Why IMF Loans Always Get Repaid

Greece is trying to make a deal to slash the amount of money it owes bondholders. Hedge funds will take significant losses. But the International Monetary Fund also loaned Greece a lot of money, and it will be paid back in full. If the IMF isn't paid back, most countries will not lend Greece any more money.

RENEE MONTAGNE, HOST:

Let's turn now to the struggle in Europe over Greece's finances and the efforts to cut its huge load of debt. If lenders make a deal with Greece over all the loans it still owes, those lenders are going to lose a lot of money, plain and simple. Greek creditors, together with European leaders, are reportedly close to wrapping up a deal to restructure Greece's debt. Bloomberg reports this morning that the latest rescue plan would mean a loss of more than 70 percent for bondholders.

But whatever is worked out, there is one institution that won't lose money. That's the IMF, the International Monetary Fund. The IMF always gets paid back - dollar for dollar.

Zoe Chace of NPR's Planet Money explores why.

ZOE CHACE, BYLINE: I called up a former chief economist at the IMF with a basic question. So Simon?

SIMON JOHNSON: Zoe.

CHACE: What's the IMF?

JOHNSON: It's kind of like a credit union of pretty much all the countries in the world, right now. They pool their resources, and in principle, they help each other out when times get tough.

CHACE: Simon Johnson is now an economist at MIT. Before we explain why the IMF gets paid back first, let's understand where the IMF gets its money.

JOHNSON: The members, the big powerful countries, pay in – like a credit union – they pay in a subscription.

CHACE: One hundred-eighty-seven countries pay in to the IMF. The bigger the country, the more money it puts on the line. Then the IMF takes that money, loans it to troubled countries and tells them what to do to fix their economies.

JOHNSON: Working with you to move your exchange rate to become more competitive, to increase your exports, to reduce your...

CHACE: The IMF is the lender of last resort. And it always expects to be paid back. But this lender of last resort, it's more glamorous than you might think.

(SOUNDBITE OF 1944 NEWS REEL)

ANNOUNCER: Representatives of 28 countries meet in the conference room of Washington's State Department for the signing of the Bretton Woods Monetary Agreement.

CHACE: In 1944, leaders of the world gathered in Bretton Woods, New Hampshire. And they came up with a monetary fund. This is a newsreel from around that time.

(SOUNDBITE OF 1944 NEWS REEL)

ANNOUNCER: Theoretically, Bretton Woods is an international pool of the goodwill of nations subscribing to the agreement.

CHACE: The Depression and the war were over. Appetite for cooperation was high. In these woods is where the IMF was born. It was a crucial part of the new economic peace. So a bunch of countries put in gold, they put in dollars - into an international fund. The idea was that it would, on occasion, lend out money to stabilize a country.

Over time, the IMF's role grows more controversial. It gets a reputation - as a rich bully - bursting into emerging market economies, telling them how to live their life.

JOHNSON: There was an extremely emotional breakdown in a relationship with Argentina for, example.

CHACE: Economist Simon Johnson remembers when Argentina defaulted on their debt a decade ago. They tried to get out of paying back the IMF, saying the IMF had contributed to their downfall.

JOHNSON: Ultimately they paid the IMF in full. Everyone pays. If you want to play in the international economy, if you want to have credit, if you want to have any kind of normal relationship with the outside world, you need to have a normal relationship with the IMF.

CHACE: If you don't pay back the IMF, the lender of the last resort to the world, then no one will lend you money. I mean really, no one.

JOHNSON: Well, perhaps the North Koreans would give you a loan, but they don't have any money. And that's what it comes down to. It's the IMF on one side and the pariahs of the international community on the other side. You know, who are you going to do business with?

CHACE: Of course, just about every country is going to choose the IMF. And that's why Greece, barring some unforeseen break with tradition, will pay the IMF back first.

Zoe Chace, NPR News, New York.

(SOUNDBITE OF MUSIC)

MONTAGNE: You're listening to MORNING EDITION from NPR News.

Copyright © 2012 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.