The IMF should cor­rect its big Greek debt mis­take

Financial Mirror (Cyprus) - - FRONT PAGE -

The Greek gov­ern­ment’s mount­ing fi­nan­cial woes are lead­ing it to con­tem­plate the pre­vi­ously un­think­able: de­fault­ing on a loan from the In­ter­na­tional Mon­e­tary Fund. In­stead of de­mand­ing re­pay­ment and fur­ther aus­ter­ity, the IMF should recog­nise its re­spon­si­bil­ity for the coun­try’s predica­ment and for­give much of the debt.

Greece’s oner­ous obligations to the IMF, the Euro­pean Cen­tral Bank and Euro­pean gov­ern­ments can be traced back to April 2010, when they made a fate­ful mis­take. In­stead of al­low­ing Greece to de­fault on its in­sur­mount­able debts to pri­vate cred­i­tors, they chose to lend it the money to pay in full.

At the time, many called for im­me­di­ately “re­struc­tur­ing” of pri­vately-held debt, thus im­pos­ing losses on the banks and in­vestors who had lent money to Greece. Among them were sev­eral mem­bers of the IMF’s board and Karl Otto Pohl, a for­mer pres­i­dent of the Bun­des­bank and a key ar­chi­tect of the euro. The IMF and Euro­pean au­thor­i­ties re­sponded that re­struc­tur­ing would cause global fi­nan­cial may­hem. As Pohl can­didly noted, that was merely a cover for bail­ing out Ger­man and French banks, which had been among the largest en­ablers of Greek profli­gacy.

Ul­ti­mately, the au­thor­i­ties’ ap­proach merely re­placed one prob­lem with an­other: IMF and of­fi­cial Euro­pean loans were used to re­pay pri­vate cred­i­tors. Thus, de­spite a be­lated re­struc­tur­ing in 2012, Greece’s obligations re­main un­bear­able — only now they are owed al­most en­tirely to of­fi­cial cred­i­tors.

Five years af­ter the cri­sis started, gov­ern­ment debt has jumped from 130% of gross do­mes­tic prod­uct to nearly 180%. Mean­while, a deep eco­nomic slump and de­fla­tion have se­verely im­paired the gov­ern­ment’s abil­ity to re­pay.

Vir­tu­ally ev­ery­one now agrees that push­ing Greece to pay its pri­vate cred­i­tors was a bad idea. The re­quired fis­cal aus­ter­ity was sim­ply too great, caus­ing the econ­omy to col­lapse. The IMF ac­knowl­edged the er­ror in a 2013 re­port on Greece. In a re­cent staff pa­per, the fund said that when a cri­sis threat­ens to spread, it should seek a col­lec­tive global so­lu­tion rather than forc­ing the dis­tressed econ­omy to bear the en­tire bur­den. The IMF’s chief econ­o­mist, Olivier Blan­chard, has warned that more aus­ter­ity will crush growth.

Oddly, the IMF’s pro­posed way for­ward for Greece re­mains un­changed: Bor­row more money (this time from the Euro­pean au­thor­i­ties) to re­pay one group of cred­i­tors (the IMF) and stay fo­cused on aus­ter­ity. The fund’s lat­est pro­jec­tions as­sume that the gov­ern­ment’s bud­get sur­plus (other than in­ter­est pay­ments) will reach 4.5% of GDP, a level of belt-tight­en­ing that few gov­ern­ments have ever sus­tained for any sig­nif­i­cant pe­riod of time.

Fol­low­ing Ger­many’s lead, IMF of­fi­cials have placed their faith in “struc­tural re­forms” — changes in labour and other mar­kets that are sup­posed to im­prove the Greek econ­omy’s longer-term growth po­ten­tial. They should know bet­ter. The fund’s lat­est World Eco­nomic Out­look throws cold wa­ter on the no­tion that such re­forms will ad­dress the Greek debt prob­lem in a re­li­able and timely man­ner. The most valu­able mea­sures en­cour­age re­search and devel­op­ment and help spur high-tech­nol­ogy sec­tors. All this is to the good, but such gains are ir­rel­e­vant for the next five years. The pri­or­ity must be to pre­vent Greece from sink­ing deeper into a debt­de­fla­tion spi­ral. Un­for­tu­nately, some re­forms will ac­tu­ally ac­cel­er­ate the spi­ral by weak­en­ing de­mand.

On April 9, Greece re­paid 450 mln eu­ros to the IMF, and must pay an­other 2 bln in May and June. The IMF’s Man­ag­ing Direc­tor, Christine La­garde, has made clear that de­lays in re­pay­ments will not be tol­er­ated. “I would, cer­tainly for my­self, not sup­port it,” she told Bloomberg Tele­vi­sion.

In­evitably, debt re­lief will be pro­vided — but in driblets and to­gether with un­re­lent­ing pain. The Greek gov­ern­ment will need to with­hold pay­ments to sup­pli­ers and work­ers, and will raid pen­sion funds. Five years from now, the coun­try’s eco­nomic and so­cial stress could well be even more acute. The ques­tion will be: Why was more debt not for­given ear­lier? No one is will­ing to con­front that un­pleas­ant arith­metic, and wish­ful think­ing prevails.

Hav­ing failed its first Greek test, the IMF risks do­ing so again. It re­mains trapped by the pri­or­i­ties of share­hold­ers, in­clud­ing in re­cent years the U.K. and Ger­many. To re­assert its in­de­pen­dence and re­deem its lost cred­i­bil­ity, it should write off a big chunk of Greece’s debt and force its wealthy share­hold­ers to bear the losses.

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