In fact, this “agreement in principle” tactic, which was used to overcome Germany’s opposition to releasing additional EU funds for Greece, is usually reserved for poor countries and has not been used since the 1980s.
But it is not the first time the International Monetary Fund has given exemptions to the crisis-ridden country.
Systemic exemption in 2010In 2010, amid the worst of the global financial crisis, the eurozone asked the IMF to participate in the rescue of Greece, then at the edge of the precipice and threatening to crash out of the monetary union.
However, that was a major challenge for the fund, since its rules only allow it to lend to a country if there is a “high probability” the debt is sustainable.
Greece’s debt was not.
Then-IMF chief Dominique Strauss-Kahn created a “systemic exemption” which allowed the Fund to provide massive loans to a country despite doubts about its solvency at a time when the stability of the financial system is at stake.
This clause allowed the IMF to join the Europeans in May 2010 and grant a huge loan of €30 billion to Greece. That was followed by a second loan in 2012.
Many voices, especially in emerging markets, have criticized this exemption, which they said gave preferential treatment to rich European countries, leeway they never allowed to emerging and developing countries, which had to agree to harsh reforms and tough oversight to receive loans.
Under pressure from the United States, the IMF finally abolished the exemption in January 2016, acknowledging that it failed to avoid the “contagion” of the crisis and posed a risk to its resources.
In the summer of 2015, the eurozone agreed on a new bailout programme for Greece, but it was contingent on IMF participation.
Anxious to restore its impartiality, the Fund this time insisted it would not approve a new loan programme until the Europeans committed themselves to further easing Greece’s debt burden.
But in the run-up to the general elections in 2017, bailout-weary Berlin resisted any new debt relief, and the dispute with the IMF blocked a new loan payment for Athens for many months.
With a July debt payment deadline for Greece looming, the Fund sought a compromise, resorting to something it had not used since the late 1980s: calling on the IMF board to approve an “agreement in principle” but without releasing any funds.
In short, the IMF will give a green light to its participation, and approval of the country’s economic reform programme, but Greece will not see a penny until Europe provides details on the debt relief plans. And that will be after the end of the current programme in 2018. .
Does that mean that the IMF will continue to lend to Greece after the programme is ended?
The institution insists this solution does not constitute preferential treatment, but it will be the first time the tactic is used for an industrialised country like Greece.
The agreement in principle was used for the first time in 1983 with Sudan and the last time with Brazil in 1988, according to the IMF.