IMF rapped for role in eurozone debt crisis
Watchdog attacks ‘culture of complacency’, string of misjudgments over Greece and failure to heed warnings
THE International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.
This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.
The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the fund to rescue their own rich currency union and banking system.
The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000pc of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the fund between 2011 and 2014.
In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.
The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen.
“Before the launch of the euro, the IMF’s public statements tended to emphasise the advantages of the common currency,” it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled. This pro-EMU bias continued to corrupt their thinking for years.
“The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said.
The IMF persistently played down the risks posed by ballooning current account deficits and the flood of capital pouring into the eurozone periphery, and neglected the danger of a “sudden stop” in capital flows. “The possibility of a balance of payments crisis in a monetary union was thought to be all but non-existent,” it said. As late as mid2007, the IMF still thought that “in view of Greece’s EMU membership, the availability of external financing is not a concern”.
At its root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt crises. States facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk. “In a
monetary union, the basics of debt dynamics change as countries forgo monetary policy and exchange rate adjustment tools,” said the report.
This would be amplified by a “vicious feedback between banks and sovereigns”, each taking the other down.
In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery.
It got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion.
“The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package.
The IMF was in an invidious position when it was drawn into the Greek crisis. The Lehman crisis was still fresh. “There were concerns that such a credit event could spread to other members of the euro area, and more widely to a fragile global economy,” said the report.
The eurozone had no firewall against contagion, and its banks were tottering. The European Central Bank had not yet stepped up as lender of last resort. It was deemed too dangerous to push for a debt restructuring in Greece.
While the fund’s actions were understandable in the white heat of the crisis, the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability.
A sub-report on Greece said the coun- try was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a selffeeding downward spiral. The worse it became, the more Greece was forced cut – what ex-finance minister Yannis Varoufakis called “fiscal water-boarding”.
Nominal GDP ended 25pc lower than the IMF’s projections, and unemployment soared to 25pc instead of 15pc as expected. “The magnitude of Greece’s growth forecast errors looks extraordinary,” the report said.
The injustice is that the cost of the bail-outs was switched to ordinary Greeks – the least able to support the burden – and it was never acknowledged that the motive of EU-IMF Troika policy was to protect monetary union.
This unfairness – the root of so much bitterness in Greece – is finally recognised in the report. “If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said. Better late than never.
‘There were concerns that such a credit event could spread to other members of the euro area’