adviser to the head of France’s BNP Parisbas, which holds about $7 billion in Greek bonds. “By doing it there is some loss. At the same time, we know what the loss is.”