The Role of the IMF in Managing the Euro Area Sovereign Debt and Banking Crises: Perspectives from East Asia
| Date | 01 November 2017 |
| Author | Yung Chul Park |
| DOI | http://doi.org/10.1111/1758-5899.12507 |
| Published date | 01 November 2017 |
The Role of the IMF in Managing the Euro
Area Sovereign Debt and Banking Crises:
Perspectives from East Asia
Yung Chul Park
Korea University
Abstract
This paper analyzes strategies and policy conditionality of the troika –European Commission, European Central Bank, and IMF
–in resolving the euro area crisis from Asia’s perspective with the 1997 IMF Asian crisis management as a possible counterfac-
tual and a yard stick for their effectiveness. The IMF entered into collaboration with the EU mainly to provide the technical
expertise in and share with its European partners the lessons it learned from managing past crises. But many of these lessons
have been unheeded –in particular limitations of the export-led recovery through internal devaluation and the need to move
forward with financial reform at an early stage of the crisis and calibrate supply side reform with the implementation capacity
of the crisis countries.
Policy Implications
•Internal devaluation driven by austerity coupled with supply side reform cannot be an effective measure for adjusting bal-
ance of payment imbalances within a monetary union. Euro area policy makers need to develop a more comprehensive
adjustment strategy, which may eventually lead to creation of a fiscal union.
•As long as euro area policy makers continue to delay reforming institutional and structural impediments blocking financial
restructuring, there is the risk that some of the euro area countries with large volumes of non-performing loans may
develop into epicenters of another round of financial crisis.
•Imposition of a long list of structural reforms irrespective of the ability and will of a country could be self-defeating in a
crisis situation. Structural reforms fail to produce the intended effects, unless they are calibrated for implementation diffi-
culties, equitable distribution of their costs and social and political opposition.
Since the crisis in the euro area broke out in 2010, a joint
crisis resolution mechanism known as the troika –involving
the European Commission, the European Central Bank, and
the IMF –was created. It provided financial assistance for
Greece in May 2010, Ireland seven months later and Portu-
gal in 2011 conditional on macroeconomic adjustments and
structural reform.
Through June 2015 the troika had provided €468.7 billion
in financial support for the three crisis countries. Of this,
€319.2 billion, or more than 68 per cent, had been allocated
to Greece. The IMF’s combined contributions to the three
countries, at €106.5 billion, was equal to 56 per cent of its
total lending to the membership, and on a scale unprece-
dented in its history (see Table 1).
Ireland and Portugal exited their troika programs in 2013
and 2024 respectively. Since then Ireland has been able to
return to international financial markets to pave the way for
rapid growth (IMF, 2017c) Portugal struggled longer than
Ireland before a robust recovery has taken hold in 2017
(IMF, 2017a). Despite the huge financial support that Greece
received in 2010, 2012, and 2015, the country has made lit-
tle progress in breaking out of the crisis and needs another
IMF stand-by arrangement (IMF, 2017b).
As in the euro area resolution programs, the IMF’sfinan-
cial support for the three Asian crisis countries –Indonesia,
South Korea, and Thailand –in 1997, which amounted to
about $91 billion in today’s dollars, came with policy condi-
tionality that required a large array of internal and external
adjustments and a wide range of drastic structural reforms.
The direct costs of the restructuring itself, in addition to the
loss of output and jobs, were staggering. In sharp contrast
to the euro area, however, the Asian crisis came to an end
much earlier-within a year and a half to return to financial
stability and robust growth.
1
Starting from the perspectives of the three Asian crisis
countries, and more broadly, East Asia generally, this study
attempts to highlight and compare some of the salient fea-
tures of the IMF’s management of the Asian crisis with those
[Correction added on 24 October 2017, after first online publication:
The article title has been updated for completeness in this version.]
Global Policy (2017) 8:4 doi: 10.1111/1758-5899.12507 ©2017 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 8 . Issue 4 . November 2017 443
Research Article
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