The
Independent Evaluation Office (IEO) of the IMF recently published its
report on the response of the organization to the European crisis.
The analysis focuses on the performance of the IMF in the context of
the programs for Greece, Portugal and Ireland. It provides a valuable
insight into the conflicts within the IMF itself, and especially
between the executive board of the organization and its management
and staff. At the hearth of this conflict was the decision making
process, which led to the disregard of technical judgments and
internal procedures in favor of choices of political nature that were
adopted in European capitals. As such, the work of the IEO offers a
more nuanced understanding of the role of the IMF in the crisis than
previously available. Furthermore, it provides additional arguments
to condemn the structure and outcomes of the programs that led to the
bailout of private creditors while simultaneously burdening public
finances with debts to the tune of billions of Euros.
In this
regard, most of the criticism of the IEO focuses on the involvement
of the IMF in Greece starting in 2010. The Greek program is highly
relevant, not only given the large sums of money involved, as Greece
became the largest debtor in the history of the organization, but
also because it set the tone for the interventions that were to
follow in other Euro zone countries. The IEO is specially critic of
the political intervention by European countries in the decision
making process of the organization regarding the Greek program. Even
though the report rejects the notion that the IMF was behaving as a
junior partner to its European counterparts in the Troika, namely the
EU Commission and the ECB, a careful reading of the supporting
material show that in many instances the IMF limited itself to follow
decisions and criteria being set by Euro area governments. In theory,
Greek and Euro zone interests should have been aligned. However, in
practice this was not the case. As a result, the design of the Greek
program followed priorities being set according to the strategic
interests of those governments, setting aside concerns regarding its
harmful impact on Greece.
The clearest
example of this internal contradiction was the decision not to
restructure Greek debt in 2010. The IEO shows the significant
division among IMF staff regarding the sustainability of Greek debt
that existed at the time. On the one hand, some staff members argued
that “in the absence of restructuring, debt was unsustainable”.
On the other, some held the view that with the right policies and
sufficient financial support the country would be able to ensure debt
sustainability without a restructuring. For the purposes of the
involvement of the IMF in Greece, this was a key distinction to make
as the rules of the organization mandated that large scale financial
assistance could only be provided if debt was determined to be
sustainable with high probability. Given that the staff was unable to
reach an agreement on this issue, the participation of the IMF could
only have taken place in the context of a debt restructuring. In any
other case this would have been a rather uncontroversial decision.
However, in Greece, other factors were at play.
In effect,
European officials had made the decision that any financial
assistance provided to Greece would exclude debt restructuring long
before the IMF became involved in the discussions. In particular,
both France and the ECB advocated strongly against this measure. At
the time, it was perceived that a debt restructuring in Greece would
create doubts regarding the safety of the sovereign bonds of other
countries, causing the crisis to spiral out of control. In order to
contain this “systemic risk” it was decided that financial
assistance to the country should only be provided as a last resort
and in what effect consisted of punitive terms. The opposition to
restructure Greek debt protected the interests of French and German
banks that stood to suffer steep losses on their €83 billion in
loans to Greece. Thus, when the IMF joined the Troika in March of
2010, the option to restructure debt was off the table. As one IMF
staff member put it “the train had already left the station”.
The IEO
report highlights that at this point the IMF could have decided to
refuse participation in the Greek program in order to avoid breaching
its own internal guidelines. However, the eagerness of management to
involve the IMF, and specifically that of Dominique Strauss Kahn, led
to the disregard of this option. Instead what followed was a
deliberate process of concealment of information by staff and
management. The goal was to secure the simultaneous approval from the
executive board of what should have been two independent decisions.
The first issue was the board’s endorsement of the Greek program.
The second issue was the modification of the lending rules of the
IMF, in order to allow the organization to provide financial
assistance in a situation in which debt was not considered
sustainable with high probability. In the case of the former, the
executive board was kept in the dark regarding the deliberations that
had taken place among the staff regarding debt restructuring and
other key aspects of the program in the run up to its approval. Even
on the day the program was approved, Gary Lipsky, the senior
representative of the IMF management, lied by explicitly denying to
the board that the staff had entertained the possibility of a debt
restructuring. As he put it: “there is no Plan B. There is Plan
A and a determination to make Plan A succeed; and this is it.”
