The Fund as ‘junior partner'? IMF-RFA crisis lending and regime complexity

GEG working paper

What is the impact of the simultaneous expansion and fragmentation of the global financial safety net on the IMF? The Fund used to be central to global financial governance, but the proliferation of regional financing arrangements (RFAs) over the past decade has dramatically reshaped the institutional environment. The resulting dynamics have been observed in a number of controversial IMF-EU financial assistance programs in Europe.

Drawing on regime complexity approaches, this article argues that partially overlapping institutions alter the bargaining balance between the IMF and debtor and creditor states. Their presence introduces a new outside option for financial assistance that under certain conditions allows creditor and borrower states to threaten to exclude the Fund from a program. However, the IMF can also strategically draw on complementarities with RFAs to increase its ability to translate preferences into program design. In turn, this has implications about whose preferences – creditors, borrowers, or Fund staff - ultimately shape program design.

This argument is illustrated with relation to the Latvian crisis of 2008-2011. Despite significant misgivings over the design of the financial assistance program, the IMF found itself unable to threaten to ‘walk away’. Such behaviour is traced to the instrumentalization of a more competitive institutional environment by the borrower rather than established state-centric or staff-driven accounts.

GEG WP 2017/136