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What did the IMF do wrong with Greece? Almost everything

There is no doubt that the international Monetary Fund imposed a not only a strict austerity program in Greece – as in many other countries. Moreover, the Fund has created a downright mess in the Euro-member country as it apparently could not deal with a currency that cannot be devalued. In addition, there came wrong projections and forecasts because on the famous “wrong multipliers” and a bailout of an unprecedented size.

European affairs magazine Politico published a feature today as Greece clashes in Brussels with its creditors in general and the IMF in particular in an effort to strike a last minute deal before defaults.

The article “Why the IMF’s so hard on Greece tries to explain how the Fund became entangled in such a mess in Greece, throwing the responsibility for former IMF- managing director Dominique Strauss-Kahn.

“The IMF’s involvement in the eurozone affairs was controversial right from the start in 2010.”

According to Politico article, Christine Lagarde was left with a mess created by her predecessor, Dominique Strauss-Kahn, and now she is struggling to ensure the Fund gets its money back.

“Because Greece was in a monetary union, and couldn’t devalue its currency, the IMF introduced a “systemic exemption” that waived any condition related to debt, says Jean-Pierre Landau, who was then a deputy governor of the French central bank and now teaches at Sciences Po in Paris.

That was “a code word for the risk of contagion inside the euro area,” he notes. The IMF board, right from the beginning, found it hard to accept and “it created resentment and a lot of skepticism” within the institution, adds Landau, who knows the IMF well, having been its French board member in the early nineties.

The Greek bailout also created a precedent in terms of size. It was the largest ever implemented by the IMF, as a percentage of a given country’s stake in the Fund. Between the first and second bailout in 2012, the IMF ended up loaning about €30 billion to Greece. Some €23 billion is still owed, to be paid back until the end of 2030, starting with €5.5 billion due by the end of this year.

Then there were the forecasting mistakes. […] The IMF revised down its estimate for Greece’s 2014 gross domestic product by some 22 percent in the space of 18 months.”

Of course, the mess could be also explained with the inability of the IMF to deal with  currencies that could not be devalued like the EURO, and this independently of whether it was Strauss-Kahn or Lagarde on the wheel. The IMF had no experience in bailing out a euro-area country and it clearly messed it up.

I can reckon that in November 2009, then newly elected PM Giorgios Panadreou had secret meetings with Strauss-Kahn and asked him to give Greece a lending hand. According to DSK’s own word, he advised Papanderou to speak with the EU first. The rest is economic history full of bad jokes.

But still. Why is Lagarde so tough on Greece? She is reportedly under pressure by the IMF board especially by representatives of emerging countries. However, Madame has one target: to be re-elected at the IMF.

“Lagarde comes up for re-election as IMF head next year. She can’t afford a split board. The European stranglehold on the IMF’s top job since its creation is being contested, and she has to show she can be tough on Europe.

That involves both being tough on Greece — making sure Athens adheres to a credible program — and being tough on Greece’s creditors, by pointing out that they will have to consent to debt relief in future. And she has until March 2016, when the current IMF program for Greece expires, to extract the institution from the Greek mess it regrets having ever stepped into.

The IMF’s role in Greece has been “one of the most credibility-sapping in its history,” noted Gabriel Sterne, a former Fund staffer who is now chief economist at Oxford Economics, in a scathing note published last year. IMF insiders and most economists tend to agree.

The main cardinal sin against its own rules that the IMF committed, as soon as Greece got its first bailout in 2010, was to agree to a program that didn’t and couldn’t guarantee the country’s long-term debt sustainability.” (full article here)

No wonder, Christine Lagarde is running now like mad from left-wing Greece to right-wing Germany, from left to right and from right to the left…

And when one considers that the European Union is preparing to materialize its vision to “strengthen the Europe’s Economic and Monetary Union as of 1 July 2015”, two sides of the Atlantic have Greece swimming amid high waves. Swimming or drown. No difference.


Today’s cover from French satirical Magazine Charlie Hebdo with IMF’s Lagarde:

“Save Europe, Drown a Greek.”

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