The Telegraph/ The International Monetary Fund failed to demand debt relief as part of Greece’s 2010 bailout despite widespread staff views that this was critical to the program’s success, an internal audit report showed on Thursday.
The IMF also did not make a serious attempt to quantify the risk of financial contagion throughout Europe that was used to justify its granting of “exceptional access” funding to Greece when the country’s debt was widely viewed internally as not having a high likelihood of repayment.
The decisions, made in the throes of a growing debt crisis, contributed to a program that proved unsustainable as Greece’s economy collapsed, the IMF’s Internal Evaluation Office (IEO) said.
The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory writes the Telegraph.
The report by the IMF’s IEO goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system.
The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000 percent of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the Fund between 2011 and 2014.
In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.
This pro-EMU bias continued to corrupt their thinking for years. “The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said.
At root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt crises. States facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk.
In Greece, the IMF violated its own cardinal rule by signing off on a bail-out in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed.
The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.
The IMF was in an invidious position when it was first drawn into the Greek crisis. The Lehman crisis was still fresh. “There were concerns that such a credit event could spread to other members of the euro area, and more widely to a fragile global economy,” said the report.
The eurozone had no firewall against contagion, and its banks were tottering. The European Central Bank had not yet stepped up to the plate as lender of last resort. It was deemed too dangerous to push for a debt restructuring in Greece.
While the Fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability.
A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced to cut – what ex-finance minister Yanis Varoufakis called “fiscal water-boarding”.
“The automatic stabilizers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report.
The attempt to force through an “internal devaluation” of 20pc to 30pc by means of deflationary wage cuts was self-defeating since it necessarily shrank the economic base and sent the debt trajectory spiralling upwards. “A fundamental problem was the inconsistency between attempting to regain price competitiveness and simultaneously trying to reduce the debt to nominal GDP ratio,” it said.
The strategy relied on forlorn hopes that the “confidence fairy” would lift Greece out of this policy-induced nose-dive. “Highly optimistic” plans to raise $50bn from privatisation sales came to little. Some assets did not even have clear legal ownership. The chronic “lack of realism” lasted until late 2011. By then the damage was done.
The injustice is that the cost of the bail-outs was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report.
“If preventing international contagion was an essential concern, the cost of its prevention should at have been borne – at least in part – by the international community as the prime beneficiary,” it said.
Better late than never.
