As Spain falters, IMF rethinks rescue strategies

A riot police officer clashes with a demonstrator during the general strike in Barcelona,Thursday, March 29, 2012. Spanish unions angry over economic reforms are waging a general strike, challenging a conservative government not yet 100 days old and joining other troubled European workers in venting their frustration on the street. AP Photo/Manu Fernandez

(Money Watch) COMMENTARY For decades, the International Monetary Fund has told cash-strapped nations the same thing: Curtail spending or we won't loan you money. Now, as budget cuts in Greece and Spain damage the countries' already ailing economies, the global lender is finally reconsidering the wisdom of such austerity measures.

IMF Managing Director Christine Lagarde said Tuesday that while "some countries under pressure have no choice but to cut deficits today... a global undifferentiated rush to austerity will prove self-defeating." She also praised the U.S. and EU central banks for continuing to inject money into their economies and hoped other nations would follow suit to keep global economic growth "strong and steady."

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The Spanish government last week unveiled plans to slash its budget by roughly $40 billion, the latest in a series of spending cuts and tax hikes aimed at reducing Spain's debt. Madrid is under tremendous pressure from investors and other European countries to rein in its deficit, which in 2011 amounted to 8.5 percent of its GDP. To date, however, parallel efforts in Greece, the U.K., and other states in the region to shrink their budgets has slowed economic growth. If those conditions persist, these nations will find it increasingly difficult to repay their debts without further -- and more significant -- financial assistance from groups like the IMF.

The primary aim of international lenders in ordering budget cuts is not aiding an ailing nation, critics content, but making sure the government continues to be able to pay its debt. After all, under these austerity policies governments don't curb their loan payments  to foreign investors. Rather, they cut spending within their own borders, axing social services, wages, pensions, and all manner of government programs.

One of the ugly ironies of the Greek bailout is that much of the money Athens receives from these lenders is sent right back to those same institutions to cover debt payments. Indeed, the government has sometimes had to make those payments before the lenders will give them the money.

When that happened last month, the Greek government raided the bank accounts of state hospitals and universities. Blogger John Ward, who broke the story, reported that these institutions lost an average of 70 percent of their funds in these accounts. They didn't find out about the withdrawals until checks began bouncing. According to the Athens News, six universities that saw their accounts drained completely dry face immediate closure.

This creates a vicious spiral, as shrinking economies mean governments have less money coming in and so have to cut even more. This has been seen in many, many cases where the IMF has stepped in to "rescue" a government. It is well past time to come up with a new approach.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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