Consequences for other countries

Even though Greece is the IMF’s first contact with the eurozone, its experience with other EU countries can be quite enlightening. While the G20 finance ministers give assurances that Greece’s problems will not spread to other countries in the eurozone, it is interesting to look at cases of European countries in which the IMF intervened in cooperation with the EU. Hungary: The Greek public became aware of the IMF’s involvement in Hungary during the recent elections there. The elections came after austerity measures which the socialist government implemented in accordance with IMF instructions after the country found itself in the midst of a financial crisis due to successive downgrades of its credit rating. Hungary negotiated an aid plan of 20 billion euros with the IMF, with the participation of the EU and the World Bank. Strict measures included cutting the Christmas bonus given to salaried workers and pensioners, increasing VAT by 5 percent and extending the retirement age by three years. A recession followed during which GDP fell by 7 percent; however the measures were considered a success by the IMF: The fiscal deficit is projected to narrow to 3.8 percent this year and 3 percent in 2011, while the decline in Hungary’s GDP will be limited to 0.2 percent. Latvia: Under similar circumstances, Latvia resorted to an aid plan with the participation of the IMF, Sweden and other European countries and received a loan of 7.5 billion euros. In compliance with IMF instructions, the government cut health spending by 40 percent, closing many hospitals. Hundreds of schools were also closed, teachers’ wages were reduced by 60 percent and those of public servants by 20 percent. GDP fell by 17.5 percent in 2009 and 27 percent overall in the last two years. Unemployment shot up to 22.8 percent from just 5.6 percent in 2007. Romania: The IMF’s involvement here was in cooperation with the EU. Romania received 20 billion euros in aid but was forced to lay off 100,000 employees in the public sector, which at the time accounted for one-third of the total employed. Teachers recently went on strike, threatening long-term action if the government goes ahead with further layoffs in their sector. With the implementation of these measures, the country’s GDP fell by nearly 8 percent. The IMF revised downward its initial estimates that the Romanian economy would grow by 1.3 percent, replacing this was a new figure of 0.8 percent. Argentina: In Greece, the IMF is best known for its disastrous intervention in Argentina. Having dispensed over 13 billion dollars in aid in the 1990s and imposing the privatization of strategic sectors of Argentina’s economy, the IMF returned in 2000 when the country found itself in dire straits after the dollar, to which the peso was linked, rose sharply. The IMF gave a further 40 billion dollars, imposing cuts of welfare programs and lowering salaries by 20 percent. As a result, the country found itself sinking in poverty and the capital was flooded with homeless people. Social unrest and suspension of payments followed in November of 2001. Soon after, however, Argentina’s debt was rescheduled, resulting in two-thirds of its debt being written off.