As French Finance Minister in 2010, Christine Lagarde opposed the involvement of the International Monetary Fund in Greece.
Now Lagarde’s tenure at the head of the IMF since 2011 will be shaped by Greece, which holds a referendum on Sunday that could pave the way to its exit from the euro.
By its own admission the Washington-based institution broke many of its rules in lending to Greece. It ended up endorsing austerity measures proposed by the European Commission and European Central Bank, its partners in the troika of Greece’s lenders.
That the IMF lent to Greece at the behest of Europe, which has nominated every IMF Managing Director since the inception of the Fund in 1946, may expose the institution to greater scrutiny, especially as it has $24 billion in loans outstanding to Greece in its largest-ever program.
The involvement of the Fund in Greece and its continued support for decisions driven by eurozone governments caused a deep split in the institution.
Some IMF economists had misgivings about lending to Greece in 2010 within the constraints of the so-called “troika” of lenders, where the Fund would be the junior partner to the European Central Bank and the European Commission.
IMF board members also protested the “exceptional” size of the program, as Athens did not meet the Fund’s criteria for debt sustainability, meaning it would have trouble repaying.
Yet swayed by the fear that contagion in Athens could spread to French and German banks, the IMF agreed to participate in a joint 110-billion-euro bailout of Greece with the Europeans.
Later, the Fund admitted that its projections for the Greek economy had been overly optimistic. Instead of growing after a year of austerity, Greece’s economy plunged into one of the worst recessions to ever hit a country in peacetime, with output falling 22 percent from 2008 to 2012.
While the eurozone’s insistence on drawing a direct link between euro membership and Greece’s debt sustainability and the negotiating tactics of the Greek government have exposed both to questions of credibility, the Fund stands charged as well.
Greek default on all $24 billion it owes to the IMF dwarfs previous delinquincies from countries like Sudan, Zimbabwe and Somalia.
While the IMF was worried about contagion when it made the loans, it also had institutional incentives for wanting to bail out troubled countries.
The IMF’s heavy involvement in large bailouts for euro zone countries, which included Ireland and Portugal, have enabled it to build up its reserve buffers in recent years. It is now aiming to store away some $28 billion by 2018.
From interest and charges on the Greek program alone, the IMF has earned some $3.9 billion since 2010.
