A Deal and a Step to International Monetary Reform

I make the case in this Wall Street Journal piece and in more detail in Congressional testimony that there’s an opportunity for a deal between the Congress and the Administration on international monetary reform.  The case starts with perhaps the most obvious lesson from the Greek crisis: The IMF should not make loans to countries with unsustainable debt. Such loans bail out banks and often worsen the situation.

The IMF learned that lesson more than a decade ago and in 2003 adopted an “exceptional access framework” enshrining the rule of no lending to countries with unsustainable debt. There were few crises in emerging markets in the years following, and it seemed to work well.

But the rule was broken in 2010 when the Greek crisis came along.  Even though Greek debt was unsustainable, the IMF lent 30 billion euros anyway.  It wrote in an exemption to the rule for systemic risk, perhaps under pressure from private holders of Greek debt.

Following this 2010 decision, the Greek economy has deteriorated sharply and many private creditors were able to get out of Greek debt leaving the public sector holding the bag, as Benn Steil has dramatically shown.

Though the framework was broken in order to make the IMF loan to Greece, it remains broken as the exemption still applies.  So it is time to restore the framework and remove the exemption. There’s a lot of support for such a reform, but the US Treasury is resisting.

There is room for a deal here: Treasury wants Congress to raise the U.S. contribution to the IMF, but Congress is reluctant to do so with no framework limiting IMF lending. If Treasury agreed to restore the framework, then Congress could provide the support . This deal would be a first step in putting America in the lead again on international monetary reform.

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