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International Monetary Fund. Independent Evaluation Office and International Monetary Fund. External Relations Dept.

Abstract

1. This evaluation by the Independent Evaluation Office (IEO) assesses the IMF’s engagement with the euro area, focusing on its surveillance and crisis management in Greece, Ireland, and Portugal. In April 2010, Greece became the first euro area country to request financial support from the IMF. The IMF joined the European Commission (EC) and the European Central Bank (ECB)—thus constituting what informally came to be known as the troika—in providing emergency financing, with the Fund’s contribution taking the form of a three-year Stand-By Arrangement (SBA) approved in May; this was replaced two years later by a four-year arrangement under the Extended Fund Facility (EFF) (Table 1).2 By the middle of 2013, the IMF, as part of the troika, had programs in three more euro area countries—Ireland (three-year Extended Arrangement approved in December 2010), Portugal (three-year Extended Arrangement approved in May 2011), and Cyprus (three-year Extended Arrangement approved in May 2013). In addition, the IMF provided technical assistance to Spain in support of European financial assistance for the recapitalization of Spanish financial institutions. The IMF was also active in providing policy advice to European institutions and governments throughout much of the crisis period.

Ms. Julianne Ams, Mr. Tamon Asonuma, Mr. Wolfgang Bergthaler, Ms. Chanda M DeLong, Ms. Nouria El Mehdi, Mr. Mark J Flanagan, Mr. Sean Hagan, Ms. Yan Liu, Charlotte J. Lundgren, Mr. Martin Mühleisen, Alex Pienkowski, Mr. Gustavo Pinto, and Mr. Eric Robert

Abstract

1. The origins of the 1980s Debt Crisis can be traced back to the acute shocks to the international monetary system in the 1970s: the collapse of the Bretton Wood system; the major oil prices hikes; and the substantial liberalization of international finance. The associated build-up of imbalances and vulnerabilities during this period ended abruptly in the early 1980s, and the IMF had to deal with its first systemic debt crisis. Given the novelty of this event, it took time for debtors, creditors, and the international community to understand the magnitude of the problems faced by these indebted economies. Reforms to the crisis-resolution framework occurred gradually and often in a piecemeal fashion. But the reforms made during the 1980s set the foundation for the IMF’s policies and principles today, remaining robust despite a continually changing landscape.

International Monetary Fund. Independent Evaluation Office and International Monetary Fund. External Relations Dept.

Abstract

13. The third and final stage of European Economic and Monetary Union (EMU) began on January 1, 1999 when a common currency, the euro, was adopted by 11 member states of the European Union (EU).11 On January 1, 2001, Greece joined the euro area as its twelfth member. The EMU architecture, as specified by the Maastricht Treaty of 1992, included (i) an independent central bank, the European Central Bank (ECB), focused on price stability and (ii) a set of rules (fiscal deficit and public debt ceilings of 3 percent and 60 percent of GDP, respectively) designed to promote fiscal discipline in individual member states. The Stability and Growth Pact (SGP), adopted in 1997, introduced a “corrective arm” that specified the procedure to be followed by a country violating these limits (known as the Excessive Deficit Procedure, EDP) and a “preventive arm” requiring countries to maintain fiscal positions close to balance or in surplus over the medium term.12 Banking supervision and deposit insurance remained national competencies.

Ms. Julianne Ams, Mr. Tamon Asonuma, Mr. Wolfgang Bergthaler, Ms. Chanda M DeLong, Ms. Nouria El Mehdi, Mr. Mark J Flanagan, Mr. Sean Hagan, Ms. Yan Liu, Charlotte J. Lundgren, Mr. Martin Mühleisen, Alex Pienkowski, Mr. Gustavo Pinto, and Mr. Eric Robert

Abstract

1. The debt crisis ended along with the 1980s, and 1989 saw interest rates drop and prospects for economic growth brighten. With the 1990s, private capital began flowing again to emerging and developing countries. This renewed interest in investment was bolstered by liberalization of international capital flows and widespread deregulation of financial institutions and capital markets. As the recipient economies found, however, the speculative inflows were subject to sudden capital flow reversals and stops.

