WATERLOO, Canada — March 26, 2014 — A credible framework for maintaining discipline over International Monetary Fund (IMF) lending is required to ensure the viability of the organization’s preferred creditor status, according to a new report from the Centre for International Governance Innovation (CIGI).
In The IMF’s Preferred Creditor Status: Does It Still Make Sense After the Euro Crisis?, CIGI Senior FellowSusan Schadler presents a short history of the IMF’s preferred creditor status then examines new issues that arose in the euro crisis and the questions they raised about the viability and basis for preferred creditor status.
Schadler says that until the euro crisis, the rules governing IMF policies were “clearly consistent with” preferred creditor status. But that the softening of those rules in the course of the euro crisis “greatly weakens the case” for preferred creditor status.
Citing the example of the IMF’s approval in 2010 of a stand-by arrangement with Greece, Schadler notes that in the absence of clear adherence to the IMF objectives, its preferred creditor status “can actually undermine the IMF’s mandate, as it appears to have done in Greece.”
Schadler’s other conclusions and recommendations include:
For preferred creditor status to be viable, the IMF needs a firm framework to ensure that its members approve only lending arrangements with a high probability of success. But as part of the approval of the Greek arrangement in 2010, a permanent change to the framework left it significantly weakened;
The justification of preferred creditor status holds up to scrutiny only if the IMF lends in support of adjustment programs that conform to the IMF’s mandate: to promote policies that avoid measures destructive of national or international prosperity and catalyze private lending (or, in more dire circumstances, position the country to regain market access expeditiously); and,
Without a restoration of a credible framework to discipline IMF lending decisions and prevent the IMF from succumbing to political pressure to lend into unsustainable circumstances, markets will eventually test the viability of the IMF’s preferred creditor status.
ABOUT THE AUTHOR: Susan Schadler is a CIGI Senior Fellow. She is a former deputy director of the IMF’s European Department, where she led surveillance and lending operations to several countries and managed a number of research teams working on European issues. Her current research interests include the sovereign debt crisis, global capital flows, global financial institutions and growth models for emerging market economies.
The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank on international governance. Led by experienced practitioners and distinguished academics, CIGI supports research, forms networks, advances policy debate and generates ideas for multilateral governance improvements. Conducting an active agenda of research, events and publications, CIGI’s interdisciplinary work includes collaboration with policy, business and academic communities around the world. CIGI was founded in 2001 by Jim Balsillie, then co-CEO of Research In Motion (BlackBerry), and collaborates with and gratefully acknowledges support from a number of strategic partners, in particular the Government of Canada and the Government of Ontario. For more information, please visit www.cigionline.org.