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  • Oct 22, 2014
  • Updated: 5:13am
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The IMF's public mea culpa on that big fat Greek bailout

Lender publicly details how it, the European Commission and the ECB got things wrong

PUBLISHED : Tuesday, 11 June, 2013, 12:00am
UPDATED : Tuesday, 11 June, 2013, 4:39am

It takes a big person to acknowledge he was wrong, and the International Monetary Fund has now repeatedly admitted to the failure of its euro-area rescue policies.

In its latest mea culpa last week, the Washington-based lender released a 50-page critique of the Greek bailout programme it devised in 2010, together with the European Commission and the European Central Bank. The IMF's report highlights how the so-called troika got that bailout wrong.

These admissions should surprise no one who has spoken with IMF officials over the past year - in private they have expressed deep frustration with the euro-area bailout programmes. Those regrets were merely made public last week, and the interesting question is: why now?

The IMF report admits to three major failings of the Greek programme. First, that Greek sovereign debt was not restructured immediately and a haircut on government bonds held by private investors was delayed until March 2012. This gave investors almost two years to reduce their exposure, dumping it on the official sector instead.

Second, the IMF admitted that the underlying macroeconomic assumptions it used in its debt sustainability analyses were wildly optimistic. As the IMF has previously conceded, it underestimated the fiscal multiplier and therefore 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. We've all seen the results.

Third, the IMF said the troika might not work like a well-oiled machine. The report highlights the difficulty of working with so many disparate interests in the euro area, including the European Commission, the ECB and individual creditors.

The report criticises the commission for failing to do enough to devise the structural reforms Greece needed to recover. It also takes the ECB to task for buying sovereign bonds, which made restructuring privately held debt less effective, and for failing to lead on bank supervision in the euro area. I think we can assume that the next meeting of the troika will be awkward. That may be precisely what the IMF was aiming for - to provoke the European Commission and ECB into kicking it out of the club. After all, apart from being such a mess, the Greek programme is also the largest (relative to the size of the economy) in which the IMF has ever participated.

After the IMF's experience in Argentina, employees are not pleased to be funding another unsustainable debt trap. I'm not sure that the IMF is looking for a way out of the troika. If it were, it could have exited during deliberations to bail out Cyprus.

The best explanation for the IMF's decision to publish its report was floated by Mark Dow, a former IMF economist and now a private investor. He thinks the IMF is trying to change policy, using lessons about debt restructuring, productivity gains and austerity from existing bailouts to apply to the next bailout (wherever that may be).

Of the troika members, the IMF provides the least cash for the euro-area bailouts - about a third of the funds for the Greek, Portuguese and Irish programmes, and less for Cyprus. As a result, the IMF has taken a backseat in determining policy responses. Like any backseat driver, however, the IMF has registered its concerns for the past year about front-loaded austerity and its effect on growth.

I doubt the IMF's call for a different policy approach in Europe will work. We won't know for sure, though, until another euro-area country asks for help.

Bloomberg

 

Lai See is on holiday

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