How IMF's Greek misadventure is changing the fund
Many of the top brass of the International Monetary Fund always had concerns about the plans to bail out Greece. That much was clear as far back as May 9, 2010, when the IMF's 24 directors gathered in Washington to sign-off on the fund's participation in the first, 110billion-euro ($125 billion) rescue alongside European institutions.
An examination of previously unreported IMF board minutes shows that a near majority of directors round the board table that day thought the Greek program would not work. "We have serious doubts about the approach," said Brazil's then director Paulo Nogueira Batista. He slammed IMF forecasts for Greece as overly optimistic - "Panglossian." Arvind Virmani, the director from India at the time, said the program imposed "a mammoth burden" that Greece's economy "could hardly bear."
But they and others who feared the IMF was walking into a quagmire had little room for maneuver. The fund's powerful Managing Director, Dominique Strauss-Kahn, and a handful of his advisers, feared Greece posed a threat to the wider euro zone financial system. They had already decided to plunge into the crisis. The doubters were given a blunt retort, according to the minutes.
"Let me be clear on a couple of things," said then Deputy Managing Director John Lipsky, who chaired the board meeting. "There is no Plan B. There is Plan A, and a determination to make Plan A succeed. And this is it."
Five years later, after the biggest bailout in the fund's history, Greece failed to make a $1.7 billion payment as required at the end of June - the first advanced economy ever to default on the IMF. Worse, after having received more than 240 billion euros in international aid, Greece's economy is still in tatters. Europe agreed a further bailout of 86 billion euros this month.
Fresh interviews with more than 20 senior officials, as well as an extensive review of IMF board records, illuminate the turmoil and divisions within the fund, then and now. They show Strauss-Kahn and his top advisers set the fund, which by tradition has always been led by a European, on a course known to be flawed, and that non-European shareholders doubted would work.
To drive through the Greek bailout, the fund bent its own rules. It lifted an IMF ban on the fund lending money to countries - like Greece - that were unable to pay their debts. It also allowed European politicians to dictate initial terms in the Greek rescue, ruling out a debt restructuring that could have given Greece a fresh start. And it shaped economic forecasts to fit political ends. The fallout still weighs on the fund. The IMF now says it will not participate in the latest Greek bailout unless Europe allows debt restructuring on a scale Europe has so far rejected.
Strauss-Kahn, who quit the fund in 2011, would not be interviewed for this article. But supporters of the fund's actions say he and the fund had little choice other than to help in the Greek crisis. The fund went against its previous policy, they say, to prevent the Greek crisis causing wider financial chaos.
"With Europe hanging in the balance ... to say the fund would not be involved ... would not have been acceptable," said Siddharth Tiwari, who was secretary of the IMF executive board in 2010 and is now the head of the fund's strategy, policy and review department.