The Corner

IMF: Bail and Bail-Out

 The arrest of IMF boss Dominique Strauss-Kahn for an alleged sexual asaault in a New York hotel room this weekend could throw a very big wrench in plans for the next stage in the Greek bail-out, a process in which the IMF would undoubtedly have a major role to play.  The IMF’s decision-making capability rests on more than one man, of course, but as those decisions will also involve considerable political jostling, Strauss-Kahn’s clout (he was likely to be have been a presidential candidate in the next French elections) will be missed.

 

The New York Times has more here (my emphasis added):

With headlines shouting of credit rating downgrades, panicky Greeks are taking their money from banks. Greece lost 40 billion euros of deposits last year, and bankers say withdrawals have increased recently.

These struggles have again made Greece an urgent matter for the 17-nation euro zone, whose finance ministers are to meet on Monday to discuss Greece and the debt crisis that has defied Europe’s yearlong efforts to contain it. On the table will be whether Greece, which is now projected to miss its deficit target by as much as two percentage points of G.D.P. this year, will be granted another round of loans totaling as much as 60 billion euros, and what further budget cuts would be required in return.

But there is serious debate about whether this kind of prescription — subjecting Greece to more cuts and sacrifice in order to justify a second installment of funds from a reluctant Europe — is the right one.

This form of remedy violates two basic economic principles, according to Yanis Varoufakis, an economics professor and blogger at the University of Athens. “You do not lend money at high interest rates to the insolvent and you do not introduce austerity into a recession,” he said. “It’s pretty simple: the debt is going up and G.D.P. is going down. Have we not learned the lesson of 1929?”

The arrest on Saturday of Dominique Strauss-Kahn, the head of the I.M.F., on charges related to sexual assault could create new uncertainty about a push for more severe austerity. Mr. Strauss-Kahn generally favored a less onerous approach, and if he is forced to resign it is possible that tougher conditions preferred by Germany will be imposed.  

Greece is almost certainly heading for default. The only question is whether that default can be clothed in the politer language of  “orderly restructuring” and whether the Eurozone’s leadership can avoid a trainwreck before finally accepting that the status quo cannot hold.

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