How IMF's Greek mis­ad­ven­ture is chang­ing the fund

The Pak Banker - - COMPANIES/BOSS -

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.

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