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.
‘Uncharted territory’
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.
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