The IMF Should Get Out of Greece

FEB 3, 2017 1:00 AM EST

Bloomberg

By
Ashoka Mody
The International Monetary Fund's involvement in Greece has been an unmitigated disaster: Time and again, its failure to heed crucial lessons has visited suffering upon the Greek people.  When the fund's directors meet on Monday, they should agree to forgive the country's debts and get out.


The IMF should never have gotten into Greece in the first place. As late as March 2010, with concerns about the Greek government's ability to pay its debts roiling markets, Europe's leaders wanted the IMF to stay away. Europeans feared that the fund’s financial assistance to one of their own would signal broader weakness in the currency union. As Jean-Claude Juncker famously put it: “If California had a refinancing problem, the United States wouldn’t go to the IMF.”



Nonetheless, German Chancellor Angela Merkel decided that the IMF’s presence was the signal needed to persuade German citizens that Greece needed urgent financial support and that strict discipline in the use of those funds would be enforced. Merkel’s political priorities coincided with the interests of Managing Director Dominique Strauss Kahn, who was desperate to pull the IMF out of irrelevance. From that moment on, the IMF became Europe's -- mainly Germany’s -- instrument in Greece.

Then came the cardinal error: At the IMF’s Board, over the fierce opposition of several executive directors, the Europeans and Americans pushed through a bailout program that, contrary to the fund’s rules, did not impose losses on Greece’s private creditors. The decision was based on a spurious claim that “restructuring” private debt would trigger a global financial meltdown.

Thus, European governments and the IMF lent Greece a vast sum to repay its existing creditors. Greece’s debt burden remained unchanged and onerous, and the most vulnerable Greeks were forced to accept crippling austerity to repay the country’s new official creditors. The economy quickly and predictably went into a tailspin.

Even when the IMF recognized the error of its ways, it didn't change course. An internal “strictly confidential” report,  later made public, acknowledged that the program was riddled with “notable failures,” including the lack of private debt restructuring and excessive austerity.

But the IMF never took responsibility. Instead, it demanded even more austerity throughout 2014. In December, the public rebelled and brought the opposition Syriza party to power, which only made the IMF’s demands more insistent. At this point, the evidence that the strategy was pushing Greece to economic and financial collapse was overwhelming. It was like requiring a trauma patient to run around the block before being admitted to intensive care. Yet as usual, the inevitable suffering was blamed on Greece's unwillingness to cooperate.

The absurdity reached an apex in mid-2015, when the IMF released a report stating plainly that under Europe's latest set of austerity proposals, Greece would need a miracle to repay its debts. At the time, the IMF’s own research showed that the best course would be to forgive the debt and abandon any further fiscal austerity. This would allow the country some freedom to grow again and possibly even attract new investment. And once that process was underway, Greece could be free of its official creditors and rely once again on private investors under notice that they were fully responsible for the risks they took.

The IMF has since sought to move in the right direction, repeatedly calling on the Europeans to write down substantial amounts of debt. The Germans, however, have refused any meaningful forgiveness. Instead, they have followed a strategy of debt forgiveness in driblets because they astonishing believe that German citizens will not be able do the sums and recognize that ever larger relief is being granted.

And so the austerity has continued, suppressing growth and causing Greece's debt burden -- measured as a percentage of gross domestic product -- to increase. The IMF’s latest analysis, in preparation for Monday’s meeting, says that Greece's public debt levels could see an “explosive surge.”

This strategy is utterly mindless. Greeks have been subjected to gratuitous pain. Those who can leave are doing so, threatening the prospect of a graying and desolate country. With every passing day, the chances that Europe’s official creditors will see their money are dwindling. Investors have again pushed up yields on Greek bonds, fearing correctly that we are at yet another impasse.

The agony won’t end unless the IMF forces the issue. The IMF and its principal shareholders -- the Europeans and Americans -- made the original mistake and perpetuated the errors. A mere mea culpa is not enough: Real accountability requires the IMF’s shareholders to honorably accept real losses. That means forgiving the country's debts to the fund and leaving the Greeks and Europeans to work out their own solution to this mess. If the IMF stays involved, it will succeed only in further shredding its credibility.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Ashoka Mody at amody@princeton.edu

To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net