IMF 'to admit mistakes' in handling Greek debt crisis

[frigidmagi]

guardian

The International Monetary Fund is to admit that it has made serious mistakes in the handling of the sovereign debt crisis in Greece, according to internal reports due to be published later on Wednesday.

Documents presented to the Fund's board last Friday will reveal that the Washington-based organisation underestimated the damage austerity would cause to the eurozone country, which has required two bailouts in the past three years.

The Wall Street Journal reported that the papers would say that financial support from the Fund, the European Central Bank and the European Commission had bought time for Greece but had only been made possible because the IMF had bent its own rules to make the country's debt look more sustainable than it was. According to the WSJ report, Greece failed to meet three of the Fund's four tests to qualify for help.

A Fund spokeswoman said: "We will be publishing a number of papers on Greece later today. The board met last Friday to discuss several documents on Greece including the review of its programme and its annual economic assessment."

Greece became the first eurozone nation to require a bailout by the international community in 2010, but needed a second round of financial assistance in early 2012 when a deep recession and high interest payments threatened to send its debts spiralling out of control.

The so-called troika of the IMF, ECB and EC forced private sector bondholders to write down the value of their Greek bonds in an attempt to bring the country's debts down to sustainable levels of 120% of national income by 2020.

Christine Lagarde, the managing director of the Fund, has said many times over the past year that Greece should now be in a position to pay off its debts, but the WSJ reports that IMF staff believe this cannot be said with any certainty.

In Athens, officials reacted with barely disguised glee to the news.

The report confirms what Greek officials have long said: that the first bailout of uncompromising budget cuts and tax increases, the price of 110 bn euro in emergency funds in May 2010, was the wrong prescription for a country not only batting a monumental debt load but rampant tax evasion and a flourishing black economy.

Under the weight of such measures – applied across the board and hitting the poorest hardest – the economy, they said, was always bound to dive into an economic death spiral. "For too long they [troika officials] refused to accept that the programme was simply off-target by hiding behind our failure to implement structural reforms," said one insider. "Now that reforms are being applied they've had to accept the bitter truth."

The Greek media recently quoted IMF managing director Christine Lagarde describing 2011 as a "lost year" partly because of miscalculations by the EU and IMF. The authoritative Kathimerini newspaper said the report identified a number of "mistakes" including the failure of creditors to agree to a restructuring of Greece's debt burden earlier – a failure that had had a disastrous effect on its macro-economic assumptions.

"From what we understand the IMF singles out the EU for criticism in its handling of the problem more than anything else," said one well-placed official at the Greek finance ministry. "But acknowledgement of these mistakes will help us. It has already helped cut some slack and it will help us get what we really need which is a haircut on our debt next year.

This is kinda of a no shit moment. Although I'm gonna point out, that the IMF didn't do anything out of the ordinary as to my understanding of their S.O.P. Bluntly there are alot of countries that have been made worse by taking an IMF loan. In fairness there are nations who avoided alot of trouble and became better over all because of an IMF loan. Thing is as far as I understand it, the IMF has pursued a more or less one size fits all policy. I'm not sure that's a good idea, but I'm drastically under qualified to make something better.

[rhoenix]

Another article on the subject that I found interesting:

Years ago when I worked at Bloomberg I noticed that the World Bank and the International Monetary Fund seemed to, without fail, overestimate economic growth for their customers in good times, and underestimate coming contractions in bad times.

Since Bloomberg encouraged us to be data driven and rigorous, I proposed we develop some boiler plate for the brief stories about the latest GDP prediction from the lenders (which we slavishly and uncritically turned into stories within minutes of their landing in our fax machines.) Something like: "The World Bank, which has overestimated coming Indonesian GDP growth six consecutive times, today predicted that Indonesia's GDP will rise by 7 percent in 1997."

Over the years current and former employees of both groups have explained that bias is down to the belief inside the financial institutions that their rosy projections can take on a life of their own by inspiring that elusive beast "investor confidence" and unleashing a deluge of cash upon their clients. They see it as a form of benevolent lying.

A senior editor there shut my proposal down as silly, for reasons I could never quite fathom.

