The International Monetary Fund (IMF), convinced that Europe erred in forcing debtor countries like Greece and Portugal to bear nearly all the pain of recovery on their own, is pushing hard for a plan that would impose upfront losses on bondholders the next time a country in the euro area requests a bailout.
Scarred by its role in misjudging the depth of the Greek recession and rebuffed in its attempt to get European governments to write down their Greek loans, the IMF is advocating a more aggressive approach to debt restructuring to try to ease the rigours of German-style austerity.
But the proposal — which is still being hashed out behind the scenes by top economists and lawyers at the fund — is encountering stiff resistance, not just from the powerful global banking lobby, but also from European policy makers, and more recently, the US government, which is the IMF’s largest financial contributor.
Germany is leading the opposition. Policymakers in Berlin and Frankfurt see the Greek debt restructuring in 2012 as a one-off. And they regard any deviation from their core principle — that debilitating debt is to be reduced almost solely via the hard medicine of spending cuts and tax increases — as an escape from fiscal responsibility.
The IMF’s debt plan has been endorsed by the body’s top leadership, including the first deputy managing director David Lipton, a widely respected former Treasury official. The initiative is seen by a number of outside sovereign-debt experts as the best of a range of admittedly tough choices in responding to future debt crises.
But the pushback against the proposal, which has caught IMF officials off guard, has delayed a planned introduction early next year, with any blueprint now not expected to be presented to the fund’s executive board until June, at the earliest. The fund declined to make any executives involved in the project available for comment.
At the root of the issue is the long-simmering dispute between Europe and the IMF over who should pay the bill the next time a country in Europe needs a bailout: Taxpayers and workers, or bankers and investors.
These tensions were on full display during the IMF meetings in Washington this autumn, when Jörg Asmussen, the powerful German representative on the European Central Bank’s executive committee, explained why Germany vetoed the fund’s idea that some of Greece’s debt, most of it now held by Europe, should be written down. “The fund