Why European loans could hurt U.S. taxpayers
There is a major disconnect between what the Obama administration says and what it does about bailing out countries in the European periphery. For while the administration keeps insisting that Europe has the financial wherewithal to rescue those European countries in distress, it has allowed the International Monetary Fund to bail out Greece, Ireland and Portugal on an unprecedented scale. And it has done so in a manner that puts the U.S. taxpayer on the hook in a major way.
And if that were not bad enough, the administration now appears to be acquiescing to substantially bolstering the IMF’s available resources with large-scale bilateral European loans. It is doing so for potential massive IMF lending to Italy and Spain that would dwarf anything that the IMF has previously done and that would put U.S. taxpayers seriously at risk.
Over the past 18 months, the IMF has lent to the European periphery on a scale that has no precedent in its 67-year history. Whereas even during the Asian and Latin American crises of the late 1990s the IMF never lent a country more than 12 times its IMF quota contribution, its recent loan commitments to Greece, Ireland and Portugal have been more of the order of 35 to 40 times those countries’ IMF quotas.
In U.S. dollar terms, the IMF’s lending commitments made to those three European countries now total around $100 billion. Considering that the U.S. has a 17¾% share in the IMF, these lending commitments put the U.S. taxpayer at risk for almost $20 billion should those countries be unable to repay the IMF. And the IMF is making these massive commitments despite the fact that Europe has the money to bail out its own periphery and that Europe contributed nothing to help the United States resolve its housing and banking sector crisis in 2008-2009.
The Obama administration downplays the potential risk posed to the U.S. taxpayer by arguing that the IMF has preferred creditor status and that to date, it has never had a significant country defaulting on its IMF loan obligations. What the administration does not say is that the IMF’s past loan repayment experience is not particularly relevant to its current European lending programs, since its European lending is so much larger than any previous IMF country loan operation.
The administration is also not leveling with the U.S. public as to how ineffectual the very large IMF financial support programs have been to date in resolving Europe’s troubled periphery’s economic problems. For while these programs have certainly succeeded in kicking the can down the road, they have done nothing to restore solvency in Greece, Ireland and Portugal.