In the case of the later, the required change in the lending rules of
the organization was embedded in the report requesting for the
approval of the Greek program. Even though the staff had discussed
the need to change the rules since April, they did not draw attention
to the issue even on the day the program was approved. The IEO
highlights that as a result of these shady maneuvers “management’s
discretion and decision-making powers were left effectively
unchecked” while “the decision-making and supervisory
roles of the Executive Board were undermined”.
The outcome
of this process was a program that was destined to failure from its
inception. When the adjustment started to get off track by early
2011, the IMF refused to acknowledge its Greek fiasco and instead
doubled down on its failed strategy. The number of structural reforms
required from Greece steadily increased from 15 in the initial
program to more than 45 by 2012. As the list of measures multiplied
after each review, so did the arguments regarding the unwillingness
of Greece to reform. To cover the funding problems derived from
unachievable fiscal targets, the IMF raised its privatization targets
for Greece from €12.5 billion to €50 billion, despite the
lackluster performance of the country in this area. In addition, the
IMF was unable to develop or provide any compelling technical
arguments that supported the claim that a debt restructuring in
Greece represented the type systemic risk that was feared by European
officials. By the time debt restructuring took place in 2012, the IMF
supported program had facilitated “the most dramatic credit
migration from private into official hands in the history of
sovereign debt”. In the meantime, from the Greek perspective,
the debt restructuring was “insufficient to reestablish solvency
decisively” while “created a large risk for European
taxpayers”. In short, as one of the IEO background papers
points out “the decision not to seek preemptive debt
restructuring fundamentally left debt sustainability concerns
unaddressed, magnified the required fiscal adjustment, and thereby—
at least in part—contributed to a large contraction of output and a
subsequent loss of Greek public support for the program”.
Against this
damning indictment, Christine Lagarde defended the actions of the IMF
on the grounds that despite its shortcomings, the program “enabled
Greece to remain a member of the Euro Area—a key goal for Greece
and the Euro Area members”. From the perspective of the
articles of agreement of the IMF, this claim holds little water. As
it was pointed out by the Argentina representative to the executive
board of the IMF on the fateful day that the first Greek programme
was approved, “The Fund’s financial assistance is supposed to…
correct maladjustments without resorting to measures destructive of
national or international prosperity”. In the context of the
IEO report this statement is especially relevant as it clearly points
out that the IMF owed a responsibility to protect Greece as a country
member, not to the Euro zone. However, the IMF neglected this
obligation in order to turn the Greek program into a “holding
operation” that gave the Euro area time to build a firewall and
prevent contagion.
Thus, the
fact that it was the mainly the Euro zone, and not Greece itself, who
stood to benefit from the program should open the discussion at least
two sets of related discussion. On the one hand, it’s the
distribution of the costs of the Greek programme. Not only was
Greece left on its own to shoulder the burden of an unsustainable
debt but it also became the scapegoat for the failures of both IMF
and Euro area governance. Given the clear-cut public good aspect
of this type of program, its costs should have been distributed among
those who stood to benefit from it. Indeed, as the IMF itself has
suggested “the burden in such circumstances should not fall
wholly on the member for whom the program is being granted… but
should be shared more widely.” Sadly, as the recent agreement
on the Greek debt shows, neither the IMF nor the Euro area are
nowhere close to assume responsibility for the damage their policies
have inflicted on Greece. On the contrary, the IMF has made more than
2.5 billion in profits from its loans to Greece. On the other hand,
there is the issue of the legal standing of the loans provided to the
country. The IEO report confirms many of the findings of the Debt
Truth Committee and as such strengthens the case regarding the
illegitimate and odious character of Greek debt. As such, it’s
important to emphasize the call made by the Committee to repudiate
the debt burden imposed upon Greece, as only the adoption of decisive
measures that lead to significant debt relief will allow to start
mending the deep social and economic damages caused by 6 years of
crisis.
Source
and references:
Comments
Post a Comment