Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”
Andrew Harrer/Bloomberg NewsJust a few years ago, euro-zone countries were at the forefront of those saying that the International Monetary Fund had lost its relevance and should be downsized. French authorities regarded the I.M.F. as so marginal that President Nicolas Sarkozy was happy to put forward the name of a potential rival, Dominique Strauss-Kahn, as a candidate for its managing director, in fall 2007.
Today the French government is working overtime to make sure that a Sarkozy loyalist, the leader of his economic team — Finance Minister Christine Lagarde — becomes the next managing director. Why do France and other euro-zone countries now care so much about who runs the I.M.F.?
The euro currency union has a serious problem, to be sure, with the likes of Greece, Ireland and Portugal, but it is beyond bizarre that these countries are borrowing from the I.M.F., which typically lends hard currency to countries that have balance-of-payments crises — they have been importing more than they were exporting, while the private-sector capital inflows (typically loans of some kind) that financed this current account deficit have dried up.
Greece has a current account deficit, but its money, the euro, is one of the world’s hardest currencies — a reserve currency in which central banks and private business keep their rainy-day funds (as are dollars, yen, Swiss francs and, perhaps, British pounds). The euro zone as a whole does not have a current account deficit.
I vividly recall discussions with euro-zone authorities in 2007 — when I was chief economist at the I.M.F. — in which they argued that current-account imbalances within the euro zone had no meaning and were not the business of the I.M.F.
Their argument was that the I.M.F. was not concerned with payment imbalances between the various American states (all, of course, using the dollar), and it should likewise back away from discussing the fact that some euro-zone countries, like Germany and the Netherlands, had large surpluses in their current accounts while Greece, Spain and others had big deficits.
Those euro-zone treasury and central bank officials had a point. After all, if one deficit country got into trouble, it could be helped out by other members of the currency union. As the euro is a reserve currency — and a highly regarded one; for example, it remains strong relative to the dollar — the I.M.F. is now essentially lending euros to the euro zone through its various bailout programs.
Does this make sense?
No, unless you understand that the goal of these various bailouts is to ensure that German and French taxpayers do not realize the full extent of their losses or appreciate the ways in which their banks have been mismanaged.
Take the most generous interpretation of I.M.F. lending to Greece: that it is like the Troubled Asset Relief Program in the United States, in the sense that a great deal of money will be laid out but all or most of it will be repaid in nominal terms.
Such lending could just as easily be made by other euro-zone countries, from current resources or by borrowing in the markets. Germany, for example, has plenty of fiscal credibility and issues some of the lowest-risk sovereign debt available. But even if all the money lent to Greece in this fashion were repaid, this would look bad — to German voters (and to French voters, because France would have to lend, too).
Such loans are much more risky than commonly supposed. The I.M.F. does eventually get its money back nominally, but not always in real terms (adjusted for inflation) and not on a risk-adjusted basis (that is, the interest rate charged does not include proper compensation for the risks being taken). There is a very real possibility that some or all of the monies lent will not be paid back in the foreseeable future.
The I.M.F., which is, in this regard, essentially a credit union owned by 187 countries — with voting based on ownership shares that reflect relative economic size. The European Union owns about 30 percent of the I.M.F., so 70 percent of any money at risk belongs to other countries: about 17 percent to the United States, 7 percent to Japan, 35 percent to emerging-market nations and the rest to other countries.
The managing director of the I.M.F. is the impresario of any bailout and oversees the big decisions that must be negotiated with all significant stakeholders. This leaves enormous scope for discretion.
Ms. Lagarde, or any managing director, could directly influence the terms of I.M.F. involvement — and based on her negotiating position to date within the euro zone, we can presume she will lean toward more money, easier terms and, above, all no losses for the banks that made foolish loans.
Increasingly, it looks as though the euro-zone leadership, under French guidance, will go for the full-bailout option, in which all Greek debt is bought by the I.M.F., the European Central Bank and other euro-zone entities. This debt will be held to maturity — and any creditor who did not yet sell will be made whole (those who have already sold at a loss are out of luck).
This course of action will be expensive, in terms of nominal outlays and in real risk-adjusted terms, because whatever terms Greece gets must also be offered to Ireland and Portugal. The I.M.F. may need to raise more capital or, more likely, tap its credit lines from member governments. (To be clear, the full bailout is painful for the debtor countries; their fiscal adjustments will involve spending cuts, tax increases and asset sales.)
The Europeans greatly fear their own “Lehman moment,” in which any attempt to impose even moderate losses on creditors will cause chaos throughout the financial system. The French and Germans fought hard against increasing capital requirements under Basel III and the results of various European banking stress tests have been completely noncredible — particularly because they did not take into account serious sovereign-debt default scenarios.
The French want to sway decision-making at the I.M.F. in order to use money from the United States, Japan and poorer countries to conceal from their own electorate that the euro-zone structure has led all its members into fiscal jeopardy: some borrowed heavily; others let their banks lend irresponsibly and thus created a large contingent liability.
The best way to hide the true cost is to have other people’s taxpayers foot the bill, preferably with the least possible transparency. Thus, euro-zone politicians have a lot at stake, and look for Ms. Lagarde to run the I.M.F.