Ms. Julianne Ams, Mr. Tamon Asonuma, Mr. Wolfgang Bergthaler, Ms. Chanda M DeLong, Ms. Nouria El Mehdi, Mr. Mark J Flanagan, Mr. Sean Hagan, Ms. Yan Liu, Charlotte J. Lundgren, Mr. Martin Mühleisen, Alex Pienkowski, Mr. Gustavo Pinto, and Mr. Eric Robert

Abstract

1. In 2001–02, Argentina experienced one of the worst economic crises in its history. The severity of the crisis, and the economic/political complexity for debt crisis resolution made it particularly important to examine what lessons could be learned from it [40]. The circumstances of the crisis highlighted the need to establish a better framework for countries to exit in a timely fashion from unsustainable debt dynamics. In the aftermath of the crisis, the IMF focused its work particularly on two areas aiming to promote a more orderly system for the resolution of sovereign debt crises: rethinking the framework for committing exceptional levels of IMF resources, and considering methods for addressing collective action problems. On the latter, the IMF considered in parallel both statutory and contractual approaches.

International Monetary Fund. Independent Evaluation Office and International Monetary Fund. External Relations Dept.

Abstract

29. In May 2010, the IMF Executive Board approved a decision to provide exceptional access financing to Greece without seeking a restructuring of Greece’s sovereign debt, in circumstances where the debt could not be “deemed sustainable with a high probability.” Thus, the Board was required to change one of the criteria under the IMF’s policy governing exceptional access, by introducing what became known as the systemic exemption clause (see below). This decision had implications beyond Greece, as the systemic exemption clause was invoked again in the cases of exceptional access support for Ireland and Portugal. This section assesses separately the decision to provide exceptional access financing to Greece and the decision to amend the exceptional access framework.

International Monetary Fund. Independent Evaluation Office and International Monetary Fund. External Relations Dept.

Abstract

44. At the launch of the euro, the IMF adopted a double-track approach to its surveillance of euro area countries (Executive Board Decision No. 11846 (98/125), December 9, 1998). The IMF conducted Article IV consultations, usually annually, with individual member countries that also belonged to the euro area. It also held twice-yearly staff discussions with the EU institutions responsible for common policies in the euro area; according to the Board decision, these discussions were to be “considered an integral part of the Article IV process for each member.” How to integrate these two strands of surveillance activity has since posed a challenge to the IMF.40

Ms. Julianne Ams, Mr. Tamon Asonuma, Mr. Wolfgang Bergthaler, Ms. Chanda M DeLong, Ms. Nouria El Mehdi, Mr. Mark J Flanagan, Mr. Sean Hagan, Ms. Yan Liu, Charlotte J. Lundgren, Mr. Martin Mühleisen, Alex Pienkowski, Mr. Gustavo Pinto, and Mr. Eric Robert

Abstract

1. In the aftermath of the Argentine crisis, IMF members experienced a relatively calm period. There were few IMF-supported programs (Brazil, Turkey, Uruguay) under the Exceptional Access Policy (EAP—see chapter 3), largely due to balance of payments problems in the current account, and relatively few sovereign debt restructurings (e.g., Uruguay, Dominican Republic, Grenada, and Belize). However, imbalances and vulnerabilities were growing and subsequently erupted in 2007 [58].

International Monetary Fund. Independent Evaluation Office and International Monetary Fund. External Relations Dept.

Abstract

93. The term troika in the context of the euro area crisis appears to have been used in two alternative ways. First, in a strictly operational sense, the troika refers to an ad hoc coordinating device by which the IMF and the EC, in liaison with the ECB, economized on the process of negotiating with the authorities of crisis countries. Without such a device, the authorities would have had to negotiate with two or three different teams, increasing the costs of reaching agreement. Second, the term troika is sometimes taken to refer to a policy framework within which the IMF was expected to accept constraints imposed by the EMU membership. This distinction is important. The IMF could have been the sole lender to a euro area country, working within the legal, political, and other institutional constraints imposed by the country’s EMU membership. In this scenario, the IMF would have faced the same policy constraints due to EMU membership as it did in joint lending operations, though it might have enjoyed greater leverage.

International Monetary Fund. Independent Evaluation Office and International Monetary Fund. External Relations Dept.

Abstract

116. This chapter presents a summary of key findings and draws lessons from the evaluation, and proposes five recommendations to help improve the IMF’s effectiveness.