The IMF's Disastrous Response To Greece: Giving In To Political Pressure
by Tim Worstall
http://www.forbes.com/sites/timworstal
July 29/16
The reputation of the International Monetary Fund has taken a tremendous ding over its actions surrounding the Greek bailout. It’s true that those of the eurozone and the European Union haven’t done all that well either, but those reputations for economic competence never were there in the first place.
The IMF’s actions have damaged the organization’s previous reputations for both economic competence and also insulation from political pressures. The serious underlying point here being that the Greek bailout violated all and every one of the IMF’s basic instructions for how to deal with this sort of problem. Those basic instructions being based on more than half a century of hard-won experience–knowledge that was just thrown out the window under the political pressures of the European project.
Not a good result at all–and this isn’t just me saying it, this is the IMF itself saying it.
Ambrose Evans Pritchard on the point:
The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.
Note again this is the IMF saying this, not Ambrose or I alone:
The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fallback plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen.“Before the launch of the euro, the IMF’s public statements tended to emphasise the advantages of the common currency,” it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled. This pro-European-Monetary-Union bias continued to corrupt their thinking for years.
Yes, there’s more:
The Independent Evaluation Office highlighted a litany of flaws in the IMF’s “uneven” response, prompting calls for greater clarity over its rescue strategy.
The assessment also raises fresh questions over the failure to restructure Greek debt at the time of its first bailout in 2010. The report, released Thursday, said key decisions had already been reached in Europe by the time the fund became involved in the rescue effort.
That’s really where the problem was. The report is here.
So, Greece was bust. It simply could not pay nor finance its debts at market interest rates. OK, this happens, we know how to deal with this. The IMF knows how to deal with this and there’s a standard procedure. First, there’s a haircut on the creditors, whatever it takes to get the debt to sustainable levels. Second, there’s a devaluation of the currency in order to produce a nice jolt of stimulus. Third, the IMF provides the local government with financing until the short-term effects are dealt with and it is possible to finance the government again at market rates from those markets.
The politics of the euro, of that project of ever-closer European integration and union, simply could not allow this to happen. For it was just not politically possible, given those goals, that anyone should leave the euro. Given that there could be no bounce from a devaluation–and thus no chance at all of being able to return to market financing of the Greek government. This in turn meant that the debt had to be (or at least was) taken over by varied governmental and EU organizations rather than busting the other European banks that had lent most of the money with a haircut. There was a haircut of some of those bonds but the vast majority of the debt was shifted off bank books and onto public ones.
At which point debt forgiveness or a haircut were not politically possible. Because those European politicians could not admit to their own voters that they’d just lost a hundred billion euros or two in pursuit of that European ideal. People tend to go off such ideals when they find out how much they cost, and that would just never do.
All of which is what this report is really about. The IMF bowed to European politics instead of insisting upon the known and sensible economic solution: a haircut, a devaluation and a reflation of the Greek economy. Instead we’ve had a maintenance of the debt owed, the crushing collapse of the Greek economy (I mean, come on, 50% youth unemployment rates?) and the European ideal staggers on a little longer.
This was not a good result and, yes, the IMF should have done a great deal better. As the IMF is now telling itself in this report.
I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.
The author is a Forbes contributor. The opinions expressed are those of the writer.
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