The broken pieces of Greece’s bailout
A couple of months before Greece and its lenders engage again for the next bailout review and with no immediate reform legislation due in Parliament, this is perhaps as good a time as any to take stock and ponder how effective, or not, the country’s successive adjustment programs have been.
The truth is that it is difficult to draw much encouragement when looking back on the last six years, which have been dominated by economic adversity, political instability and social upheaval. “We look back on our life as a thing of broken pieces, because our mistakes and failures are always the first to strike us,” German writer Johann Wolfgang von Goethe mused some 200 years ago. Goethe, though, also believed that making mistakes is an important way to progress. “By seeking and blundering we learn,” he wrote.
At the International Monetary Fund, one of Greece’s main lenders, the task of identifying errors in the Washington-based organization’s handling of bailout programs lies with its Independent Evaluation Office (IEO). The IEO has in the past assessed the IMF’s role in Asian and Argentinean crises and last week published its report on the IMF’s role in the euro area crisis, focusing particularly on Greece. The aims of these reports are to improve the Fund’s future crisis management.
The extensive report, whose main points were set out in Kathimerini several days before the official publication, outlines a number of mistakes made by the IMF in its handling of Greece. These include its failure to closely monitor the implementation of reforms before the outbreak of the crisis in 2009, the absence of a proper debate on the full range of options (including debt restructuring) available to deal with the problem in 2010, the awkward troika arrangement that allowed political concerns to trump technical judgment, the lack of ownership in Athens, poor communication from the IMF and an ill-designed program.
Unlike the European members of the troika, the IMF has repeatedly highlighted the errors it has made in dealing with Greece over the last few years. In January 2013, the IMF’s then chief economist Olivier Blanchard published a working paper admitting that the Fund had underestimated the fiscal multipliers (i.e. the recessionary impact) attached to the austerity measures implemented in Greece. In June of that year, the Fund published its so-called mea culpa, an internal report outlining a series of missteps, suggesting that the key focus of the Greek program had been on conducting a holding operation that gave the rest of the eurozone time to build a firewall to protect itself from possible contagion. Since then, several members of the IMF’s research department have also posted blogs questioning the sharp fiscal adjustment undertaken in Greece. Also, last year, minutes from the IMF board meetings that took place before the body joined the first Greek bailout in 2010 were made public. They highlighted the level of disagreement about the structure of the program within the Fund and gave the impression of an organization not at all comfortable with its role.
In this respect, the IEO report largely goes over matters that have already been covered. It is, however, a much more comprehensive assessment than anything that has gone before. As such, some of the issues that it does highlight deserve to be studied carefully. Paul Blustein, a journalist who has authored two definitive books about the IMF and its handling of the crises in Asia and Argentina during the 1990s and 2000s (“And The Money Kept Rolling in” and “The Chastening”) picked out one such example.
“One particularly damning revelation is the section of [Susan] Schadler’s report for the IEO [“Living with Rules”], where she talks about how half-baked the effort was within the Fund to assess the potential danger of contagion from a Greek debt restructuring in the spring of 2010,” Blustein told Kathimerini English Edition. “She cites a couple of memos that were sent to management but she essentially argues that they didn’t provide a convincing case at all – she even writes, in a footnote on page 15: ‘It was also clear during interviews that some of the analyses were not well-understood by staff members who were not the ones actually carrying out the analysis.’
“She also makes a very good and telling point, namely that it was silly to assess only the contagion danger from a full default but not from an orderly restructuring of the sort many people favored,” explained Blustein, currently a senior fellow at the Center for International Governance Innovation (CIGI).
The absence of a thorough assessment of debt restructuring prospects before the implementation of the program obviously raises serious questions about the method lenders followed and whether the Greek people and economy could have shouldered a lighter burden since 2010. However, this does not mean that the entire program deserves to be trashed. There has been a tendency when such reports have been issued over the last few years for those who are vehemently opposed to the bailouts to feel that the findings justify all their beliefs, while the lenders and those who support their positions go on the defensive.
The latter usually results in representatives of the institutions highlighting what a difficult and particular case Greece was, while underlining how much political instability and social resistance help up the proper implementation of the program. This time was no different.
“Greece, however, was unique: while initial economic targets proved overly ambitious, the program was beset by recurrent political crises, pushback from vested interests and severe implementation problems that led to a much deeper than expected output contraction,” said IMF Managing Director Christine Lagarde in reaction to the IEO report, comparing the problems encountered in Greece to the relatively smoother execution of programs in Ireland and Portugal.
There is, though, something slightly misleading in this response. Greece was a unique case even before the program implementation began because it had a 24-billion-euro primary deficit in 2010, which was far bigger than any other eurozone country and – in the absence of debt relief – required a monumental fiscal adjustment, which itself reverberated through the Greek political system and society.
“I’m not at all convinced by Lagarde’s argument that Greece was a unique case,” explained Blustein, who is preparing to publish a new book on the IMF and the eurozone crisis this October.
“Of course it’s true that ownership was not as strong as Ireland, and that political instability was greater. But it’s a chicken and egg problem. If the initial program had been better designed – in particular, if debt restructuring had been undertaken earlier – Greek ownership might well have been stronger. The country’s leadership would have been able to make the case to the public that creditors were sharing the pain, and there would have been at least somewhat less need for fiscal austerity, which could have made the recession less terrible than it was.”
In one way this is an academic debate but in another it is very relevant to Greece’s immediate future. This fall the IMF will have to decide whether to be part of the third Greek bailout. The main obstacle it faces is that it does not believe the country’s debt is on a sustainable trajectory and some kind of intervention from the European lenders, who hold the bulk of Greece’s loans, will have to be made. The eurozone, mainly driven by political concerns in member states, is reluctant to discuss this issue at the moment. More than six years may have passed since the first Greek bailout but debt restructuring and the relationship between political priorities and technical concerns continue to dominate the decision-making process.
The question that the Greek people might ask is whether those who will take the decisions have learned enough from previous blunders to help put together the broken pieces of Greece’s recent past.
