Greece, the new failure of the IMF

The new IMF failure, step by step

Monday 8 March 2010. The IMF Director said that Greece does not need an IMF bailout. He believes Greece resolve its debt crisis without an IMF bailout, and today dismissed fears that other European nations will be engulfed by the crisis.

IMF Reaches Staff-level Agreement with Greece on €30 Billion Stand-By Arrangement

Press Release No. 10/176[i]

May 2, 2010

Mr. Dominique Strauss-Kahn (DSK), Managing Director of the International Monetary Fund (IMF) issued the following statement today on Greece:

 “To support Greece’s effort to get its economy back on track the Euro Area members have pledged a total of €80 billion (about US$105 billion) in bilateral loans. An IMF staff mission, in consultation with representatives  from the European Commission and the European Central Bank, also reached agreement today with the Greek authorities to support this program with a three-year SDR 26 billion (about €30 billion; or US$40 billion) Stand-By Arrangement. Our joint commitment will bring total financing to €110 billion (about US$145 billion).”

“We believe these strong measures by the Greek government, along with the significant risks of spillover to other countries, merit an exceptional level of access to IMF resources—equivalent to 3200 percent of Greece’s quota in the Fund. This represents the largest access granted to a member country and it indicates the Fund’s high level of support for the program and for Greece.”

“The success of Greece’s recovery program will depend, first and foremost, on the commitment of its government and people. While the initial implementation period will be difficult, we are confident that the economy will emerge more dynamic and robust from this crisis—and able to deliver the growth, jobs and prosperity that the country needs for the future.

A year later, not a century later, the IMF said that Greece needs a new bailout package.  The IMF acknowledged that an additional EUR 71 billion in European Union aid and EUR 33 billion from private creditors is needed.

© 2011 International Monetary Fund July 2011

IMF Country Report No. 11/175[ii]

Greece: Fourth Review under the Stand-By Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria.

E. External Financing

36. The authorities recognized a need for additional external financing to support implementation of their policy program (…). In light of the current difficult financing circumstances, Greece would be unlikely to regain private market access by early 2012, as initially envisaged under the program. While the authorities’ significant privatization effort would help to reduce financing needs, a residual gap of about €70 billion would remain through the end of the program period (mid-2013). (This could rise perhaps to a total of €104 billion through mid-2014 if market access is further delayed by a need to demonstrate a more advanced state of fiscal and macroeconomic adjustment). The additional needed amounts are spread across the program period, but some front loading is likely due to the additional estimated funding needs for the FSF [Financial Stability Fund] can improve Greece’s debt service profile and prospects to return to the market. The approach may, however, crystallize losses on Greek banks’ balance sheets, necessitating extra funding for the FSF (…). The design of a debt operation must also confront the need to preserve Greek banks’ eligibility for ECB refinance and minimize spillovers. These factors have led European policymakers to seek a voluntary scheme that would not involve a credit event or a ratings downgrade to selective default (although it may not be possible to avoid the latter on a temporary basis).

56. Greece will take longer to regain capital market access, necessitating additional external support. Euro area member states have agreed to provide this. Still, the very public debate in Europe over this issue—and about the role of PSI [private sector involvement] —has been a major problem for securing confidence around the program.

Before that, The Wall Street Journal (16 April 2011) posted:

IMF Believes Greece Should Consider Debt Restructuring By 2012[iii]

“The International Monetary Fund believes Greece’s debt is unsustainable and has told European government and central bank officials that Athens should consider restructuring by next year, three people familiar with the situation said Saturday.”

IMF spokesman William Murray denied the IMF was recommending a restructuring of all Greek debt.

And in June (June 7, 2011), the WSJ published:

The IMF Official Warns Against Greek Debt Restructuring.[iv]

Talk about a Greek debt restructuring—or any other reorganization of the country’s giant debt burden—could unleash dangerous and uncontrolled consequences for Europe, a senior International Monetary Fund official said Tuesday.

Speaking at a banking conference, Bob Traa, the senior resident officer for the IMF in Greece, rejected recent suggestions of a so-called soft restructuring of the country’s debt, including a reprofiling or rollover of that debt.

Instead, Greece must continue with its fiscal and economic program.

And now, few days ago (8 July 2011), Christine Lagarde, the new Managing Director said that the IMF it will release a further €3.2 billion of funds to Greece as part of the multi-billion euro IMF/EU bailout deal for the country.

“Lagarde said that Greece has made ‘some progress’ with regard its economic reforms, and the IMF said that it expected the country to return to positive economic growth in the first six months of next year.”

“The fiscal deficit is being reduced, the economy is rebalancing, and competitiveness is gradually improving,’ but ‘A durable fiscal adjustment is needed.”

Lagarde said the government’s plan to sell 50 billion euros of assets by 2015 is a ‘critical step’ in reducing debt and spurring growth.

According to the IMF staff Greece will need around €104 billion through mid-2014, even with a successful privatization program, which will take place according to Mrs. Lagarde by 2015.

Some IMF officers said that Greece’s debt is unsustainable and told European government and central bank officials, in private, that Athens should consider restructuring by next year; others, in public, rejected even a so-called soft restructuring of the country’s debt.[v]

Mrs. Lagarde said that Greece had made some progress, and it is expected the country will have positive results the next year.

It is difficult to reconcile so many contradictions, as well as admitting they are speaking about the same country. How could be better next year a country which will need another €104 billion euros in aid just to meet their debt payments?

DSK, Christine Lagarde and other IMF Senior officers made such statements in public, in interviews or press conferences, however, nobody asks them how they evaluated that Greece did not need a bailout, and just two months later they granted to this country a multi-billion bailout package, considering that it would be enough to solve de Greece troubles, and then, just one year later estimate that Athens requires another multi-billion bailout.

Will anyone remember the things that the IMF was saying and advising, in public and in private, about the severe Greece crisis? Will anyone ask them about it?

By Raúl de Sagastizabal

[v] In my opinion Greece has only two options: default or debt restructuring. The latter is her best option. The sooner, the better.