In today’s editorial on the IMF legislation before Congress the Wall Street Journal refers to my oped of several weeks ago in which I strongly criticized the IMF for breaking its own rules in its “exceptional access framework” when it made loans to Greece in 2010 in an unsustainable debt situation. Many have asked me about this framework and why I think breaking it was such a serious offense.
The framework was created in 2003 when I was Under Secretary of the U.S. Treasury for International Affairs. Its purpose was to place some sensible rules and limits on the way the IMF makes loans to support governments with debt problems—especially in emerging markets—and thereby move away from the bailout mentality that came out of the 1990s. Such a reform was essential for ending the terrible crisis atmosphere that then existed in emerging markets. The reform was closely related to, and put in place nearly simultaneously with, the actions of several emerging market countries to place collective action clauses in their bond contracts.
I wrote about this reform in some detail in a chapter called “New Rules for the IMF” in my book Global Financial Warriors, explaining how modern economic theory, including time inconsistency and commitment issues, were used in crafting the reforms. A great deal of consensus formed around this framework at the time, and it was essential for garnering support for the IMF in the US Congress. In my view the framework played an important role in the sharp reduction of the crisis atmosphere in emerging market countries.
So when I learned that the IMF permanently abandoned the framework in 2010 so it could make loans to Greece in a clearly unsustainable situation (and under political pressure), I was greatly disappointed.
It’s not simply a matter of how one applies the framework. It’s a matter of whether there is a framework. It’s fundamental to the operation, credibility and effectiveness of the IMF. The editorial is correct to highlight the need for such rules to be reinstated and adhered to before increasing the amount of funds available for such lending