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FACTDROP: IMF Admits Mistakes on Greece Bailout


IMF Admits Mistakes on Greece Bailout

A Greek flag flutters on above the parliament building as the moon rises over Athens, in a photo taken on May 23.

Πηγή: WSJ
June 5 2013

BRUSSELS—The International Monetary Fund has admitted to major missteps over the past three years in its handling of the bailout of Greece, the first spark in a debt crisis that spread across Europe.

In an internal document marked "strictly confidential," the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece's economy, which has been mired in recession for the last six years.

But the fund also stressed that the response to the crisis, coordinated with the European Union, bought time to limit the fallout for the rest of the 17-nation euro area.

The IMF said that it bent its own rules to make Greece's burgeoning debt seem sustainable and that, in retrospect, the country failed on three of the four IMF criteria to qualify for assistance.

The Washington-based fund released the document, prepared by IMF staff, on Wednesday after its contents were reported by The Wall Street Journal.

Over the last three years, a number of senior IMF figures, including Managing Director Christine Lagarde, have repeatedly said that the country's debt level was "sustainable"—likely to be repaid in full and on time.

Yet the document described the uncertainties around the Greek rescue as "so significant that staff was unable to vouch that public debt was sustainable with a high probability."

Two former IMF officials, speaking on condition of anonymity, said the fund's chief lawyer, Sean Hagan, repeatedly warned in mid-2010 that the Greek program was bordering on breaking the institution's rules.

"What happened at the time, and it's much easier with the benefit of hindsight, is that not all criteria of exceptional access as defined at the time were satisfied," Ms. Lagarde said in a separate interview last week.

"And yet there was a crying need at the time for support," she said. If the IMF hadn't tweaked its rules, "it probably would have meant no IMF support at that time."

The IMF report also said that it was too optimistic about the Greek government's prospects for a return to market financing and its political ability to implement the conditions of its rescue program.

An IMF spokesman declined to comment on the report, as did the Greek Finance Ministry and the European Commission.

The document is the most significant in a series of IMF analyses over the past few months that attempt to assess the institution's involvement in the euro-zone financial crisis.

The greater beneficiary of the 2010 bailout wasn't so much Greece as the wider euro-zone, the document suggested.

It described the rescue as a "holding operation" that "gave the euro area time to build a firewall to protect other vulnerable members and averted potentially severe effects on the global economy."

The IMF joined forces with the European Commission and the European Central Bank in 2010, forming the so-called troika, to manage Greece's first bailout of €110 billion ($143 billion)—one of the largest international rescues ever.

The three continued to run the country's second bailout, which came in 2012. Beyond Greece, the troika is managing the Irish, Portuguese and Cypriot bailouts.

While the fund has been scaling back its new financial commitments to euro-zone economies, it has put up a total of $47 billion for Greece, the biggest loan the IMF has ever made when compared with the size of a country's economy.

The fund criticized the delay restructuring Greece's massive debt load, which eventually came in May 2012. But it conceded that cutting it before then was "politically difficult" because of resistance from some euro-area countries whose banks held too much Greek government debt.

An immediate restructuring would have been cheaper for European taxpayers, as private-sector creditors were repaid in full for two years before 2012 using the money borrowed by Athens. Greece's debt level thus remained undented, but it was now owed to the IMF and euro-zone taxpayers instead of banks and hedge funds.

The IMF also said its own analysis of the future development of debt was wrong "by a large margin." The fund's debt-sustainability analysis—a critical piece of forecasting—"included stress tests but these turned out to be mild compared with actual outcomes."

The issue of the so-called fiscal multiplier—an estimate of how much an economy will contract for every euro in spending cuts or tax increases—has become part of the government's arsenal in its negotiations with the troika.

In talks next week, Greece will ask for permission to cut certain value-added, or sales taxes, arguing that an increase in restaurant taxes, for example, has generated less revenue not more by crimping spending.

Conversely a cut in the tax rate for eateries, the government says, could actually boost revenue by drawing in more diners. So far, however, officials at the European Commission have been cool to the idea.

The commission, which is the European Union's Brussels-based executive, comes in for special criticism in the IMF document.

The report says the commission "tended to draw up policy positions by consensus, had enjoyed limited success with implementing [fiscal conditions]…and had no experience with crisis management."

It adds that the commission focused more on "compliance with EU norms than on growth impact" and "wasn't able to contribute much to identifying growth enhancing structural reforms."

The commission is the lead EU institution tasked with designing and promoting growth-enhancing and job-creating policies for the entire bloc.

"None of the [troika] partners seemed to view the arrangement as ideal," the paper continued in a section discussing the "unusual" arrangement, noting that there were "marked differences of view within the troika, particularly with regard to the growth projections."

Those growth projections were wildly off the mark but Greece still had to meet the same targets of cutting deficit, it said. "The fiscal targets became even more ambitious once the downturn exceeded expectations. In addition, the starting point moved."

The paper added that the targets and the underlying macroeconomic projections weren't revised to reflect what was actually happening in Greece for 18 months, until December 2011.

The IMF had originally projected Greece would lose 5.5% of its economic output between 2009 and 2012. The country has lost 17% in real gross domestic output instead. The plan predicted a 15% unemployment rate in 2012. It was 25%.

Slowing the pace of austerity would have helped Greece's economy, but wasn't politically possible, the fund said.

"While earlier adjustment of the targets could have tempered the contraction, the program would have then required additional financing," which neither the IMF nor euro-area governments were prepared to give, the document said.

The paper criticized Greek governments for failing to implement structural economic changes that could have propped up the private sector and said the pain of the adjustment was "unevenly spread across society."

But it said there were few precedents for the size of the spending cuts and tax increases that Greece implemented to hit the targets.

The fund didn't explain why it made the choices it did in detail, nor why it agreed to troika analyses that it now says were incorrect. But it said IMF staff "explicitly flagged" risks in the Greek program implementation.

In last week's interview Ms. Lagarde said the review of the fund's experience in Greece "will probably lead us to reassessing the exceptions to the exceptional access criteria" and "will certainly lead us to calibrating well how we work with regional financing arrangements."

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