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IMF
has betrayed its mission in Greece, captive to EMU creditors
The IMF’s Original Sin in
Greece was to let Dominique Strauss-Kahn hijack the institution to save
Europe's banks and the euro when the crisis erupted, dooming Greece to
disaster.
By Ambrose Evans-Pritchard The
Telegraph
3:25PM BST 05 Jun 2015
The International Monetary Fund is in very serious trouble.
Events have reached a point in Greece where the Fund's own credibility and
long-term survival are at stake.
The Greeks
are not withholding a €300m payment to the IMF because they
have run out of money, though they soon will do.
Five key players in the radical-Left Syriza movement – meeting
in the Maximus Mansion in Athens yesterday – took an ice-cold, calculated, and
carefully-considered decision not to pay.
They knew exactly what they were doing. The IMF’s
Christine Lagardewas caught badly off guard. Staff officials in
Washington were stunned.
On one level, the “bundling” of €1.6bn of payments due to the
IMF in June is just a technical shuffle, albeit invoking a procedure last used
by Zambia for different reasons in the 1980s. In reality it is a warning shot,
and a dangerous escalation for all parties.
Syriza’s leaders are letting it be known that they are so angry,
and so driven by a sense of injustice, that they may indeed default to the IMF
on June 30 and in so doing place the institution in the invidious position of
explaining to its 188 member countries why it has lost their money so
carelessly, and why it has made such a colossal hash of its affairs.
The Greeks accuse the IMF of colluding in an EMU-imposed
austerity regime that breaches the Fund’s own rules and is in open
contradiction with five years of analysis by its own excellent research
department and chief economist, Olivier Blanchard.
Greece’s
public debt is 180pc of GDP. The loans are in a currency that
the country does not control. It is therefore foreign currency debt. The IMF
knows that Greece cannot possibly pay this down by draconian austerity – the
policy already implemented for five years with such self-defeating effects –
and the longer it pretends otherwise, the more its authority drains away.
It is has pushed for debt relief behind closed doors but only
half-heartedly, unwilling to confront the EMU creditor powers head on.
Objectively, it is acting as an imperialist lackey – as Greek Marxists might
say.
Indeed, it has brought about the worst possible outcome. The
Fund’s man on the ground in Athens – Poul Thomsen – has pushed the austerity
agenda with a curious passion that shocks even officials in the European Commission,
pussy cats by comparison.
This would be justifiable (sort of) if the other side of the
usual IMF bargain were available: debt relief and devaluation. This how IMF
programmes normally work: impose tough reforms but also wipe the slate clean on
debt and restore crippled countries to external viability.
It is a very successful formula. On the rare occasion when the
IMF goes wrong it is usually because it tries to prop up a fixed-exchange rate
long past its sell-by date.
All of this went out of the window in Greece. The IMF enforced
brute liquidation without compensating stimulus or relief. It claimed that its
policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk
recovery.
What in fact happened was six years of depression, a deflationary
spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young
and the brightest, chronic hysteresis that will blight Greece’s prospects for a
decade to come, and to cap it all the debt ratio exploded because of the
mathematical – and predictable – denominator effect of shrinking nominal GDP.
It is a public policy scandal of the first order. One part of
the IMF has issued a mea culpa admitting that its own analysts
misjudged the fiscal multiplier badly. Plaudits to them.
Another part of the Fund continues to push new variants of the
same indefensible policies, demanding a combined fiscal squeeze from pension
cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the
economy lurches back into recession.
Ashoka Mody, former chief of the IMF’s bail-out in Ireland,
refuses to criticise his former colleagues on the European desk, but the
meaning of the words I quoted last night are clear enough.
“Everything that we have learned over the last five years is
that it is stunningly bad economics to enforce austerity on a country when it
is in a deflationary cycle. Trauma patients have to heal their wounds before
they can train for the 10K."
“I am frankly shocked that we are even having a discussion about
raising VAT at all in these circumstances. We have just seen a premature rise
in VAT knock the wind out of a country as strong as Japan."
“Syriza should recruit the IMF’s research department to be their
spokesman because they are saying almost exactly the same thing as Syriza on
the economics of this. The entire strategy of the creditors is wrong and the
longer this goes on, the more is its going to cost them.”
The IMF’s Original Sin in Greece was to allow the urbane
Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s
monetary union and the European banking system when the crisis erupted in 2010.
Former IMF chief Dominique Strauss-Kahn
The Fund’s mission is to save countries, not currencies or
banks, and it certainly should not be doing dirty work for a rich currency
union that is fully capable of sorting out its own affairs, but refuses to do
so for political reasons.
It was of course a difficult moment in May 2010. The eurozone
was spinning out of control. There were no backstop defences – due to the
criminal negligence of Europe’s leaders and banking regulators – and fears of a
euro-Lehman were
all too real.
Yet leaked minutes from the IMF board meetings showed that all
the emerging market members (and Switzerland) opposed the terms of the first
loan package for Greece. They protested that it was intended to save the euro,
not Greece.
It loaded yet more debt onto the crushed shoulders of an already
bankrupt country, and further complicated the picture by allowing one large
French bank and one German bank – no names please – to offload much of their
€25bn combined exposure onto EMU taxpayers.
“Debt restructuring should have been on the table,” said
Brazil's member. The loans “may be seen not as a rescue of Greece, which will
have to undergo a wrenching adjustment, but as a bailout of Greece’s private
debt holders, mainly European financial institutions”.
Arvind Virmani, India’s member, was prophetic. "The scale
of the fiscal reduction without any monetary policy offset is unprecedented. It
is a mammoth burden that the economy could hardly bear,” he said.
“Even if, arguably, the programme is successfully implemented,
it could trigger a deflationary spiral of falling prices, falling employment
and falling fiscal revenues that could eventually undermine the programme
itself." This is exactly what has happened.
The Fund might have atoned later by acknowledging its special
duty of care towards Greece and softening the terms. It did not do so. We
should hardly be surprised if Syriza is now on the warpath.
The IMF needs to be careful. It has itself become an emblem of
bad governance. Mr Strauss-Kahn was caught in flagrante
delicto, only to be replaced instantly in a political
stitch-up by another French finance minister (of quality and integrity – but
that is not the point). Mr Strauss-Kahn’s predecessor was recently indicted in
Spain for fraud.
The institution cries out for reform. There is no justifiable
reason why the job of managing-director should go by divine right to a
European, nor why the Europeans still control eight seats on the IMF board. You
might make a parallel argument about the British, French, and Russian vetoes at
the United Nations. I would not disagree.
These anomalies should have been sorted out at the time of the
Strauss-Kahn debacle – along with quota reform blocked by the US Congress – all
the more so since China and a host of rising reserve powers were already
bursting onto the scene by then.
Leadership failed. The West disgraced itself. No wonder Asia is
now going its own way with a rival set of bodies.
Greece’s firebrand government is bringing matters to a head for
an institution already in trouble, but one with a superb staff and still worth
saving.
Christine Lagarde, head of the IMF
Mrs Lagarde must stop playing the role of a diplomat. She must
take off her European hat and speak instead for the organisation she leads and
for the world.
She must confront the EMU creditors head on and in public. She
must tell them, in blunt language, that they share much of the blame for the
current impasse.
She must make it clear to them that Greece needs sweeping debt
relief – as a matter of economic science, whatever the morality – and that the
refusal of the creditors to face up to this elemental fact is now the chief
impediment to a solution. And she should tell them that the IMF will no longer
play any part in their deceitful charade.
If she does not do so, and if the lack of leadership by Europe’s
political class leads to a catastrophic denouement on every level, then let it
be on her head too.
Greece's
endgame: timeline of upcoming events
June 5
IMF loan repayment: €305m (missed)
June 10
Greece due to sell €1.6bn in Treasury bills to
refinance maturing debt
June 12
IMF loan repayment of €312m due
June 16
IMF loan repayment of €573m due
June 18
Eurogroup Meeting in Luxembourg
June 19
IMF loan repayment of €343m due
June 19
Greece owes €85m to the ECB for bonds the
central bank bought
June 19
European Union finance ministers meet
June 25 and 26
European Union leaders Summit in Brussels
June 30
Greece due to pay €1.5bn wage and pensions
bill by month-end
June 30
Greece’s current bail-out deal expires
Greece must also make all its IMF payments by
this date or it will be in arrears to the Fund
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