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The International Monetary Fund issued a dark warning this week about heightened risks to world growth. It cited the political deadlock in Washington and faltering prospects in emerging economies, and cautioned the Federal Reserve against a quick exit from monetary easing, putting the potential global bond losses stemming from an abrupt change in Fed policy at a whopping $2.3-trillion (U.S.). This is but the latest example of the IMF's departure from its old austerity-above-all-else dogma, which it had frequently used to bludgeon hapless borrowers.

The world's lender of last resort stopped worshipping slavishly at the altar of austerity not long after Christine Lagarde and some of her European allies saw the fallout from the Euro crisis. The ruthless budget cuts and heavyhanded retrenchments imposed on Greece and other fiscally crippled members of the euro zone, imposed in exchange for the loans needed to meet their debts, led to economic and social calamity that had been widely predicted in anti-austerity quarters.

Now we learn from confidential documents obtained by The Wall Street Journal that the IMF faced a serious internal rift over its condition-laden 2010 bailout of the insolvent Greek government. Close to a third of the agency's board members, representing 42 countries, warned that the proposed deal forced all the hardship of wrenching cuts on the Greeks, while European creditors would reap the benefits.

"The alternative of a voluntary debt restructuring should have been on the table," Pablo Andres Pereira, who was then Argentina's representative on the board, is reported to have said at the meeting. His warning that the IMF risked "postponing, and maybe worsening the inevitable" debt default would prove prescient.

Despite rumours of deep divisions, then-IMF chief Dominique Strauss-Kahn publicly insisted the fund had "no doubt" the bailout would do the trick. Canada was one of the internal dissenters, along with Switzerland (surprisingly, for a banking haven). But because of their weighting, the U.S. and most European countries – worried about their struggling banks' heavy exposure to losses in any restructuring – easily carried the vote.

Now, three years, two bailouts and the world's biggest debt restructuring later, Greece remains a financial basket-case, while the IMF regularly criticizes governments that go too far down the austerity trail (Hello, Britain!) and fail to balance budget restraint with growth-oriented policies.

Which brings us back to Washington. No one is actually suggesting the Fed will be shutting off the taps any time soon. Vice-chair Janet Yellen, who has been tapped by President Barack Obama as the next Fed head, is at least as dovish on policy as Ben Bernanke. And if anything, the central bank will have to increase its $85-billion worth of monthly bond purchases if Washington's current budget impasse morphs into a full-blown debt-ceiling crisis.

But you can't blame Ms. Lagarde for sounding the alarm about Fed policy and the dangers of a debt-ceiling showdown. Washington accounts for 17.7 per cent of the IMF's financial resources and nearly 17 per cent of the votes. If the Americans stop paying their bills, Ms. Lagarde might have to take a pay cut. How's that for austerity?

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