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IMF admits ‘notable failures’ in bailout programs deepened Greece’s recession

The International Monetary Fund (IMF) has admitted “notable failures” in the first Greek bailout including a deeper-than-expected recession, a run on the country’s banking system and exceptionally high unemployment.

The IMF’s Review of Program Design and Conditionality provides a deep look into the design of 133 IMF-supported lending programs in operation between September 2011 and December 2017.

The IMF research paper said the multi-billion rescue package for Greece failed to restore market confidence, that the fiscal adjustment proramme had notable failures, wrong projections and overlook. It also admitted that delays in debt restructuring saved the foreign banks but it was of little help for Greece. The PSI of March 2012 did not help either.

The review also identified several factors that potentially inhibited programs from fully reaching their objectives. Overoptimistic economic forecasts reduced a program’s chances of success; accordingly, the review recommends using a more conservative approach to economic forecasts and providing deeper analyses of the impact that policies under the program could have on economic growth. More extensive contingency planning should also be included when designing programs.

Public debt is a case in point. Debt sustainability improved in most cases where debt vulnerabilities started out high. In some programs, however, debt exceeded the Fund’s initial projection by considerable margins. Fund policies are already in place to deal with unsustainable debt in Fund-supported programs. While any debt restructuring needs to be considered on a case-by-case basis, more careful diagnosis is essential—this means sharper tools for the IMF’s debt sustainability analysis are needed to reduce any bias in judgement when assessing debt.

The review finds many programs applied fiscal adjustments that were less growth-friendly than initially envisaged. Fiscal adjustment tended to be achieved by cutting public investment, possibly curtailing future growth, rather than by lowering current spending or raising revenue. To be a more useful guide for the government’s fiscal policy, an IMF program could set more granular targets, like a floor for critical public investments.

The IMF said the 2010 Greek programme gave the euro area time to build a ‘firewall’ around other vulnerable members, but said not tackling the country’s public debt problem decisively at the start created uncertainty about the bloc’s ability to resolve the crisis.

The IMF pledged about €30bn to Greece at the time, out of a total package of €110bn.

“Market confidence was not restored, the banking system lost 30pc of its deposits, and the economy encountered a much deeper-than-expected recession with exceptionally high unemployment,” the IMF report said.

The IMF report said that it lowered its standards and approved an exceptionally large loan to Greece in May 2010 despite having considerable misgivings about the country’s debt sustainability, although it said fiscal adjustment was unavoidable.

The bailout avoided a disorderly default and limited contagion across the eurozone, it said, but accepted that the recession has been deep with exceptionally high unemployment.

The Washington-based organisation also said it may have been overly constrained by working with European leaders in a monetary union, and not focused enough on ensuring political support existed within Greece for the rapid economic adjustments called for under the bailout.

“The programme did not restore growth and regain market access as it had set out to do,” the report said.

But the European Commission rejected the criticisms in the IMF report about the need for upfront debt restructuring.

“The (IMF) report argues that an upfront debt restructuring in 2010 would have been desirable. We fundamentally disagree,” a spokesman for the commission said, according to irish independent.

IMF report here.

PS It is the third time the IMF admits failures, errors and mistakes in handling with the Greek crisis. So, now what? Will it hand out some extra money to the thousands of impoverish Greeks? Admitting mistakes is not enough for those who indebted their lives until the end of their days.

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  1. To some it was not a failure.

    Financial Times noted back in 2015 that for Greece

    “To service its debt burden would require Greece to operate as a quasi slave economy, running a primary surplus of 5 per cent of GDP for years, purely for the benefit of its foreign creditors.”

    If its for the benefit of foreign creditors, then economic success becomes defined in their terms – not your terms.

    For example, labour market reforms in Europe are primarily (1) to reduce unit labor costs – reduce your incomes ; (2) adherence to positive primary budget surpluses – reduce your savings; (3) labour mobility – accepting worse conditions (easier to fire people, reduce social benefits) (4) combat social fraud and tax evasion which can pertain to anything considered communal or exchanging favors — so they can be taxed (this also has a bonus effect of creating an illusion of growth as now more things are include in the National Income statistics).

    And here is a sentence from the Bank of Greece measuring some success :

    “Firm level agreements have allowed for wage freezes and the downward adjustment of wages of between 10% and 40% (BoG, 2013).”

    Contrast this with the Bank of England (which isn’t a fake central bank like the above one) chief economist’s warning of returning to the weak work forces of the pre-1750 era.

    The concerns of the Bank of Greece governor are not for citizens of Greece but for its creditors.

    So when the Governor says there is no “fiscal space” in 2019 for more benefits there are 3 things to say this: (1) fiscal space is as meaningful as the term “twilight zone”; (2) that you have given more money (taxes and selling off assets) than what the government provides and it is not going to be returned as (3) “no fiscal space left for more “benefits” means your money or handouts are reserved for creditors who will always come first no matter how stupid their purchases and investments were.

    The governor of the bank of Greece uses the word “benefits” as if you need to earn them to get them as a reward. The reality is that you have already more than earned them by paying too much taxes (budget surplus). Its an extraction from the Greek economy that voters cannot vote against.

    As the FT said Greece is ran as a “quasi slave economy”.

  2. That is like a thief saying “sorry I robbed your house, but don’t be too angry”. Of course this is what economists, bankers and financial managers are always best at: failure, mistakes, and errors. Not to mention lack of foresight.