The IMF’s mea culpa on Greece is here. This is turning into a bit of a habit.
From the IMF’s post-mortem on the Argentina fiasco, written in 2003
The experience raises more general questions about the Fund’s use of its “seal of approval”. If the Fund had chosen to withdraw its financial support, the main consequence would have been the adverse impact on market sentiment. (This was the case particularly during the period when Argentina’s arrangement was precautionary, but even when it was not, the IMF’s financing—at least until September 2001—covered a relatively small portion of Argentina’s total borrowing requirements.) The IMF yielded to external political and market pressures to continue providing its support, despite serious concerns over fiscal and external sustainability. Such attempts to make strategic use of the “seal of approval” ultimately devalue that signal and compromise the Fund’s credibility more generally. The limits to the Fund’s involvement should be base d on the underlying quality of policies, not on the perceived cost of withdrawing support.
An important consideration that has to guide the Fund’s decision-making process and that was clearly underscored by the Argentine experience is that, in a situation in which the debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring.
The program projections badly misgauged the severity of the downturn. In part, this reflected the fact that the IMF’s projections were somewhat more sanguine than the consensus, partly reflecting pressures to agree with the authorities on a common set of program projections and, perhaps, partly a concern to avoid damaging confidence through gloomy forecasts. Erring on the side of optimism in this way was probably detrimental to the programs’ credibility.
Failing to foresee the depth of the recession meant that the monetary programs were originally set to allow more rapid growth of money and credit; and fiscal targets were originally more restrictivethan they would otherwise have been;1 it also meant underestimating the magnitude of financial sector restructuring needed.
Hindsight is always 20:20 for sure. But even the financial sector manages to come up with creative new errors for new crises, rather than repeating the same old mistakes (although the Dijsselbloem plan for Cyprus shows an encouraging tendency to find exciting new catastrophes).
Back in 2010, it was an open secret that the Fund’s Staff at least were scarred by Argentina and had no appetite for pouring money into another unsustainable debt trap. They were overruled – and the Fund indeed gave its seal of approval.
Back in 2010, Greece had few palatable options. On the table:
1) Hard, disorderly default. With an underlying budget deficit of around 9% of GDP (Argentina was in balance) this would essentially have meant doing the fiscal adjustment since mid-2010-2013 in one year, not three, and would have made preserving Greece’s banks probably unacheivable. People who think this would have looked like Iceland know nothing about Iceland or Greece.
2) Pour more money into Greece accompanied by debt guarantees and a mini-Marshall Plan (Germany would essentially guarantee Greek debt worth 60% of GDP in return for patronising lectures on running a successful economy) . Politically not a flyer in Germany, would ultimately still have required a debt restructuring
3) Unilaterally write off a big chunk of Greece’s debt. Unlike 2 at least practical in economic terms. But politically unacceptable to the core. Probably the most “efficient” solution in economic terms – the lowest level of losses across all actors.
4) An early PSI-style debt restructuring. This would have cost Greece less and the core more. But protecting core interests is no part of the IMF’s mandate. Greece would still have required an aggressive fiscal tightening, but much less severe.
I would note here that a lot of the unpalatability of the “better” options e has to do with the Greek political class. Pretty much all the “good” options (forebearance on austerity, debt writedowns) involved a level of trust in the established politicians that frankly a six-year-old would be reluctant to give. As long as concessions were seen as “giving more money to Evangelos”, they were always going to be a struggle. From Poland in the 90s to Iceland in 2009, the IMF’s record with governments acting in good faith is far better than widely perceived.
As it is, look what’s been acheived. As with Argentina (terrific account here
), the Troika provided cover to the Global Investor to get out. Greece paid down around 35 bn Euros between the start of the program and PSI. The PSI losses were much bigger than they need have been because of the establishment of a big share of senior creditors (the Troika, including the abortive Securities Market Programme, which at peak accounted for over EUR45bn). Greek (and Cypriot) creditors were left holding the bag, creating the need for another round of borrowing to repair the banks. Greek Debt:GDP is at fresh, nosebleed highs. ( though to be fair, at fairly concessional terms – the servicing cost of this debt is far lower than market rates, so the burden of a given level of debt is lower).
The choices were indeed tougher than some of the finger pointing admits, and I have some sympathy for Dan Davies’point:
But the IMF did sign off on what it knew was a bad plan, and deserves most of the criticism being handed over, both for the Greek economy and for the standing and legitimacy of the Troika. Writing down Greek debt early was the only honest option, and signing off on dishonest options is itself a bad thing. The IMF knew the Greek debt was unsustainable, should have known the GDP path was unrealistic because it had made these mistakes before. A rotten, sorry chapter.
Update: Excellent look through the actual Greece document here
. Strongly recommended