ANALYSIS:The IMF, ECB and EU may send out mixed messages as they have their own agendas but their tussles can deliver a balanced approach, writes DONAL DONOVAN
THE RECENT sharp deterioration in Greece’s financial situation has been accompanied by a growing sense among some observers that the IMF and the European institutions may not quite be singing from the same hymn sheet. The IMF was reportedly uneasy about proceeding with the latest Greek bailout, without greater signs that Europe was willing to consider additional financing to fill a looming financing gap. In unusually blunt language, United States secretary of the treasury Timothy Geithner recently took the Europeans to task publicly for not speaking with one voice on the crisis.
Stresses have also been alluded to in the case of the Irish bailout. In their recent report, the IMF staff politely made it clear that they favoured a lowering of the interest rate charged by the EU, as well as the conversion of short-term emergency lending by the ECB into a medium-term facility, steps neither the EU nor the ECB have been willing to take so far.
It has also been widely reported that from the start of the negotiations last November, the IMF has not been against some form of “burning” of senior bank bondholders, a course of action vigorously opposed by the ECB.
To what extent, then, are there key differences – in objectives, structure and governance, and “style” – between the IMF and the European institutions (particularly the ECB), and might these explain such possible disagreements? Moreover, do such differences really matter?
First, and most fundamentally, the ECB, as a central bank that can print euros has an unequivocal statutory obligation to ensure the financial stability of the euro area and, in particular, to control inflation. These requirements govern ECB policies on extending credit to financial institutions facing financial difficulties. They also loom heavily in assessing whether implementing “haircuts” on creditors will have a destabilising effect on financial markets.
Not surprisingly, as is usually the case with any central bank, the ECB’s watchword is caution, exemplified by a reluctance to take major proactive steps unless all their implications have been carefully thought through beforehand. This conservative approach is compounded by the fact that unlike many other central banks, the ECB is a relatively new institution which is not used to handling major financial crises. Its leadership is undoubtedly conscious of the need to protect the reputation of what is still a fledgling euro currency.
On the other hand, the IMF, not being a central bank, cannot print money, and does not have any formal responsibility or means (beyond persuasion) to deliver on low inflation or financial stability anywhere. Therefore, the IMF is more akin to an international consulting agency backed up by government funding that adds clout to its advice.
The IMF is far from unmindful of the merits of financial stability. But it may well be willing to take slightly more risks than the ECB and would not see a special role for itself as protector of the euro’s reputation. Based on longstanding extensive experience, the IMF is also less instinctively averse to considering debt restructuring whenever the net benefits appear positive.
A second crucial difference is, of course, that the EU and the ECB take decisions based on the interests of their respective memberships. However, the IMF is a worldwide organisation, with the EU countries’ comprising just over 30 per cent of total IMF votes and those of the euro area somewhat less. The US has a – perhaps the – major say in the IMF. While US officials no doubt are in constant informal contact with their European colleagues, their views on specific proposals are conveyed largely via the IMF and are informed by the latter’s wider mandate and experience.
Third, governance arrangements vary. Much of the ECB’s examination of crisis policy options seems to be undertaken by the ECB’s executive council – comprising the president and several vice-presidents, who are independent of national central banks and governments. While the ECB’s governing council (consisting of the governors of euro area central banks) meet once a fortnight in Frankfurt, the extent of their influence in shaping day-to-day crisis management is not entirely clear.
The IMF, for better or for worse, has a different governance structure. All IMF member governments either appoint (for large countries) or elect (in the case of country groupings) a full-time national official as executive director / alternate executive director to reflect their views on the IMF board. The IMF board meets at least three times per week and governments are thus in a position to provide direct immediate feedback on proposals under consideration. Thus, whenever the IMF “expresses a view” publicly, this is likely to have the backing of the key elements of the membership.
A fourth aspect, that of consistency and clarity, is an important, closely related, element – albeit perhaps one more of “style” than of substance.
