I.M.F. Concedes Major Missteps in Bailout of Greece

The 50-page report, titled “Greece: Ex Post Evaluation of Exceptional Access Under the 2010 Stand-By Arrangement,” acknowledges major mistakes in Greece’s first bailout, which totaled about $143 billion and came into effect in 2010. The fund bent or broke three out of four of its own rules with the lending program, the report concludes. It also seriously underestimated the severity of Greece’s downturn.

The first bailout failed to set Greece on a sustainable path. “Market confidence was not restored, the banking system lost 30 percent of its deposits, and the economy encountered a much deeper-than-expected recession with exceptionally high unemployment,” the report said. In 2012, the I.M.F. and its partners, the European Commission and the European Central Bank, agreed to a bigger second program, totaling about $170 billion and requiring Greece’s private sector bondholders to accept losses of at least 50 percent. The Greek economy has been shrinking for six consecutive years, with no end in sight, erasing a full decade of growth. The unemployment rate has hit 27 percent.

The report said that the fund miscalculated the so-called multiplier, or the effect that adding or subtracting a dollar of government spending would have on the broader economy during the downturn. It underestimated the scale of what has proved to be a devastating Greek depression, fueled in part by sharp government spending cuts and tax increases.

Over the last year, the fund has performed a broader reassessment of the fiscal multiplier during the downturn, to help explain why it underestimated some countries’ growth and overestimated others.

Multipliers at that time were actually multipliers that were in line with estimates by the Organization for Economic Cooperation and Development, said Poul Thomsen, the fund’s mission chief for Greece, in a conference call with reporters. He said other, unexpected factors had contributed to Greece’s collapse: among them the country’s internal political crisis, concern within the European Union that the country would abandon the euro currency and worries among investors that the Europeans did not have an adequate crisis response.

The initial program for Greece was “necessary” and “appropriate,” the report concludes. But it also bent the I.M.F.’s own rules for lending to bankrupt countries. In particular, the fund’s experts were “unable to vouch” that Greece would be able to repay its loans in the medium term. “Staff favored going ahead with exceptional access because of the fear that spillovers from Greece would threaten the euro area and the global economy,” the report said.

The I.M.F. released the document after The Wall Street Journal reported some of its conclusions online.

In hindsight, the fund arguably missed two other internal criteria as well, the report concludes: ascertaining that Greece had “good prospects of regaining access to private capital markets” and ensuring that it had a “reasonably strong prospect of the programs’ success taking into account institutional and political capacity to deliver adjustment.”

The report suggests that the so-called troika responsible for the bailout program — the I.M.F., the European Commission and the European Central Bank — might have forced Greek bondholders to take a haircut on their bonds sooner, while noting the political opposition to that step. “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,” the report states.

The report also said Greece might have benefited from less stringent fiscal targets, or targets spread out over a longer time frame. But that would have required billions more euros in support, the fund said, and that support clearly did not exist. Indeed, “the fiscal targets became even more ambitious once the downturn exceeded expectations,” the report said.

The initial Greek program ended up acting as a “holding operation,” buying time for Europe to try to limit the fallout, the report concludes.

The I.M.F. also expressed misgivings about the troika that financed and ran the bailout program.

“None of the partners seemed to view the arrangement as ideal,” it said, and they failed to establish a proper division of labor. Still, “the view of everybody involved on the inside is that given that these are three institutions that have not had a history of working in that way together, it worked surprisingly well,” Mr. Thomsen, the Greek mission chief, said. “It doesn’t mean it couldn’t work better.”

Article source: http://www.nytimes.com/2013/06/06/business/global/imf-concedes-major-missteps-in-bailout-of-greece.html?partner=rss&emc=rss