What Latin America Can Teach Europe About Crisis Resolution

Readers may recall that in June a senior IMF official sent a resignation letter to the IMF Board complaining of “European bias”, failures to act, and “risk aversion”. Two days later a Wall Street Journal blog reported: 

“Many economists say the IMF hasn’t treated Europe with the same tenacity and aggressive policy prognosis as it has emerging markets, such as in Asian and Latin American financial crises in previous decades. For example, some economists believe the IMF should have urged a restructuring of Greek debt much earlier, but acquiesced in the face of strong opposition within EU’s power circles. If Greek debt had been restructured at an earlier stage, those economists say, Europe may have been able to stem its crisis.”

It was evident from the start of the Eurozone crisis that the IMF under Dominique Strauss-Kahn had greatly softened loan “conditionality”. When the morally-challenged Strauss-Kahn was forced to resign and make way for a new chief, Europe pushed hard for another European at the helm. The appointment of Christine Lagarde left the IMF open to charges, at least initially, that IMF resistance to debt restructuring in Greece reflected the desire of European politicians to avoid forcing haircuts on European banks and investors.

Former IMF chief economist Ken Rogoff was incensed by what he said could be regarded as the equivalent of a “regulatory capture” of the IMF. He wrote at Project Syndicate: