At long last, European creditor nations and Greece have reached an agreement on a third bailout in five years.
The bailout, which was approved by Greece’s Parliament on Friday, included familiar details: In return for an infusion of 86 billion euros, or $95 billion, Greece has promised to increase taxes, cut spending and enact measures to make its economy function more efficiently.
But there was one glaring omission. As it stands, none of that new money flowing into Greece will come from the agency that has, until now, played a crucial role in virtually every bailout, in Greece and elsewhere around the world: the International Monetary Fund.
That is because the I.M.F. says that Greece was simply incapable of repaying its staggering debt. Yet the accord reached last week makes no effort to reduce that burden. If you agree with the I.M.F.’s reasoning, you might have to conclude that despite all of the seemingly ironclad provisions of the agreement imposed by eurozone creditors, Greece will be no more able to honor the deal or to repay its new loans than it has been in other bailouts.
“I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own,” the I.M.F.’s chief, Christine Lagarde, said on Friday, following the accord’s approval this week.
The Greek debt drama has had its share of twists and turns. Alliances have shifted, rivalries have deepened, and the back-room maneuverings have been appropriately Byzantine.
But the I.M.F. shift from being Greece’s most persistent scold to its main advocate for a break on its debt has been among the most intriguing developments so far.
Clashing Assessments
In late June, representatives of European countries and the I.M.F. gathered at a private meeting at the European Union’s headquarters in Brussels. The officials were racing against time to devise a plan to keep the country in the eurozone. But the dispute between Greece’s two largest lenders was about to boil over.
Poul M. Thomsen, the Danish fund official who served as the I.M.F. point person in the Greek talks, had been negotiating around the clock, and his voice was hoarse. Since early in the spring, he had been arguing that while Greece needed to follow through on tough economic measures, its debt was out of control. Europe, however, insisted that the Greek government had only to enact tough austerity measures to set itself on a prudent financial path.
Now the Europeans wanted to highlight their own, more sanguine view of Greece’s debt prospects at a crucial meeting of the creditor countries’ finance ministers the next day. And in doing so they took the I.M.F.’s conclusion — that Greece could no longer repay its debt and that Europe might have to face losses on its exposure there — and presented it, in one throwaway sentence, as a long-shot scenario.
For the I.M.F. it was a breaking point. Not only were officials frustrated that Europe was not accurately reflecting their view, but they also wanted to make sure that their non-European shareholders, many of whom had become very critical of the fund’s aggressive lending in Greece, got the full picture of how their analysis had changed. So, in a highly unorthodox move, they decided to make their disagreement public. They released their full analysis — a 23-page document — a week later.
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Since then the fund has been adamant: Europe must provide significant debt relief in order for the I.M.F. to provide cash toward the next Greek bailout.
A growing number of economists agree that Greece needs more than another dose of austerity policies to recover. But they are also asking why it took so long for the fund to reach that conclusion.
“I applaud the fund for releasing the report, but at the same time it was too late,” said Gabriel Sterne, an economist at Oxford Economics in London who has closely studied the I.M.F.’s role in Greece. “For right or for wrong, they are the only honest broker here so they really should have gotten this out sooner.”
No More Argentinas
Founded in 1944 as part of a broad mandate to ensure global financial stability after the end of World War II, the I.M.F. for many years primarily lent money to developing economies — largely in Latin America and Asia — that experienced a financial crisis.
But after the 2008 financial crisis, the I.M.F. turned its attention to Europe. An astonishing 61 percent of the I.M.F.’s loan book is now tied up in Ireland, Portugal and, of course, Greece.
The standard prescription in a crisis is a dollop of loans in return for belt-tightening measures.
When this analysis is done correctly, the endings tend to be happy. The economy recovers, and the country goes back to the usual method of meeting its financing needs by borrowing on global bond markets, as has happened with Ireland and Portugal.
