New Castle, Pennsylvania (PressExposure) July 07, 2011 -- http://blogs.reuters.com/columns/2011/05/18/imf-should-use-crisis-to-toughen-itself-up/
DOMINIQUE STRAUSS-KAHN | IMF
THUR May 19, 2011
By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The International Monetary Fund has a chance to toughen itself up. Under Dominique Strauss-Kahn, the managing director currently imprisoned in New York after being accused of sexual assault, the IMF's lending has multiplied, largely to basket cases like Greece. But recent loans have failed to force change while damaging other lenders' standing.
When Strauss-Kahn joined in 2007, the IMF's lending programs had almost atrophied. However, the 2008 financial crisis and the fund boss's activist leanings caused a surge in activity, with loans outstanding rising tenfold to the equivalent of more than $104 billion and the institution garnering the ability to lend far more.
The results have been mixed. A smallish loan to Latvia in December 2008 was only partly drawn, and helped the country survive the savage deflation needed to maintain its currency's peg to the euro. Having downsized its government and reduced wage rates, Latvia's finances are now in decent shape and economic growth has returned.
But larger programs that have lacked firm support from the recipient governments have been more problematic. In Ukraine, for instance, the IMF risked playing politics when it first dragged its feet over lending to Yulia Tymoshenko's government, then released funds to Viktor Yanukovich after he defeated Tymoshenko in the January 2010 election.
By far the IMF's largest current commitment is roughly $42 billion to Greece, around 13 percent of the country's GDP, with about half that amount outstanding at present. Unfortunately it has not fixed Greek finances. If Greece eventually restructures its debt, as looks unavoidable at some point, the IMF loans - which will end up being senior to other debt - will have the effect of reducing what other creditors recover.
So Strauss-Kahn's expansion of IMF credit has mostly subsidized failure and encouraged moral hazard. The scandal engulfing him presents and opportunity for the organization's member countries to replace the soft DSK with a mean SOB who will lend only on much tougher terms. And if there aren't enough deserving Latvias to sustain the IMF's bureaucracy, then maybe it should shrink - or even disappear altogether.