IMF internal probe exposes failings in response to Greek crisis

28/7/2016

By Arthur Beesley

An unsparing assessment of the International Monetary Fund’s intervention in the eurozone debt crisis prompts new questions over its approach to Greece, the origin of the saga and its epicentre.

At issue is an IMF decision expected this autumn on whether to take part in a third bailout of Greece, which has been under international tutelage for six long years. Germany has threatened to stop lending to Athens if the fund pulls out.

The IMF has warned repeatedly that it cannot participate in any further bailout without meaningful debt relief. Amid ructions in Turkey after a failed military coup two weeks ago, the US has stepped up pressure on European creditors of Greece to settle its finances so it can serve as a regional anchor. But this remains deeply contentious in the eurozone, where Germany leads resistance to far-reaching debt forgiveness.

The report by internal IMF inspectors makes clear that this question goes right back to the beginning of the crisis in 2010, when the fund was drawn into Europe’s chaotic campaign to shore up the single currency. A succession of huge bailouts for Greece and other weaker states followed. It paints a picture of poor pre-crisis surveillance, followed by problems in the design and execution of rescue programmes. Improvisation was the order of the day and rules were stretched, not least in the IMF where there was doubt from the outset about the Greek rescue.

Taking issue with the lack of open discussion in the fund on an alternative strategy for the country, inspectors said staff occasionally felt pressured by European colleagues to accept a less-than-ideal outcome in light of political concerns. That assessment is disputed by Christine Lagarde, IMF managing director.

Still, the fund’s decision to provide loans to Greece required a change to its internal lending criteria. The reason for this was that Greek debt could not be “deemed sustainable with a high probability.” Sustainability concerns were left unaddressed, magnifying the need for fiscal adjustment. At least in part, this contributed to large contraction in economic output and undermined public support in Greece for the rescue effort.

From the European perspective, the question of debt restructuring was already off the table by the time the IMF joined the fray in March 2010. This had its roots in fear of contagion. But IMF officials were almost evenly split on the question. Ultimately, it was Ms Lagarde’s predecessor Dominique Strauss-Kahn who decided to take a chance on the programme and go along with European policy.

On all of this the inspectors are clear: “Decision-making could have been strengthened by taking one or both of the following steps during the early months of 2010: a formal, open and early discussion of all options available to the IMF; and a more rigorous attempt to quantify likely contagion outcomes under different options.”

In summary, there was no open discussion — including with the IMF executive board — on alternatives to a loan package without debt restructuring.

The inspectors bemoan a lack of transparency in the way IMF lending rules were changed, saying the original proposal was embedded in a staff report with no advance warning to IMF executive directors. “Few recognised the implications of the language until one of them raised the issue during the meeting. Otherwise, the decision would have been approved without the board’s full knowledge.”

The irony here is that the very rule that was changed was originally cast to make the IMF “less vulnerable to pressure to provide exceptional access when prospects for success are quite poor”. The decision to lend to Greece undermined the rule’s purpose, which was to limit discretion and flexibility.

Lessons from past crises were not always taken into account, the inspectors added. One was that the IMF underestimated the likely negative response of private creditors to a high-risk programme. While the IMF also knew from the Asian crisis that a long list of structural conditions without prioritisation would be counterproductive, this was not applied to the joint EU-IMF programmes.

The IMF’s performance was uneven, with only patchy availability of staff with relevant experience. “Programme design and implementation (including the pace of fiscal adjustment and flexibility for the operation of automatic stabilisers) was close to exemplary in Ireland but severely wanting in Greece. Financial sector work was first-rate in Spain but inadequate in Portugal.”

The report points that much of the responsibility lies with Athens, where various governments failed to fulfil their promises: “To a greater or lesser degree, successive governments blamed the outside world for the hardships imposed under the adjustment programme.”

The global political agenda may have moved on from Greece but the problems brewing since earliest days of the debacle still fester.

Πηγή