Based on the economic state of affairs in Greece, the Greek government in collaboration with international economic organizations, especially the International Monetary Fund (IMF), is in the verge of implementing various structural revenue-side and spending-side economic reforms. Besides, the government, alongside IMF strongly advocate for the mass privatization program to help open investment opportunities, increase level of funds and to boost the country’s growth potential. The IMF is a financial institution recognized internationally for its promotion of exchange rate and monetary stabilization. Specifically, the International Monetary Fund has advocated for the following to help stabilize Greece exchange rate and monetary stability.
The IMF among other undertakings has pledged to help stabilize Greece monetary as well as to improve the rate of exchange via basically contributing a three year loan totaling to €30 billion. In essence, the loan allocation would definitely help support Greece’s attempt to get its economy in track. The loan is believed to be in a position of safeguarding the Greece financial system. Besides, the IMF intervention is likely to boost the level of a country’s bank equity. The loan will however only be awarded on condition that the Greece meets the International Monetary Fund loan terms and conditions. IMF has as well offered support for the measures put in place to boost fiscal consolidation in Greece. After the approval of the fifth review, IMF also pledges to make a contribution amounting to €2.2 billion.
The loan to be awarded to the Greek government by the International Monetary Fund would definitely violate the IMF charter or formal mandate. The proposal is not right basically on the grounds that it breaches IMF goals and that it is unwarranted biasness to Europe since developing counties’ perception will be negative. The loan pledge conflicts with IMF’s mission. International Monetary Fund is basically established for restoration of a country’s balance of payments, more to the developing countries and not restoration of fiscal crises.
However, the pledge to extend a three year loan amounting to €30 billion implies fiscal rescues as well--which conflicts with the IMF charter. It contravenes IMF goals and mission due to the fact that it prompts larger budgets and extra staff. This does not conform to the IMF’s goals. IMF charter vividly states that loan should not be awarded for any undertaking that is not balance of payment oriented. Besides, the Greek government has large fiscal demand and not balance of payment. By definition, International Monetary Fund is a monetary authority and Greece on the other hand does not suffer from monetary issues. In short, the fiscal support contravenes IMF’s goals as the fiscal crises support is left to the Euro zone countries. For instance, the International Monetary Fund program for the Greek government advocates for significant decline in government spending besides an increase in revenue. The IMF award loans to settle balance of payments problems as stipulated in its charter. Even though Greece does not meet IMF conditions, i.e. not a developing country and does not suffer from balance of payments, IMF goes ahead to disburse the loan in phases. This implies that a fiscal support is extended and this violates the IMF’s charter.
Also, the IMF program appears unusual based on its magnitude. The IMF’s limit to lend either via an SBA or Extended Fund Facility (EFF) for countries facing long term problems balance of payments is violated. As opposed to the IMF’s guideline for 200% of a member quota yearly and 600% cumulatively, the loan awarded to Greece is 3200%--the highest in history even though it is an exceptional case. Lastly, the loan disbursement to Greece does not conform to IMF charter on receiving country’s solvency. The Greek government may not be in a position to pay back the debt to the International Monetary Fund.
The loan disbursement to Greece contrasts with International Monetary Fund resource to Hungary. First of all, Hungary did not face any fiscal crises for the funding requested. As opposed to the Greece fiscal crises, Hungary requested IMF funding purposefully for the restoration of its balance of payment problems. Besides, the funding was mainly meant for boosting the country’s economic growth. The Hungary’s IMF request basically was intended to solve the market sell-off on the probable credit cut rating. Hungary’s IMF resource was one with no conditions, also known as the Flexible Credit Line. As opposed to the Greece economy, Hungary boasts of superb fundamentals, better policy implementation record as well as better fiscal standings.
Providing IMF funds to Greece initiated intense debate, because the IMF has not lent to developed countries in the recent decades and the IMF program for the Greece is quite large relative to the size of its economy. The main objective behind the IMF financial support, according to the Greek government and almost all mainstream Greek media, is to “rescue” Greece from the financial crisisi. IMF is seen to not only rescue Greece materially, but also force her to transform her institutions in ways that shall bring long-term prosperity.
