Wednesday, April 28, 2010

Greece, the Euro, and the IMF

. Wednesday, April 28, 2010

Emmanuel wonders whether the IMF can lend to Greece, because Greece faces a funding problem but not a balance of payments problem. Because the IMF exists to fund governments facing balance of payments problems, Greece doesn't or shouldn't qualify for IMF assistance.

Yet, Greece does have a balance of payments problem. Its current account deficit is about 6% of GDP. I can't imagine that it is not experiencing net capital outflows at present. The question is, then, from whom can Greece borrow to cover its twin deficits when markets are reluctant to lend at less than penalty rates?

Greek banks can't borrow from the ECB without limit. If Greece could borrow from the ECB without limit, it wouldn't be facing its current crisis. And the Germans wouldn't be wringing their hands and dragging their feet over the proposed extra-ordinary funding. If Greece could borrow without limit from the ECB, it would sell bonds to the ECB and use the euro to settle its current deficit. This is exactly the contingency that made the Germans reluctant to throw their lot in with the PIGs to begin with and makes them reluctant to support Greece now. The Germans are reluctant because this monetizes Greece's deficit and produces inflation.

The situation in Greece is therefore no different, fundamentally, than the Argentinian crisis or the bigger Latin American crisis of the 1980s. So of course the IMF is mandated to lend to Greece.


Emmanuel said...

Thanks for the explanation, Dr. Oatley!

Manuela said...

I was wondering about the technicalities of IMF assistance to Greece. Since IMF lending transactions are not loans per se but exchanges of monetary assets (i.e. the country seeking assistance is said to make a purchase of the stronger currencies it needs with an equivalent amount of its own currency), what kind of assets are exchanged in the case of Greece? Thanks

Greece, the Euro, and the IMF
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