Europe’s Two Years of Denials Trapped Greece

THE warning was clear: Greece was spiraling out of control.

But the alarm, sounded in mid-2009, in a draft report from the International Monetary Fund, never reached the outside world.

Greek officials saw the draft and complained to the I.M.F. So the final report, while critical, played down the risks that Athens might one day default, with disastrous consequences for all of Europe.

What is so remarkable about this episode is that it wasn’t so remarkable at all. The reversal at the I.M.F. was just one small piece of a broad pattern of denial that helped push Greece to the brink and now threatens to pull apart the euro. Politicians, policy makers, bankers — all underestimated dangers that seem clear enough in hindsight. Time and again over the last two years, many of those in charge offered solutions that, rather than fix the problems in Greece, simply let them fester.

Indeed, five months after the I.M.F. made that initial prognosis, Prime Minister George Papandreou of Greece disclosed that, under the previous government, his nation had essentially lied about the size of its deficit. The gap, it turned out, amounted to an unsustainable 12 percent of the country’s annual economic output, not 6 percent, as the government had maintained.

Almost all of the endeavors to defuse this crisis have denied the overarching conclusion of that I.M.F. draft: that Greece could no longer pay its bills and needed to drastically cut its debt.

Until October, when European leaders conceded that point, the champion of the resistance was Jean-Claude Trichet, who stepped down this month as president of the European Central Bank. It was he who insisted that no European country could ever be allowed to go bankrupt.

“There is simply no excuse for Trichet and Europe getting this so wrong,” said Willem Buiter, chief economist at Citigroup. “It is fine to make default a moral issue, but you also have to accept that outside of Western Europe, defaults have been a dime a dozen, even in the past few decades.”

If leaders had agreed earlier to ease Greece’s debt burden and moved faster to protect the likes of Italy and Spain — as United States officials had been urging since early 2010 — the worst might be behind Europe today, experts say.

The turning point came at a late-night meeting last month when Angela Merkel, the German chancellor, pushed private creditors to accept a 50 percent loss on their Greek bonds. Mr. Trichet had long opposed such a move, fearing that it could undermine European banks. Instead, at his urging, European leaders initially promoted painful austerity for Greece, prompting a public backlash that pushed Mr. Papendreou’s government to the brink of collapse and could force Athens to abandon the euro.

Many view the latest rescue plan as too little, too late.

“Because of all this denial and delay, Greece will need to write down as much as 85 percent of its debt — 50 percent is not enough,” Mr. Buiter said.

It was never going to be easy to turn things around in Greece, particularly given European politics. In countries like Germany and the Netherlands, many people oppose bailing out their southern neighbors. Policy makers and, indeed, many financiers believed that they could buy enough time for Greece to solve its problems on its own.

“It was quite obvious, by the spring of 2010, that Greek debt could not be paid off,” said Richard Portes, a European economics expert at the London Business School. “But in good faith, policy makers felt that Greece could grow out of its debt problem. They were wrong.”

BOB M. TRAA is no one’s idea of a radical. A Dutchman, he labors at the I.M.F., among the arcana of global debt statistics. He wrote the 2009 report.

Immediately after that bulletin, he produced another, more damning analysis, which concluded that if Greece were a company, it would be bankrupt. The country’s net worth, he concluded, was a negative 51 billion euros ($71 billion).

But because Greece had a high-enough credit rating at that time, it could keep borrowing money and skate by. Once again, the Greek government objected to the I.M.F. analysis, although this time, the report was not amended.

Attention has only recently been drawn to these early I.M.F. studies. The Brussels research group Bruegel, which conducted an analysis at the I.M.F.’s behest, concluded the fund should have done more to draw attention to Greece’s troubles.

By early 2010, banks and bond investors were growing reluctant to lend Greece money. The country’s finance minister, George Papaconstantinou, delivered a blistering message to his European partners.

Stephen Castle reported from Brussels.

Article source: http://www.nytimes.com/2011/11/06/business/global/europes-two-years-of-denials-trapped-greece.html?partner=rss&emc=rss