Financial Times
December 5, 2012
For many observers who lived through the constant debt-rescheduling processes of Latin American countries in the 1980s it is difficult to regard the latest episode of the Euro-Hellenic drama without experiencing a sense of déjà vu.
Last week, once again, a new plan was devised by the troika of the European Commission, the International Monetary Fund and the European Central Bank to keep Greece funded and avoid default in the short term, while its economy continues to plummet with no end in sight. After two rescue programmes, along with the largest debt restructuring in history, Greece remains insolvent and eurozone leaders refuse to recognise the need for a new approach. To achieve solvency, a serious debt-relief plan, conditional on structural reform, should be implemented to shift the emphasis from fiscal austerity to recovering economic growth and restoring market confidence. It is time for the IMF to assert a commanding role away from European leaders’ short-term political incentives and achieve a credible strategy out of the Greek crisis.
During the Latin American “lost decade”, the region experienced a series of economic crises that brought several countries to the brink of default. Rescue funds were provided through commercial banks, which were governments’ main financing source, the IMF and other multilateral agencies – the 1980s equivalent of today’s troika – to avoid this scenario. Throughout the decade, the region’s debt profile deteriorated continually as the fund failed to address the issue of insolvency and treated the problem as one of illiquidity. Every year the IMF would project gross domestic product to rise and debt-to-GDP ratios to fall, sustaining the illusion that these countries were not fundamentally insolvent. Every year the opposite occurred.
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