“Today the executive board of the IMF approved an important reform to the Fund’s exceptional access lending framework, including the removal of the systemic exemption,” IMF spokesman Gerry Rice said in a brief statement.
The “systemic exemption” amounted to a loophole in the IMF’s longstanding policy that required the crisis lender to judge a member country’s public debt to be sustainable with “high probability” before it could provide financial assistance that exceeds a member’s contribution to the institution.
Reeling from budget and banking crises in 2010, deeply indebted Greece did not meet the sustainability condition and the IMF decided that a debt restructuring could pose severe negative spillovers on the rest of the eurozone.
The IMF thus created the “systemic exemption” provision which paved the way for it to join the European Union and the European Central Bank in the so-called “troika” of international lenders throwing a lifeline to Greece.
For the IMF, that amounted to 30 billion euros ($32.7 billion) in May 2010, then an additional 18 billion euros in a second bailout two years later.
The systemic exemption was used more than 30 times to permit loan payments to Greece but also for Ireland and Portugal, two other eurozone members receiving assistance from the troika, by end-May 2014.
Its use, nevertheless, has stirred criticism, notably from some emerging-market countries that saw it as giving favorable treatment to European states in response to pressure from Western powers.
With the elimination of the loophole, the IMF is seeking to close a controversial chapter in its recent history as it decides whether to join the EU and ECB in a third bailout of Greece launched last August.
In a sign that the abolition of this “systemic exemption” was already effectively in place, the IMF is demanding this time, before unblocking any new loans, that the Europeans first agree to ease Greece’s debt burden to ensure its sustainability.