Crisis at the IMF over Greece

What is the IMF?

The International Monetary Fund (IMF) was set up in 1945 as part of the Bretton Woods system of international monetary policy coordination. Up until the early 1970s it focused on managing the fixed-exchange-rate regimes in place at the time. But since the collapse of the Bretton Woods system and the introduction of floating exchange-rate regimes, the IMF's role has widened.

Its formal mandate was updated in 2012 to include "all macroeconomic and financial-sector issues that bear on global stability". Its role is now three-part: "surveillance" (analysing national economies and the global economy, and giving advice and warnings); "financial assistance" (lending countries money to get them through tough times); and "technical assistance" (policy advice and practical help).

Who is a member?

The IMF was initially set up with 29 members, but that quickly increased. Today the IMF has 188 members most of them sovereign states, plus a few sub-national or contested territories (Hong Kong, Kosovo and the like). The only European states that choose not to join are the tax haven statelets Andorra, Liechtenstein and Monaco.

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North Korea is the only Asian refusenik, although Taiwan is not a member due to its sovereignty dispute with China (it was a member until 1980, when it lost its United Nations seat to China). Cuba left in 1964 and the tiny Pacific island of Nauru only applied to become the 189th member last year, despite becoming independent in 1968.

Where does it gets its money?

The primary source of the IMF's money is its members' "quotas" or contributions which broadly reflect each member's relative size in the world economy at the time they joined. The size of the quota also determines each member's voting power within the organisation. The IMF's total quota resources amount to about $362bn.

In addition, it has access to additional pledged or committed resources of $885bn. Around $163bn of its funds are committed under current lending arrangements, of which $137bn have not been drawn. And although its primary focus has been developing countries and poorer developed countries, its four current biggest borrowers are all in Europe.

Who are the borrowers?

Portugal, Greece, Ireland and Ukraine. And it's the IMF's dealings with Greece, in particular, that are proving highly controversial and threaten to wreck its credibility, as Greece totters on the brink of default. Some believe that the IMF should never have been involved there in the first place, and that its demands for ever-harsher austerity have backfired (the IMF has often been criticised for this in the past, in interventions from Russia to Argentina to southeast Asia).

Opponents say that the whole mess is symptomatic of the IMF's control by rich Western countries at the expense of emerging powers, such as China, India and Brazil (see below). Leaked minutes from the IMF board meetings of May 2010 show that all the emerging-market members (and Switzerland) opposed the terms of the first Greek loan package and associated austerity conditions, on the grounds that it was intended to save the euro and European banks, rather than Greece.

Will Greece default?

There's at least a chance that Greece will default on the €1.6bn of payments it owes to the IMF at the end of June. Last week, Greece failed to pay €300m that fell due on 5 June, and instead "bundled" it into the money owed at the end of the month. That's technically a perfectly legitimate "reshuffle", but the technique was last used by Zambia in the 1980s. If a default happens, more questions will be asked about why the IMF's predictions for the Greek economy have proved so spectacularly wrong and its policy prescriptions misconceived.

The IMF's projection for Greece was that the austerity it demanded would lead to a 2.6% contraction in GDP in 2010 followed by a swift recovery. Instead, the country has seen six years of recession, a 26% fall in GDP and 60% youth unemployment.

What will the outcome be?

That's impossible to say, but it seems likely to give more ammunition to the IMF's critics, including former insiders who have been voicing their disquiet. "Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity in a country when it is in a deflationary cycle," said Ashoka Mody, the former chief of the IMF's bailout in Ireland. "The entire strategy of the creditors is wrong and the longer this goes on, the more it is going to cost them."

Is the IMF a tool of America?

Accusations that the IMF is controlled by rich countries arehard to rebut. America has a policy veto due to the size ofits quota and all the IMF's managing directors have beenEuropean (the current IMF head is France's Christine Lagarde,who beat the arguably better-qualified Augustn Carstens ofMexico to the job). China, India and Brazil have only 8% ofvoting rights despite accounting for 19% of global GDP.A revised quota settlement was agreed in 2010, but thereforms have been stymied by Republicans in the USCongress.

Yet US dominance "undermines [the IMF's]legitimacy and fuels interest in alternatives, such as a Brics backedbank to finance infrastructure or bilateral agreementsto provide short-term financing. By the time America getsround to approving the IMF's reforms, it may have become amuch less important institution," says The Economist.