The bailout of Greece was bungled because it was an attempt to save the single currency rather than the debt-stricken country, according to a highly critical IMF report.
The IMF also admits that the impact of austerity policies in Greece was badly underestimated
The internal report on the handling of the Greek crisis has detailed a
catalogue of errors, which led to the IMF breaking three out of four of its
own rules relating to lending money to bankrupt countries.
It also admits that the impact of austerity policies in Greece was badly
underestimated as EU institutions and leaders tried to save their political
skins at the expense of the Greek economy.
The report, first leaked to the Wall Street Journal, explained that in
2010 the IMF lent €36bn (£30.5bn) to Greece despite a risk “so significant
that staff were unable to vouch that public debt was sustainable”.
While the IMF scaled back its contribution to a second Greek bailout in 2012,
amid growing concerns over whether debt could be paid back without
devastating economic consequences, its loan to Greece is the largest ever in
the fund’s history, relative to the size of the recipient country’s economy.
Most damaging of all is the IMF admission that the Greek bailout was not drawn
up to help Greece but was 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 fund criticises the delay in restructuring Greece’s massive debt load,
which eventually came in May 2012, two years after Greece’s original bailout
deal.
The IMF document reveals that a decision write off the country’s debt, making it more sustainable and reducing the economic impact of austerity, was delayed because it was too “politically difficult” for countries whose banks held Greek bonds.
"Not tackling the public debt problem decisively at the outset or early in the program created uncertainty about the euro area's capacity to resolve the crisis and likely aggravated the contraction in output," said the report.
"An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners. A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands."
The prevarication also cost eurozone taxpayers dearly because during the two-year period between May 2010 and the summer of 2012, when a “haircut” was finally agreed, the debt burden had shifted from private banks to EU governments and the IMF.
The failure to write down Greek debt while it was privately owned increased the amount of money that Greece would have to pay back and led to a second €130bn bailout that was larger than the first, in 2012.
However, the report fails to explain why, notwithstanding the problems, the IMF agreed twice to bail out Greece, except to say that staff from the fund “explicitly flagged” risks and were concerned about global financial stability.
The IMF report is scathing about the so-called “troika”, a body that was created when the fund joined forces with the European Commission and the European Central Bank to run the first €110bn Greek bailout in 2010.
The EU side of the "troika" is crticised by the IMF, with the implication that it put secretive internal procedures and massaged figures to help meet fiscal targets set out in the Maastricht euro treaty before the economics of solving the Greek debt crisis.
"The Fund's program experience and ability to move rapidly in formulating policy recommendations were skills that the European institutions lacked," the report said.
"There were occasionally marked differences of view within the troika, particularly with regard to the growth projections."
The indictment of the “troika” will have wider resonance because as well as administering Greece it oversees the economies of the other bailed eurozone countries - Ireland, Portugal and Cyprus.
For 18 months, until December 2011, the troika failed to revise Greek austerity targets, effectively making them impossible to achieve as the economy in Greece worsened much more than the official forecasts suggested, including those by the IMF.
“The fiscal targets became even more ambitious once the downturn exceeded expectations,” the report said.
"The preceding discussion has raised questions about whether the fiscal targets should have been less stringent and whether less optimistic projections should have been made about growth, deflation, privatisation receipts, and regaining market access. Varying these assumptions would have materially affected the outlook for debt sustainability."
The IMF report additionally criticises the commission at a time when the Brussels-based EU executive has been given a beefed up role in managing eurozone economies in the wake of the debt crisis.
"The European institutions brought an integrated view to studying the Greek economy and emphasised the extent of possible spillover effects within Europe. At least initially, this was not the perspective taken by the Fund which was more accustomed to analysing issues with a specific country focus," said the report.
"However, the EC tended to draw up policy positions by consensus, had enjoyed limited success and had no experience with crisis management."
The IMF document reveals that a decision write off the country’s debt, making it more sustainable and reducing the economic impact of austerity, was delayed because it was too “politically difficult” for countries whose banks held Greek bonds.
"Not tackling the public debt problem decisively at the outset or early in the program created uncertainty about the euro area's capacity to resolve the crisis and likely aggravated the contraction in output," said the report.
"An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners. A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands."
The prevarication also cost eurozone taxpayers dearly because during the two-year period between May 2010 and the summer of 2012, when a “haircut” was finally agreed, the debt burden had shifted from private banks to EU governments and the IMF.
The failure to write down Greek debt while it was privately owned increased the amount of money that Greece would have to pay back and led to a second €130bn bailout that was larger than the first, in 2012.
However, the report fails to explain why, notwithstanding the problems, the IMF agreed twice to bail out Greece, except to say that staff from the fund “explicitly flagged” risks and were concerned about global financial stability.
The IMF report is scathing about the so-called “troika”, a body that was created when the fund joined forces with the European Commission and the European Central Bank to run the first €110bn Greek bailout in 2010.
The EU side of the "troika" is crticised by the IMF, with the implication that it put secretive internal procedures and massaged figures to help meet fiscal targets set out in the Maastricht euro treaty before the economics of solving the Greek debt crisis.
"The Fund's program experience and ability to move rapidly in formulating policy recommendations were skills that the European institutions lacked," the report said.
"There were occasionally marked differences of view within the troika, particularly with regard to the growth projections."
The indictment of the “troika” will have wider resonance because as well as administering Greece it oversees the economies of the other bailed eurozone countries - Ireland, Portugal and Cyprus.
For 18 months, until December 2011, the troika failed to revise Greek austerity targets, effectively making them impossible to achieve as the economy in Greece worsened much more than the official forecasts suggested, including those by the IMF.
“The fiscal targets became even more ambitious once the downturn exceeded expectations,” the report said.
"The preceding discussion has raised questions about whether the fiscal targets should have been less stringent and whether less optimistic projections should have been made about growth, deflation, privatisation receipts, and regaining market access. Varying these assumptions would have materially affected the outlook for debt sustainability."
The IMF report additionally criticises the commission at a time when the Brussels-based EU executive has been given a beefed up role in managing eurozone economies in the wake of the debt crisis.
"The European institutions brought an integrated view to studying the Greek economy and emphasised the extent of possible spillover effects within Europe. At least initially, this was not the perspective taken by the Fund which was more accustomed to analysing issues with a specific country focus," said the report.
"However, the EC tended to draw up policy positions by consensus, had enjoyed limited success and had no experience with crisis management."
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