When the analysis is not done correctly, the results can be disastrous. The country goes bust. The I.M.F. is not paid back. And most acutely, citizens end up suffering from the failed policies.
Arguably, then, the I.M.F.’s most critical task is figuring out whether or not a country can pay back its loans. That calculation will determine how much the fund pushes pure austerity policies or whether it will also impose losses on lenders to return the economy to health.
As an emergency creditor — the world’s subprime lender, if you will — the I.M.F. has some failures. Before Greece, the fund’s biggest debacle had been Argentina. The fund lent billions of dollars to the country just before it defaulted in 2001, leading to an economic tailspin. It took years for Argentina to come out of it.
To guard against falling into a similar money pit, the fund put in place a “no more Argentinas” rule, according to the author Paul Blustein in his definitive paper on the I.M.F.’s Greek drama.
The rule decreed that the fund would hand out money only if there was a “high probability” that the applicant could make good on the loan.
In May 2010, Greece would be the first test of this new rule.
From the outset, most of the fund’s senior staff concluded it was highly unlikely that Greece could pay the money back, given its voluminous debts and dysfunctional economy.
Several top officials went so far as to push for an immediate debt “haircut” — a permanent loss to the lenders — in secret meetings with their European counterparts, according to Mr. Blustein’s recounting of those events.
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But the fund, then under the leadership of Dominique Strauss-Kahn, wanted to get back into the bailout game. Having hit a low of $9 billion in 2007, I.M.F. lending had been slowly ticking up through 2010. Mr. Strauss-Kahn, who was known to have his eye on the French presidency, was not going to miss an opportunity to play a central role in resolving the European debt crisis.
So the I.M.F. made a last-minute adjustment to its “no more Argentinas” decree. It would approve the loan request under a new “systemic exemption.” That is, the fund could justify the loan if it would prevent a broad financial panic.
Greece seemed to fit that exemption. The bailout request came less than two years after Lehman Brothers had failed. The global economy was still in a precarious state, and European debt markets had been rattled by Greece’s troubles. With the European Central Bank not yet ready to use its ability to print money to intervene, the fund decided to back Greece in spite of its disastrous finances.
It was a controversial decision. The bailout was a salvation for bond investors, namely large European banks, which owned the majority of Greek debt. But the Greek people would have to pay, as the country was required to institute severe budget cuts and tax increases to make the debt numbers add up. The immediate halt in government spending had a devastating effect in an economy dependent on state largess. Unemployment soared, suicide rates jumped, and pensioners took to begging on the streets.
The fund, nonetheless, produced optimistic reports about the outlook for Greece. (Since 2010, the fund’s growth estimates missed the mark by a cumulative 25 percent, a forecasting error of such a magnitude that the fund’s chief economist was forced to acknowledge in 2013 that the I.M.F. had underestimated the extent to which austerity policies could sink an economy.)
By 2012, Greece would need a second bailout, and this time fund officials were able to convince their European partners that bond investors must contribute to the rescue by accepting steep losses on their investments. In addition, they extracted a commitment from Europe that it would take steps to reduce Greece’s debt in the coming years.
With all the hoopla of the second bailout, this clause drew little notice, but for the I.M.F. it was a victory of sorts, as it gave voice to what officials had been saying internally: The time would come when Europe would have to take a hit on its Greek loans.
The Pressure Mounts
By mid-2014, Greece had made some progress. Excluding interest paid on its debt, its budget had reversed from a 10 percent deficit to a slight surplus.
The government was again able to tap global markets for cash, and Greek banks raised billions of dollars in New York and London.
That July, Rishi Goyal, a senior member of the I.M.F.’s Greek team based in Washington, hailed the achievement in a speech in Athens.
Privately, however, fund officials were voicing doubts to their European partners over whether Greek politicians, notorious for their free-spending ways, could maintain fiscal discipline.
