IMF cancels rule created in 2010 to bail out Greece and demands EU debt relief for Greece before new bailout

AFP/Guardian — The International Monetary Fund abolished Wednesday a rule created in 2010 that allowed it to participate in an international bailout of Greece despite doubts about the country’s debt sustainability.

“Today the executive board of the IMF approved an important reform to the Fund’s exceptional access lending framework, including the removal of the systemic exemption,” IMF spokesman Gerry Rice said in a brief statement.

The “systemic exemption” amounted to a loophole in the IMF’s longstanding policy that required the crisis lender to judge a member country’s public debt to be sustainable with “high probability” before it could provide financial assistance that exceeds a member’s contribution to the institution.

Reeling from budget and banking crises in 2010, deeply indebted Greece did not meet the sustainability condition and the IMF decided that a debt restructuring could pose severe negative spillovers on the rest of the eurozone.

The IMF thus created the “systemic exemption” provision which paved the way for it to join the European Union and the European Central Bank in the so-called “troika” of international lenders throwing a lifeline to Greece.

For the IMF, that amounted to 30 billion euros ($32.7 billion) in May 2010, then an additional 18 billion euros in a second bailout two years later.

The systemic exemption was used more than 30 times to permit loan payments to Greece but also for Ireland and Portugal, two other eurozone members receiving assistance from the troika, by end-May 2014.

Its use, nevertheless, has stirred criticism, notably from some emerging-market countries that saw it as giving favorable treatment to European states in response to pressure from Western powers.

With the elimination of the loophole, the IMF is seeking to close a controversial chapter in its recent history as it decides whether to join the EU and ECB in a third bailout of Greece launched last August.

In a sign that the abolition of this “systemic exemption” was already effectively in place, the IMF is demanding this time, before unblocking any new loans, that the Europeans first agree to ease Greece’s debt burden to ensure its sustainability.

Meanwhile, the European Union will need to provide significant debt relief for Greece if it is to persuade the International Monetary Fund to put its financial clout behind the country’s third bailout package, the Washington-based organisation has said.

After what was described as a cordial meeting between the IMF’s managing director, Christine Lagarde, and the Greek prime minister, Alexis Tsipras, on the sidelines of the World Economic Forum in Davos, the fund said it was only prepared to support the recession-ravaged eurozone country on a strings-attached basis.

It said Greece had to be prepared to implement a tough package of economic reform and the country’s eurozone partners had to be willing to write down Greece’s debts.

The IMF took part in the first two Greek bailouts but is concerned that, at 175% of GDP, Greece’s debts are too burdensome and will prevent a lasting recovery. Lagarde told Tsipras the IMF regarded reform of Greece’s pension system, which accounts for 10% of GDP, as vital.

The IMF said of the talks: “The managing director reiterated that the IMF stands ready to continue to support Greece in achieving robust economic growth and sustainable public finances through a credible and comprehensive medium-term economic programme.

“Such a programme would require strong economic policies, not least pension reforms as well as significant debt relief from Greece’s European partners to ensure that debt is on a sustainable downward trajectory.”

The Greek government said the talks had been sincere.

Earlier in the day, Tsipras told Davos he was committed to reforming the Greek economy, which lost 25% of its GDP through austerity programmes which sent jobless rates to twice the eurozone average. But he criticised Europe’s insistence on lowering budget deficits, saying: “We must all understand that, next to balanced budgets, we must also have growth … We need to be more realistic, and show more solidarity too.”

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