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IMF’s Greek mea culpa

Does the Fund have a future in Europe?

26 June 2013

In June the IMF released an ex post assessment of its 2010 lending programme to Greece which described a series of errors and found that the Fund consciously chose to break its own rules on the sustainability of the programme.

The report, compiled by Fund staff, admits that at the time Fund officials had doubts over Greece’s ability to repay its loan but agreed to the plan because of fears of contagion from Greece’s predicament affecting other European states (see Update 85, 71). The report sets out a number of other specific failures of the 2010 agreement: “Market confidence was not restored, the banking system lost 30 per cent of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment”. Nevertheless, the assessment concluded that the IMF’s participation in the agreement was a “necessity” though it acknowledged that the reform package agreed with Greece, leading to the imposition of severe cuts, was based on projections that “were too optimistic”. In 2010 a staff position note described default on any debt in advanced economies as “unnecessary, undesirable, and unlikely” (see Update 72), but just 18 months later the IMF advocated a 70 per cent ‘haircut’ (cancellation) on Greek government debt as a condition of continued IMF involvement in lending to Greece.

Economist Megan Greene writing for financial news agency Bloomberg pointed out that the IMF has already conceded (see Update 83) that it “underestimated the … impact of austerity and budget cuts on economic growth … with growth estimates way off, deficit and debt-to-gross domestic product ratios were wrong as well. The much sharper than forecast contraction meant that unemployment also soared beyond the IMF’s expectations.” The IMF revised down 2014 nominal GDP projections by 27 per cent between November 2010 and April 2013.

Despite this conclusion, June statements from the Fund following the release of the assessment revealed no regrets. IMF managing director Christine Lagarde argued that if the Fund had not chosen to bypass its own rules that it “probably would have meant no IMF support at the time“. Greek IMF negotiating lead Poul Thomsen reiterated that “in the same situation … we would have done the same thing again”. Former Fund staffer Gabriel Berne, writing in the Financial Times newspaper in June, suggested that the leadership of the IMF “sidestepped” the staff’s criticism; the official response of the executive board “agreed that [the report] provides a good basis for all parties to draw valuable lessons”. Berne added “to those of us familiar with IMF board-speak, it sounds as though the report may have just been binned”.

“Fiddling while Athens burned”

The Fund’s assessment has provoked a blame game amongst the Troika partners – the lenders to European crisis states comprising the IMF, European Central Bank (ECB) and European Commission (EC). The report asserts that debt restructuring had been discussed from the very start but was “ruled out by the euro area”, exacerbated by what Karl Whelan of University College Dublin describes as “fiddling while Athens burned”. Whelan interprets the assessment as “extremely … harsh on the role played by the euro area member states”. In June EC vice president Ollie Rehn specifically refuted the claim that the IMF sought “early debt restructuring”, describing the IMF’s report as the Fund “trying to wash its hands and throw dirty water on European shoulders”.

There is nevertheless consensus about the underlying motivation of the original agreement. The report acknowledges that lending programme became merely a “holding operation” to buy time for other European states to limit the fallout from the Greek crisis. Rehn told the Wall Street Journal in June that he rejected the report’s findings because permitting Greek debt restructuring would have jeopardised the euro. Prime minister of Luxembourg and head of the committee of eurozone nations during agreement of the 2010 loan, Jean-Claude Juncker, was blunt during a June trip to Greece to receive the Greek state’s highest national honour, insisting that the rescue programme met its “basic aim” of keeping Greece a member of the euro.

The economic plight of Greek citizens is not yet easing. In early May Greece’s statistics agency said unemployment rose to 27 per cent in February, with 64 per cent of Greek youth unemployed. However, Greek prime minister Antonis Samaras lauded the Greek “success story” while on a May trip to China to attract investment, calling it a “Greekovery”. The same month following a mission to the country Cephas Lumina, UN special rapporteur on foreign debt and human rights, warned that the “Troika bailout conditions are undermining human rights”, with “more than 10 per cent of the population in Greece [living] in extreme poverty”. Elena Papadopoulou, of Greek think tank the Nicos Poulantzas Institute, said “the refuted ‘success story” of the Greek economy is leading to a new political impasse. Gambling with democracy in such critical times is a dangerous choice for the Greek government and the European authorities”.

In May efforts to privatise the state gambling monopoly failed amidst concessions from the Greek government that it will not meet the sale target of €2.6 billion ($3.4 billion). The Greek parliament passed legislation in May as a condition of the latest Troika loan disbursement which allowed public servants to be dismissed via mandatory redundancies. In June, the Greek state broadcaster ERT was summarily closed in a shock decision, without consulting parliament or apparently even informing the Greek cabinet, though a subsequent court ruling required ERT to keep broadcasting during the restructure. The government suggested this was driven by the Troika’s conditionality requiring cuts to the public sector payroll. Local NGO the Greek Debt Audit campaign condemned the closure of ERT, calling it a “huge gift to media oligarchs and a huge blow to the public’s right to information”.

The IMF is now openly advocating more debt relief, despite the politically explosive nature of asking for more ‘bailout’ money from Greece’s European partners including Germany and the Netherlands (see Update 84). Fund spokesperson Gerry Rice said in early May: “our projections show that further debt relief will be needed”, but added “none of this is new”. In late June the Financial Times reported that the Fund may be forced to suspend the next loan disbursement due to unmet targets on deficits, a likelihood dismissed by deputy managing director David Lipton as “premature”. Eurogroup president and finance minister of the Netherlands Jeroen Dijsselbloem said that the “eurogroup would consider” measures to bring the debt down, including further debt relief, but only “if Greece fully complies with its commitments, then we will be ready to do more to help it”.

IMF silenced?

The Fund’s assessment indicated a fundamental ambiguity of roles within the Troika partnership: “there was no clarity in the assignment of responsibilities across the Troika.” Former IMF chief economist Simon Johnson, writing for Bloomberg financial news agency, asserted that “the IMF is prevented from speaking the full truth to authority by its current governance arrangements” because European states are “grossly over-represented … both in terms of their votes and seats on the board”, on top of the convention that the managing director is always European.

The internal tensions over its lending to Greece, as well as controversy over Cyprus (see Update 85), are raising the prospect of an end to the Troika arrangement. During testimony in May, both Rehn and ECB executive board member Joerg Asmussen suggested that the IMF’s role will not be necessary indefinitely, suggesting “in the longer-term … we should return to a fully EU-based system”. Activists and developing countries have been asking for precisely this to occur for years (see Update 84). Fund spokesperson Gerry Rice responded that Asmusssen’s remarks “underscored that he would not advise to change the Troika system right now”. Mohamed El Erian, head of the world’s largest bond investment fund, wrote for news agency CNNin April that “the IMF felt it had no choice but to succumb to pressure by European politicians”, proving the need for the Fund’s “political masters to revamp the institution’s governance and practices”.