Europe experienced twin crises, one in economy and the other in policymaking; the IMF shares responsibility for both. Its surveillance did not anticipate the crisis and its programmes did not contain it; layers of mistakes that culminated in some astonishing forecasting errors.
The Fund revised down its projections for the level of 2014 Greek GDP a mind-boggling 22% in just 18 months (yes, over 1 percent a month).
Greece has endured the largest but by no means the only forecast errors; errors which can be explained by the dismal algebra of exit fears +credit crunch + austerity = output collapse.
With such errors, it was impossible to produce the medium-term budgeting adjustment central to stabilising Greece.
Where did it all go wrong for the Fund?
First, the Fund broke one of its most essential rules by supporting a programme in Greece from May 2010 which was inadequate to secure debt sustainability. To break the rule is to throw good money after bad; it not only delays the inevitable, but makes it worse.
Even by their own arbitrary definitions of debt sustainability (120% of GDP by 2020), the Greek programme was unsustainable between the second review (December 2010) until the fifth review (December 2011), which incorporated PSI.
Ultimately the IMF’s Greek procrastination was fruitless: Private lenders to Greece suffered a scalping, Greece did not have a bank that lent between mid-2011 and mid-2013, youth unemployment reached 60%, and the ECB had to intervene massively to keep swathes of the European banking system afloat.
Second, the IMF treated the Eurozone as a partner to be accommodated wherever possible, not as a patient to be cured. The IMF enforced voluminous but asymmetric conditionality, pertaining only to the crisis countries and never to the broken central institutions.
Third, Fund actions were hampered throughout the euro-crisis by fundamental diagnostic errors. For example:
- Efforts to encourage bank-recapitalisation in the Eurozone were too timid and too late;
- The Fund has consistently and unequivocally praised German supply-side reforms, even though – absent matching reforms elsewhere – they are a key cause of the euro-imbalances.
Regrets, IMF have a few
In mid-2013 the IMF published an historic staff report that raised concerns about the quality of the Fund’s work on the Greek bailouts.
But then again…
The IMF’s rejection of its own staff’s mild criticism is arguably the bigger and yet under-told part of the story. The official IMF response to the staff report was contained in a single paragraph offered by its Executive Board on June 5:
Directors … agreed that [the report] provides a good basis for all parties to draw valuable lessons … noted … overly optimistic assumptions, including about growth … [and] noted the benefits of a timely restructuring of sovereign debt….
Is that it? To those of us familiar with IMF Board-speak, it sounded as though the report may had just been binned. It said nothing about what the “valuable lessons” were; or about follow-up work on how to learn from them. And who could be against “timely” anything?);
The prevailing mood in IMF management was one of “je ne regrette rien”.
The IMF’s policy response so far
In April 2013, the IMF published its first major paper in a decade on sovereign debt restructuring. But its review got off to a false start.
The IMF’s initial proposal aimed to enhance the crisis resolution toolkit, partly by incentivising more timely restructurings, in turn by making them less of a big deal.
In short, if the IMF determines that debt is in an uncertain “grey” area of sustainability the Fund would lend. But in order not to “waste” official money bailing out private creditors, the sovereign would have to bail in the latter by “reprofiling” debt: extending maturities on all private sector bonds and loans falling due within the life of the programme.
But the rating agencies would spell “reprofiling” D-E-F-A-U-L-T, and I doubt there will ever be a default without serious consequences.
The centrepiece of the proposals – to virtually automatically link Fund lending to a partial creditor-bail in – was a radical, misguided departure from the case-by-case approach, the decades-old first key principle underpinning the approach to sovereign debt restructurings.
The Fund published a revised paper on Sovereign Debt proposals in June 2014 responded to many of the criticisms but will probably not add much to the sovereign debt restructuring tool kit. If reprofiling was so obviously good, why has it not been used more in past crises?
The main problem is not with the toolkit, but with the Fund itself.
*Read the entire article at Macropolis.
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