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Mr. Thomsen, the head of the I.M.F.’s European department, was among the most skeptical. A career technocrat from Denmark with a blunt manner, he had put together the original Greek program in 2010 and had become frustrated with Greece’s reluctance to follow through with reforms.
In particular, Mr. Thomsen was infuriated when the Greek prime minister at the time, Antonis Samaras, fired Harry Theoharis, a crusading young reformer in the Greek finance ministry.
Mr. Theoharis had the enthusiastic support of the I.M.F. to retool the country’s deplorable tax system. With the government backtracking on reforms, the country’s small surplus disappeared.
In January of this year, the anti-austerity party of Alexis Tspiras came to power. By April, negotiations over debt repayment had stalled, the government was hemorrhaging cash, and the economy was at a standstill.
On Easter Sunday, Yanis Varoufakis, who had become Greece’s finance minister, flew to Washington to meet with Mr. Thomsen and Christine Lagarde, who became the I.M.F.’s chief in late 2013, and threatened to stop payment on more than a billion dollars in loans that were soon coming due.
Relations between fund officials and the Greeks had reached their nadir. Mr. Tsipras said that the fund had “criminal responsibility” for the crisis, and Mr. Varoufakis was telling people that Mr. Thomsen’s work in Greece would go down in history as the I.M.F.’s greatest failure.
Yet having run the numbers, the fund now accepted the central argument being made by Mr. Varoufakis: Greece was bankrupt and needed debt relief from Europe to survive.
The fund was also feeling the pressure from the non-European members of its board who questioned the huge commitment to Greece (currently about $15 billion) relative to the small size of its economy.
Ms. Lagarde and David Lipton, her top deputy, became more insistent, pressing European nations that economic reforms alone were not enough and that a debt restructuring would be needed as well.
In late April, Mr. Thomsen took up the issue once more at a critical meeting of European finance ministers in Riga, Latvia.
Two months later, Ms. Lagarde found herself at the Brussels meeting of European finance ministers, with the country’s future in the eurozone hanging in the balance.
The Europeans were pressuring Mr. Varoufakis to agree to an austerity-loaded debt deal that he was resisting.
I have a question for Christine, he said. Can the I.M.F. formally state in this meeting that this proposal we are being asked to sign will make the Greek debt sustainable?
She could not. And when Jeroen Dijsselbloem, the Dutch finance minister and lead negotiator for Europe, cut off all discussion of debt relief, the die was cast.
Back at I.M.F. headquarters in Washington, the decision was unanimous: It would go public with its assessment that Greece’s debt situation was hopeless.
‘Old Wine in a New Bottle’
The 19 countries of the euro area make up the I.M.F.’s largest shareholder base, but as the world’s financial watchdog, the fund also represents 169 other nations.
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If the I.M.F. wants to be seen as an international, as opposed to a European, monetary fund, it must prove that it can speak with an independent voice. And if that means arguing that Europe, its senior partner in these talks, needs to take a loss on its loans — well, so be it.
Many have commended the fund for going public with its views. But the release of its debt reports has not yet had any practical effect.
The latest bailout is heavy on austerity measures like privatization of power companies and seaports, reduced pensions and tax increases in shipping and tourism, and says nothing about debt relief.
“This is old wine in a new bottle,” said Meghan E. Greene, chief economist at Manulife in Boston. “I see very little chance that the bailout will succeed — it’s too much like the other ones.”
Would it have made a difference if the fund had officially broken with Europe in the spring, when it began to conclude that the Greek debt had become unmanageable?
Probably not, says Susan Schadler, a former I.M.F. economist and author of a widely read paper on the fund’s Greece saga.
But she argues that by not forcing creditors to take a loss back in 2010, the pain has been borne almost exclusively by the Greeks themselves, and not by bond investors.
“The fund should have pushed for a restructuring then,” she said. “That, after all, is its job — to assess the risks and say whether or not the debt is sustainable.”
source:nytimes.com
STUDIO 3 NEWCASTLE AUSTRALIA 