The International Monetary Fund — and not the European Central Bank — should provide the solution to the sovereign debt crisis, wrote former IMF managing director Hendrikus Johannes Witteveen in an editorial published in the Financial Times.Witteveen argued that the creation of an IMF “debt facility” would permit the fund to provide large-scale temporary financing to heavily indebted countries by borrowing from nations who maintain larger central bank reserves — in particular China, Japan, or the Middle East.
The former IMF director — who faced the OPEC oil crisis during his tenure — argued that this would provide a far bigger pot of financing with which to aid Italy and Spain than the ECB could amass because the fund is not limited to Europe alone.
He drew numerous parallels to the oil crisis in the 1970s.
“The original facilities were helpful because the IMF’s ability to borrow is constrained by its system of financing via quotas related to the size of different countries. So when in 1973 oil prices rose sharply, Opec countries suddenly had balance of payment surpluses far larger than their quota. The facility allowed the fund, which had only relatively small amounts of their currencies, to borrow more and use the funds for loans to countries where the oil price increase had caused deficits not easily financed by commercial banks.”
Witteveen also implied that the IMF could hold nations to more stringent economic policies than the ECB.
“A final advantage would be to bring big countries such as Italy and Spain under IMF conditionality. The fund could then take over the work of the ECB, whose courageous buying of indebted countries’ bonds requires adequate fiscal policies. This is clearly more the task of the IMF than of the ECB. It would restore market confidence, so the financing can eventually be taken over again by the normal market mechanisms.
International action is now urgent to avert a vicious recessionary cycle, which many governments – bound by their debt problems – would be unable to counter, even becoming a recessionary force themselves.”