Nevertheless, the evidence that these groups get it wrong have been mounting for decades, however, many of us in the press still act surprised when they're wrong, yet again. The latest evidence is the IMF's mea culpa this week over its incorrect assumptions and ineffective prescriptions for Greece in relation to the ultimately $310 billion bailout of the country. It's the latest, and some of the largest, evidence that the oracular powers and financial wisdom of the Bretton Woods institutions aren't what they're cracked up to be.

In short, the IMF austerity program for the country has been a failure, at least from the perspective of the Greek people (the IMF estimates it may have prevented "contagion" from spreading to other countries, which is surely a comfort to all the Greeks out of work).

In the case of Greece, the IMF published a report yesterday that said the Fund had (wait for it...) underestimated the depth of the Greek economic downturn, underestimated the harm to Greek income and employment that would be caused by slashing spending, and overestimated the likelihood that "investor confidence" would return in response to all this and spread its magic pixie dust over the Greek people.

The IMF also admits, obliquely, the extent to which politics and not the best and most honest advice possible, played a role as the Fund worked with the European Central Bank (ECB) and the European Commission to figure out what to do two years ago as Greece teetered on the edge of bankruptcy and an exit from the euro.

"On the positive side, moving ahead with the Greek program gave the euro area time to build a firewall to protect other vulnerable members and averted potentially severe effects on the global economy," the Fund writes. "However, not tackling the public debt problem decisively at the outset or early in the program created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output. An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners."

By debt restructuring, they mean sharp reductions in the amount of money owed by Greece to private and government lenders across Europe. But everybody else wanted to get paid, so the IMF acquiesced. (The European Commission said today that the IMF is wrong about this and that haircuts for lenders before the bailout would have led to "devastating consequences.")

This is far from the first time. In the early 1990s, the IMF warned Argentina against imposing currency controls to deal with a financial crisis. Argentina ignored the IMF, and the Fund later admitted the country's politicians were correct in doing so.

In the middle of that decade, the so-called Asian financial crisis hit much of the region, with capital flight threatening private banks, government coffers, and project finance alike. Thailand and Indonesia accepted IMF loans in exchange for "structural adjustment programs" (government spending cuts, foreign investor friendly legal changes, promises to have fully convertible currencies), while Malaysia, against dire warnings from the IMF, imposed currency controls and sought to stimulate the economy out of the downturn with an expansive government budget. The results? Malaysia weathered the crisis better than its neighbors, with fewer job losses and much less political turmoil.

In 2001, Argentina ran aground financially again and appealed to the IMF for cash. A review by the Fund later found that its projections for Argentina were too rosy at the time, complained that the IMF backed the Argentine government in public even when senior officials in private knew it was pursuing a disastrous course, and undermined its own credibility. The author wrote that "any catalytic role that IMF financing might have had in the past has been put into question, as large-scale IMF support can no longer be seen as signaling policy sustainability."

Yet come 2010, there was an assumption from within the IMF that its seal of approval would breed confidence in investors. It wasn't true then, and it certainly isn't true in the case of Greece now.

That wasn't the only strange assumption the IMF made. On page 5 of another recently released report the Fund writes that it expected that "fiscal consolidation" (government spending cuts and tax increases) and expected productivity gains had authorities expecting "that the crisis would mobilize broad political support for comprehensive structural reforms." What that essentially means is that the IMF and its partners apparently believe that the Greek people, as their economy tanked and employment sank, would rally around policies likely to lead to further short-term unemployment.

Any student of politics, well, anywhere, probably wouldn't make that kind of assumption.

Finally, is the question of whether "austerity" – which used to be called shock therapy sometimes – actually works. The IMF admits in the case of Greece it might have made more sense to provide more cash to the country (though says that was not politically possible, given the reluctance of wealthy European nations like Germany to pony up more) and eased Greece's deficit targets.

But as things deteriorated, the IMF and its European partners instead tightened the fiscal screws. "The scope for increasing flexibility was also limited," the authors write. "The fiscal targets became even more ambitious once the downturn exceeded expectations."

IMF Managing Director Christine Lagarde probably feels awful about the Fund's errors. But at least she has $550,000 compensation package to cheer her up (tax free to boot; IMF and World Bank executive salaries are unburdened by the taxes they're always urging struggling governments like Greece to increase on their citizens.)

Meanwhile, Greece's people are left to ponder whose advice they'll take next, as the country heads through its sixth consecutive year of economic contraction.

This is more an opinion piece on the subject, but it's an interesting one.