Consistent with Mr Geithner’s remarks, the last nine months have been marked by a constant stream of speeches, interviews and writings by named senior officials of the European institutions as well as reports of views and expectations from “unnamed, but influential” sources.
As Ireland’s experience on matters such as the possible reduction of the interest rate, the corporation tax rate issue and the possible provision of a medium-term ECB lending facility, testifies, such indications seem to change frequently, and have proved very often to be less than authoritative.
The IMF, partly because it is a less overt political institution, and has learnt from experience, tends to convey whatever views it expresses publicly (and relatively infrequently) more deliberately and cautiously. One can be fairly sure that whatever an AJ Chopra, never mind a Dominique Strauss-Kahn or John Lipsky, says to the media will reflect fairly closely the current IMF consensus.
It may be that the more “free for all” style adopted in Europe is inevitable, given the deeply political nature of the issues and the proliferation of institutions involved. Nevertheless, markets that are already very nervous can be unsettled further by apparent contradictory and inconclusive messages. Furthermore, people may not appreciate being subject to public lecturing. Not long ago, Lorenzo Bini Smaghi, vice-president of the ECB, chose to criticise certain more populist Irish views as to the causes of our banking crisis. It is not clear to what extent Bini Smaghi was expressing his own or the ECB’s official views. Additionally, and quite apart from the merit or otherwise of his opinions, no one likes to be openly taken to task for their shortcomings. The IMF has learned that such “megaphone negotiating” does not help – and may very well hinder – a constructive resolution of the problem.
Finally, both the IMF and the ECB/EU share a common desire to ensure that their bailout funds are repaid. Any losses experienced on the financing extended by the ECB would be reflected in corresponding losses for member central banks. These would in turn end up in lower transfers to national budgets (the Irish Central Bank for example, transferred almost €700 million to the exchequer for 2010) or even to a requirement for budgetary subsidies. Non-repayment of IMF loans (which has occurred, albeit rarely) leads to a surcharge levied on members, also an implicit burden on the taxpayer, as well as a loss in the IMF’s reputation, which is constantly under fire from conservative elements of the US Congress.
Partly for this reason, the IMF reportedly made known its concerns about not being unduly exposed to financial risk in Greece and the possible need for additional financial help from European sources. The IMF’s reputation was badly burnt in the case of Russia and Argentina when it was “left out in the cold” with insufficient bilateral support. Its board will, quite rightly, be anxious not to fall into the same trap again. A call for more equitable “burden sharing” among official lenders is a natural consequence of each institution’s anxiety to preserve its own financial integrity.
As to possible divergences in policy recommendations, while “mixed messaging” entails some costs, it may not be that bad a thing for some different views to be put on the table by elements of the troika. The significance of such differences can be exaggerated and, as in the case of the interest rate reduction issue for Ireland, could end up having more to do with timing aspects. Would a situation where from the outset Ireland was negotiating either with the EU/ECB alone or with the IMF exclusively really have been preferable?
Somewhat unexpectedly, given its prior reputation, the IMF has turned out to be portrayed in Ireland as the “good guy”, with the ECB seen as the hardline “villain”. This may partly be because borrowing from Europe is more akin to asking for money from one’s relatives or close neighbours where implicitly some special treatment may be expected. If this is perceived as not being forthcoming, severe strains can be placed on relationships. By contrast, being financially bailed out by the IMF is more similar to borrowing from the anonymous bank manager in the distant town and can be less stressful.
In the bailout business, given their generally mixed record of successes and failures, no single institution among the troika can claim a monopoly of wisdom nor a dominating role. It is arguable that the involvement of three institutions, while messy – and there is surely scope for greater discipline on the European side – may lead to a wider, more balanced, range of policy options being considered.
Donal Donovan was a member of the IMF staff during 1977-2005, retiring as a deputy director. He is currently adjunct professor at the University of Limerick and a visiting lecturer at Trinity College Dublin