Call for debt audit as IMF austerity fails

6 April 2011

As IMF austerity policies fail to solve Greece’s debt crisis, activists call for an audit commission. Despite ongoing public protests and increasing challenges from academia, old economic principles continue to guide Fund practices.

In mid March, the IMF completed the third review of Greece’s Stand-by Arrangement. New conditions include another tranche of government guarantees worth €30 billion ($42 billion) to bail-out troubled banks. The bank guarantee will add another 10 per cent to the total government debt stock. Andy Storey of University College Dublin said, “This is the type of ‘blank cheque’ state guarantee of private debt that has bankrupted Ireland.”

Disputes had previously erupted between the Greek government and EU and IMF reviewers over the country’s privatisation reforms, heavily pushed for by EU and IMF creditors (see Update 74). Greece has now committed to raise €15 billion through privatisation by the end of the EU-IMF programme in 2013 – more than doubling last year’s privatisation pledges. Journalist Nick Malkoutzis, on his blog Inside Greece, commented in late February that “privatisation may be a way of Greece taking ownership of its own debt problem. … However, this should not disguise the fact that privatisation comes with many deep pitfalls.”

Is debt sustainable?

Despite privatisation pledges, concerns regarding Greece’s ability to repay its loan have led the IMF to move Greece from the short-term Stand-by Arrangement to the medium-term Extended-Fund Facility. In mid March, eurozone governments agreed to extend Greece’s loan repayment period from three to seven and a half years and – conditioned on the privatisation scale up – offered an interest rate cut from 5.8 to 4.8 per cent.

A February briefing by Brussels-based think tank Bruegel criticises EU/IMF loan policies for having “failed to recognise the possibility of insolvency” and recommends that “further lending without a large enough debt restructuring is not viable.” Even if measures like lowering interest rates were applied, “the primary budget surplus requirement would still be unrealistically high.” Bruegel economists estimate that in order to return to a debt-to-GDP ratio of 60 per cent by 2034, Greece would need a 30 per cent public debt cut.

Warning of the social costs of excessive austerity due to high debt burdens, activist scholars in Greece including Costas Lapavitsas, Giorgos Mitralias and Leonidas Vatikiotis, supported by an international civil society coalition and academics like Slavoj Zizek and Noam Chomsky, called for an audit commission to examine Greece’s public debt in February. Their petition states that “current EU and IMF policy to deal with public debt has entailed major social costs for Greece. Consequently, the Greek people have a democratic right to demand full information on public and publicly-guaranteed debt.” Based on the commission’s findings, recommendations can be made on how to deal with debt, “including debt that is shown to be illegal, illegitimate or odious.” The audit commission for Greece could also serve as a prototype for other eurozone countries.

IMF faces public anger

In late March, a bailout for Portugal was increasingly being called inevitable, as its parliament failed to agree a new EU-demanded austerity plan, prompting the government to fall, with national elections to take place in June. As a result, the interest Portugal would be expected to pay on any new bonds has skyrocketed. Nick Dearden of UK NGO Jubilee Debt Campaign (JDC) said, “An EU and IMF bailout would be for private banks, not the Portuguese people.” JDC finds that of the €216 billion gross public and private external debt, just €43 billion is owed by the Portuguese government. In late March, New York Times journalist Landon Thomas called the combination of bailouts and increased austerity in countries such as Portugal both “unworkable and unfair. … A cheaper way to attack the problem would be to go to the root of the issue and restructure the country’s debt”

In Ukraine, in late February the Federation of Trade Unions urged the government to stop cooperation with the IMF (see Update 72, 71, 68). Worrying about IMF conditionality impacting wages, pensions and consumer prices, chairman Vasyl Khara said, “We have expressed a resolute protest … because the demands … on holding a preliminary dialogue with social partners ahead of determining terms of credit have been neglected again.” In late March, more than 6,000 teachers took to the streets in Kiev to demostrate against drastic cuts in education funding that the Ukraine government is planning to meet IMF austerity targets.

Also in March, over 7,000 people marched to the offices of Swaziland’s prime minister demanding the entire cabinet resign, because of the fiscal adjustment roadmap presented to the IMF and World Bank to qualify for budget support. Protests were mainly directed against wage cuts for public workers.

Ears kept shut

In early March, the IMF hosted a conference on macroeconomic and growth policies after the crisis to tackle “some profound questions about the pre-crisis consensus on macroeconomic policies’. The Washington event was organised by the director of the Fund’s research department Olivier Blanchard, along with David Romer of University of California, Michael Spence of Stanford University, and Joseph Stiglitz of Columbia University – all economists associated with criticisms of mainstream economics.

One debate challenged former Fund consensus by arguing for the stabilising effects of counter-cyclical fiscal policy. The session on growth strategies included Dani Rodrik of Harvard University and Andrew Sheng of the China Banking Regulatory Commission advocated the greater use of industrial policies in developing countries (see Update 75). Sheng criticised “politically blind” analysis that ignores distributional consequences of growth policies.

Dean Baker of US-based Center for Economic and Policy Research called the conference a “glasnost” for IMF thinking, but was sceptical whether Fund “policies have undergone a similar adjustment.” Baker finds that the IMF continues to promote “internal devaluation” – “forc[ing] workers to take pay cuts under the pressure of high rates of unemployment” – to confront economic crises, policies which have “led to an enormous economic and human disaster. The fact that many of the world’s most prominent economists … can make policy prescriptions that are essentially ignored by those conducting policy, provides more evidence that policy is not being guided by neutral individuals seeking the best outcome.”