The Political Power of Finance: The Institute of International Finance in the Greek Debt Crisis

• Date: 01 September 2017
• Published date: 01 September 2017
• Author: Manolis Kalaitzake
• DOI: 10.1177/0032329217707969
• Subject Matter: Articles

https://doi.org/10.1177/0032329217707969

Politics & Society

2017, Vol. 45(3) 389 –413

© 2017 SAGE Publications

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DOI: 10.1177/0032329217707969

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Article

The Political Power

of Finance: The Institute

of International Finance

in the Greek Debt Crisis

Manolis Kalaitzake

University College Dublin

Abstract

Through empirical investigation of the Eurozone and Greek debt crisis 2010–12,

this article demonstrates how a peak organization of financial firms—the Institute

of International Finance (IIF)—was able to mobilize its members transnationally to

secure several key political and economic objectives. At the height of the crisis, large

European banking firms were threatened by the prospect of a disorderly Greek

default, coercive intervention by governments, and, potentially, a regional banking

collapse. In this context, representatives from the IIF entered the policymaking

process to facilitate concerted private sector action, assisting EU officials with

the negotiation of a substantial and orderly creditor writedown, and cooperating

with legal action by the Greek government to sideline a minority of financial firms

hostile to the deal. The article shows that the IIF’s disproportionate influence

over policymaking was a result of their technical expertise, their ability to recruit

individuals with long-standing experience of sovereign debt restructuring from the

public and private sector, and the operation of elite revolving-door processes. In

contrast to recent studies showing that financial actors are able to exercise more

power at the national level by remaining collectively inactive, these findings suggest

that, at the transnational level, financial actors can be most effective at securing their

preferences when they are well organized and when they coordinate politically on

the basis of collective interests.

Keywords

financial political power, structural and instrumental power, transnational organization,

Eurozone crisis, Greek debt crisis, Institute of International Finance, financial elites

Corresponding Author:

Manolis Kalaitzake, University College Dublin, Belfield, Dublin 4, Ireland.

Email: manolis.kalaitzake@ucd.ie

707969PASXXX10.1177/0032329217707969Politics & SocietyKalaitzake

research-article2017

390 Politics & Society 45(3)

The ability of the financial industry to influence policymaking outcomes has been

a prominent topic since the financial crisis of 2007–8. Most analyses make the

familiar division between studies of instrumental power, which focus on the strate-

gic mobilization of financial actors in order to have their political preferences

implemented, and studies of structural power, which emphasize the role of finan-

cial markets in withdrawing or restricting capital investment, thus indirectly pres-

surizing policymakers to pursue finance-friendly policies. Nevertheless, several

authors have tended to blur the sharp distinction between these different modes of

influence. They look instead at the intrinsically reciprocal nature of finance-gov-

ernment interactions and show that the level of organization (or disorganization)

displayed by financial sector actors is a key determinant of their ability to secure

favorable policy outcomes. This article follows this recent line of thinking in the

empirical context of the Eurozone crisis and Greek debt restructuring negotiations

in the period from 2010 to 2012.

Although much has been written about these events, little scholarly attention has

been paid to the role of the financial industry representative, the Institute of

International Finance (IIF), throughout the negotiations.1 By contrast, this article

contends that IIF involvement is a critical untold story of the Eurozone crisis and

one that illustrates much about the nature and extent of financial political power

within contemporary society. A case study analysis of the Eurozone/Greek debt

crisis shows how persistent market instability and contagion effects threatened

major European banking firms on several fronts and instigated a severe collective

action problem. Faced with this scenario, the IIF entered the political stage to orga-

nize the banking industry on the basis of their collective interests and to assist EU

authorities in the negotiation of a voluntary writedown acceptable to a majority of

Greek creditors. While banking firms suffered a substantial headline loss from this

debt restructuring deal, it was seen as a small price to pay for a wide range of politi-

cal and economic upsides: avoiding a disorderly default, mitigating the risk of a

regional banking collapse, forestalling the threat of coercive government interven-

tion, effectively severing private bank exposures to Greece, and attaining of a range

of generous government inducements.

The political influence of the IIF was transmitted through several mechanisms that

the organization was uniquely configured to exploit. First, as a result of its extensive

financial expertise and technical knowledge of the debt restructuring process, the IIF

engaged in a form of political capture. It was able to recruit key figures with extensive

experience of the process on both the financial side and the intergovernmental side, and

to leverage their technocratic capacity to facilitate the coordination of creditors around

a workable deal. The IIF also maintained a close relationship with legal advisers work-

ing on behalf of the Greek government, assisting in the formulation of several key

compromises that characterized the final resolution. Second, reflecting the influence of

revolving-door networks, the IIF maintained an insider political status due to a wide

array of informal and professional interlinkages between individuals working for the

organization and senior policymakers from EU institutions and national member states.

Similarly, the high-profile status of several key IIF figures, particularly within the area