Washington - The sight of politicians walking hat-in-hand into
meetings with the International Monetary Fund officials has been
humiliating for voters in Greece, Ireland and Portugal and unnerving to
their European neighbours.
Now, bond investors are casting wary eyes on Italy and Spain.
During a visit in early December to Brazil, one of the
emerging economic powerhouses that could help pull the world economy out
of the ditch, IMF chief Christine Lagarde said that the international
crisis lender was working mostly behind the scenes in the eurozone
"I'm very happy if the IMF is in the middle of it, but
in an effective way, not necessarily a visible way," she told
broadcaster Globo News in Sao Paulo.
When the eurozone crisis first broke into the open in
Greece, the European Union struggled - first, to muster the political
will to keep Athens afloat and then, on a technical level, to forge a
rescue fund and conduct a bailout.
As the international crisis lender to its 187 member
countries, the IMF has a long track record of working with governments
in budgetary trouble and brings the credibility to reassure financial
markets. "The fund has the mechanisms in place," IMF spokeswoman Conny
Lotze told dpa.
Many economists argue that the eurozone, through the
European Central Bank, could rescue its own budgetary basket cases
without outside help, at least in theory. But the IMF brings not just
money but a symbolic value that the rest of the world stands behind
"Although the eurozone could handle this crisis with
its own resources, and clearly bears the key responsibility, there is
likely to be a very useful role for the IMF to play," Douglas Elliott, a
fellow in economic studies at the Brookings Institution, a top
Washington think tank, told a House of Representatives committee on
The IMF role in the eurozone bailouts can "help
reassure financial markets that the total resources necessary would
truly be available," he said.
"Most importantly, the IMF is in the best position to
impose conditionality on lending to troubled eurozone countries, since
it is viewed as more dispassionate and less political about Europe's
situation than would be true for purely European institutions," Elliott
"It has the history and technical resources to credibly
impose conditions on disbursements of funds as they are needed.
Further, it can provide a great deal of technical advice, which is more
likely to be taken when the IMF is also a provider of funding. We listen
more carefully to people who are also providing us money."
The first impacts of the IMF's loan conditions are seen
in budgetary direct pressure to staunch the flow of red ink: tax hikes
and stepped up tax collection; cuts to government payrolls, subsidies
and welfare-state benefits; and auctions of state-owned companies and
But the budget axe is soon followed by similarly
unpopular economic reforms to boost the anaemic long-term growth rates
that are at the root of the eurozone troubles.
In Greece, for example, the country is being required
to make far-reaching reforms to loosen its labour market and reduce
barriers to doing business.
Greece is receiving money to make economic adjustments
under a Stand-By Agreement, which is the "workhorse" of IMF credit
facilities, "used in many urgent balance of payments crises," Lotze
said. The measure is meant to give governments in fiscal trouble
"breathing space" during the worst of the crisis so they can start to
bring their houses in order.
Ireland and Portugal were each granted an Extended Fund
Facility, which is a similar IMF programme, but has longer repayment
periods than the Stand-By Arrangements and somewhat lower interest
rates. Greece could eventually convert to an Extended Fund Facility, but
there is no specific timetable.
"The IMF could play a very useful role in any
comprehensive solution (in the eurozone)," Elliott said, "by providing
some of the firepower to reassure the markets, and, more importantly, by
supplying discipline to the execution of the rescue plans through
enforcing conditionality on loan disbursements.