April 8, 2020

Inside Europe: Troika Has a Patchy Record on Bailouts

PARIS — If the troika that handles bailouts of distressed euro zone countries were a soccer team, it would probably be looking for a new manager after achieving a track record of one win, one loss and one draw.

The uneasy trio — the European Commission, the International Monetary Fund and the European Central Bank — was assembled in haste in March 2010 after Greece’s public debt and deficit exploded and it was about to lose access to market funding.

Last week’s “mea culpa” report from the I.M.F. about the failures of the Greek program blew the lid off the fiction that the three institutions saw eye-to-eye on the rescue packages they designed and are enforcing in Greece, Ireland, Portugal and now Cyprus. Behind closed doors, they clashed over whether Greece should restructure its debt, forcing investors to take losses, and whether Ireland should make bondholders in its shattered banks share the cost of a financial rescue.

They still differ over whether European governments should write off some loans to Athens to make its debt sustainable in the long term, an idea that is politically explosive before a German general election in September.

The public airing of such differences raises the question of whether the troika has reached the end of the road. The I.M.F. says it lowered its standards to support a flawed program for Greece; the European Commission says it “fundamentally disagrees” with the I.M.F.’s view that Greek debt should have been written off sooner; and the E.C.B. says the I.M.F. is applying misleading hindsight.

The Europeans contend that in the market panic of 2010, before the euro zone had begun to build a financial firewall, letting Greece default or making it restructure its debt could have caused massive contagion to other countries and perhaps swept away the euro itself.

“It would have been Europe’s Lehman moment,” said the Europe’s economic and monetary affairs commissioner, Olli Rehn, referring to the 2008 collapse of Lehman Brothers that sparked a global financial crisis. “I don’t recall the I.M.F.’s managing director, Dominique Strauss-Kahn, proposing early debt restructuring, but I do recall that Christine Lagarde was opposed to it.”

Ms. Lagarde was French finance minister at the time and replaced Mr. Strauss-Kahn as head of the I.M.F. in 2011.

The most damaging suspicion raised by the I.M.F. study of the Greek program is that the troika made overoptimistic growth forecasts and massaged the debt numbers because euro zone political leaders had exerted undue influence on the process.

Wrapped in the forensic jargon of financial analysis, the I.M.F. experts say European leaders made Greece’s economic crisis worse by delaying an inevitable debt write-off, buying time for their own banks to cut their losses at taxpayers’ expense.

“The troika is a unique set-up which has institutionalized political influence in I.M.F. decision-taking,” said Ousmène Mandeng, a former I.M.F. official. “Decisions were perceived to be taken in Berlin and Brussels rather than by the I.M.F. board. The I.M.F. should never again be a junior partner in this way.”

Mr. Mandeng argues that the fund should either pull out of the troika or take sole control of the rescue programs.

The E.C.B. president at the time, Jean-Claude Trichet, initially opposed bringing the I.M.F. on board, arguing that Europe should be able to sort out its own problems. He also rejected debt restructuring and making bank bondholders share losses, saying it would ruin the euro area’s standing in financial markets. Germany and its allies in Northern Europe insisted on I.M.F. involvement because they feared the commission would be too soft on indebted member states and too willing to commit taxpayers’ money.

But the I.M.F. is not the only body to give rise to misgivings. Some E.C.B. stakeholders, notably in Germany, are worried about potential conflicts of interest if the central bank stays in the troika while it is backstopping euro zone government debt through its bond-buying program and about to take over supervision of banks that lend to troubled sovereigns.

An E.C.B. executive board member, Jörg Asmussen, told the European Parliament that once the current crisis is over, the troika should be replaced by the euro zone’s rescue fund and the European Commission. But not now.

Many independent economic experts argued from the outset that Greece would never be able to repay its debt mountain and questioned the troika’s rosy forecasts for the Greek economy. The initial Greek program projected that gross domestic product would contract by just 3.5 percent between 2009 and 2013. In fact, it crashed by 22 percent. Troika officials repeatedly increased the amount Greece was supposed to raise by privatizing state assets, even as its economy crumbled and investors fled.

The biggest errors were in predicting unemployment. The troika foresaw a peak jobless level of 14.8 percent this year. The real figure is 27 percent.

Growth forecasts for Portugal, where the outcome of an E.U.-I.M.F. adjustment program remains uncertain, were also overoptimistic, though not to the same extent. Even in Ireland, the one “success” which returned to growth and expects to get back to market funding this year, the troika underestimated job losses and the related social damage.

Now I.M.F. members in Latin America and Asia, which endured harsh lending terms in the 1980s and 1990s, are loath to pour more money into one of the world’s richest regions.

“Operationally and financially, the I.M.F. has become much more involved in Europe than its global shareholders deem sustainable,” said Jean Pisani-Ferry, the departing director of the Bruegel economic study group in Brussels.

A person at the I.M.F., speaking on condition of anonymity because he is still involved with the bailout programs, said the real problem with the troika was that no one was in charge.

“It’s more like a soccer team with no manager and no clear definition of who plays where on the field,” he said.

Paul Taylor is a Reuters correspondent.

Article source: http://www.nytimes.com/2013/06/11/business/global/troika-has-a-patchy-record-on-bailouts.html?partner=rss&emc=rss

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