Greece: The IMF’s Deceptive Mea Culpa

On Thursday, the International Monetary Fund (IMF) published an ex-post evaluation of the first adjustment programme (Stand-by Arrangement or SBA) implemented in Greece between May 2010 and March 2012. The IMF recognizes a number of failures (unsustainability of public debt, unprecedented recession, record unemployment) and some successes (the country is still part of the eurozone, and has reduced its structural public deficits).

The ex-post evaluation of the programmes is a classic IMF procedure. It considers the objectives set at the outset–in Greece’s case, to reduce the excessive budget deficit by 2014, return the economy to growth and restore its access to the markets in 2012 and ensure the sustainability of the public finances without debt restructuring. The SBA programme failed on all these counts. By year-end 2012, GDP fell to 17% below its 2009 level, while the unemployment rate soared to 25%. Government debt was restructured in March 2012, and access to financial markets for medium- and long-term funding has still not been restored.

While a deep recession was judged inevitable, the institution acknowledges having underestimated the fiscal multipliers. Initially estimated at 0.5. The impact of a point of fiscal retrenchment on the economy was in fact twice as high. In addition, the IMF conceded that it did not fully grasp the factors potentially triggering a deeper recession, above and beyond the direct impact of fiscal austerity on growth. In particular, the significant liquidity constraints affecting households and the difficulties to refom institutions and lift productivity were all underestimated.

Regarding structural reforms, the report singles out the fierce opposition from vested interest groups and the lack of resources allocated to combating tax fraud, with both of these factors contributing to an inequal distribution of efforts across society. In return, the weakening of the social contract reduced the government’s margin for manoeuvre, already squeezed by the lack of a political consensus. By its own admission, the IMF believes that it did not accurately assess the government’s ownership of the program and its political ability to satisfy the conditions given the country’s institutional weaknesses.

More specifically, the report singles out the dearth of direct measures taken to enhance competition in the goods and services markets, as well as the lack of flexibility in private sector earnings which had deleterious effects on employment. The IMF emphasises the fundamental contradiction between the internal devaluation, which was required in Greece and the sustainability of the public finances. Wage deflation, critical for improving competitiveness without the option of devaluation, reduces the denominator of the public debt ratio, exposing debt, which was already very high at the start of the program to the risk of unsustainability.

The ex-post evaluation reveals that the IMF bent its own rules by going ahead with a SBA programme for Greece, when the sustainability of the public debt at medium term could not be assured with high probability. The IMF’ self-criticism stops here. Actually, this is the poor European management of the Greek crisis that is considered to be the main cause of the program’s failure.

The institution wonders whether it would have been better to restructure Greek government debt in 2010. While the authors share the reasons that prompted the European partners to initially oppose an ex-ante restructuring, they criticise their change of heart during the October 2010 Deauville summit, and then their prevarication. According to the report, it has accentuated the contraction in Greek GDP, dealt a heavy blow to the program’s credibility and led to less than optimum use of its resources. With hindsight, the IMF considered that a debt restructuring in 2010 would have been better for Greece and the efficiency of the programme. Finally, the 1st Greek programme is described as a holding operation that gave time to the euro area to build debt crisis management tools (EFSF ESM) that did not exist at the outset.

Besides, the report recalls that the acute crisis in confidence triggered by political and social developments in Greece and the uncertainty allowed to linger for too long at European level concerning the possibility of the country’s exiting the euro zone were also major contributors for deposits outflows (bank deposits were down 30% in 2012) and the slow progress in privatisations.

The report also points the lack of a clear division of labor across the Troïka and conflicts in the areas of fiscal consolidation and structural reform between the European Commission, primarily looking to comply with the European rules (Maastricht Treaty and European standards) and the IMF keen to identify appropriate measures for Greece. Much more overtly, the report’s authors directly single out the Commission’s lack of experience in crisis management and poor track record in impelementing conditionality under the Stability and Growth Pact.

Lastly, the report emphasises the need for refining the Fund’s lending policies to countries belonging to monetary unions. It says a particular challenge is to “find ways to translate promises of conditional assistance from partner countries into formal program agreements”. Probably a way of reminding European leaders of the commitments they gave last November when they said that they are ready to take the necessary measures to ensure the sustainability of Greek public debt by 2020 if the 2nd programme is on track.

BY Thibault MERCIER