According to the government and the defenders of the government’s response, the country would have been “bankrupt” without the support. This would have been catastrophic. Considering the 2010 case, the debt-to-GDP ratio was around 115%. The support greatly reduced the debt to sustainable levels. Many believe that after the default in early 2010, Greece would be shut out from the international bond markets. Due to the fact that the country did not have a primary budget surplus, the government would have not been able to pay the wages, the pensions and its other bills. However, others argue that even if foreign lending were not to become available, ordinary Greeks would have gladly bought Greek government bonds at 4.5% instead of the 2% or lower they had been getting in their bank accounts. More so, the cuts across the board could have occurred, at a discount, and perform the role of near-money. This move would have improved the private sectors’ liquidity and prevent the depression induced by the IMF’s policies and at the same time reduced public debt to sustainable levels in the eyes of everybody, including the Greeks. As the predictable depression continues to deepen, the demands of unrealistic privatization plans, greater budget cuts, and wholesale cookie-cutter institutional changes, with little or no concern for the Greek laws or the Greek Constitution and have no hope of working, are still peddled to date as a “rescuing ” Greece. Many tend to believe that the IMF financial support was just meant to rescue the bondholders.
In disbursing the funds, IMF divides the loan into tranches and only disburses the next tranche following a verification that the specified economic policy reforms have been met. These policies ensure that the loans are repaid to the IMF and the required economic reforms are implemented. It is viewed that the IMF program for Greece results into substantial reductions in government spending and at the same time raises the revenue. Some individuals argue that the policy reforms, associated with the IMF financial support, would lend additional impetus to reforms and provide the Greek government and the EU at large with an excuse for pushing through politically unpopular reforms. Some have also believed that the participation of IMF enabled the Eurozone countries to more easily agree on the conditions and terms of the loan program than might have been the case if they had to arrange it separately.
The IMF support has seen limited success in its endeavor to “rescue” Greece from the financial crisis. Greece has continued with its debt payments in full and on time. Investors, on the other side, have continued to take losses on their investments, even though plans have been laid down with private sector input and are expected to proceed in a controlled manner. The policy responses have, to date, not put Greece on a clear path to recovery. According to IMF, the Greece’s public debt increased significantly from 143% of GDP to 166% of GDP between 2010 and 2011. IMF also forecasted that the Greece’s debt would rise again to 172% of GDP in 2012, and only start declining in 2013.ii The path to debt sustainability in Greece has been hindered by lack of growth in the Greek economy. It is believed that growth lowers the country’s debt and deficit levels as a percentage of GDP, makes investors resume lending, and counteract the contractionary effects of the fiscal reforms, resulting into political well being. However, encouraging short-term growth in the economy of Greece has, to date, not been a central feature in the policy response, as the growth in the economy proves to be elusive with the economy’s contraction rate being faster than expected. According to IMF estimates in May 2010, the Greek economy would contract by 2.9% in 2011iii. However, the revised estimates now project a contraction of 3.9% for 2011. The policy responses have not provided enough assurance to the bond markets in order to prevent the spread of the debt crisis to other countries in the Eurozone.
Be that as it may, the IMF assistance has been of undisputable important to Greece. It has led to the growth of the government revenues due to the pressure to repay the loans. The revenue measured are expected to yield 4% GDP through 2013 by raising the value-added tax and taxes on luxury items. The government has strengthened its tax collection and has raised contributions from those who have not carried a fair share of the tax burden. Financial stability under the financial stability fund package ensures a sound level of bank equity. The entitlement programs for selected social security benefits have been cut and at the same time, the benefits for the most vulnerable ones maintained. There have been pension reforms, and structural policies that strengthen labor markets and income policies that have improved the business environment.
Works Cited
IMF, “Frequently Asked Questions: Greece,” May 11, 2010, Retrieved at http://www.imf.org/external/np/exr/faq/greecefaqs.htm
IMF, “IMF Reaches Staff-level Agreement with Greece on €30 Billion Stand-By Arrangement,” press release, May 2, 2010, Retrieved at http://www.imf.org/external/np/sec/pr/2010/pr10176.htm
Real GDP growth. International Monetary Fund, “Greece: Fourth Review Under the Stand-By Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria,” July 2011, http://www.imf.org/external/pubs/ft/scr/2011/cr11175.pdf.
Real GDP growth. International Monetary Fund, “Greece: Staff Report on Request for Stand-By Arrangement,” May 2010. http://www.imf.org/external/pubs/ft/scr/2010/cr10110.pdf
