Greek Bailouts: From Impasse to Breakthrough and Back Again

DAVOS/SWITZERLAND, 26JAN13 - Christine Lagarde, Managing Director, International Monetary Fund (IMF), Washington DC; World Economic Forum Foundation Board Member is seen during the Session 'The Global Economic Outlook' at the Annual Meeting 2013 of the World Economic Forum in Davos, Switzerland, January 26, 2013.. . Copyright by World Economic Forum. . Moritz Hager

A recent bout of soul-searching from the International Monetary Fund has shed some revelatory insights into the Fund’s role in bailing out Portugal, Ireland, and Greece. In Greece, where the financial crisis that began eight years ago is still far from over, the controversial new findings could still instruct the troika and the Greek government as they head toward the next round of bailout reviews. Of course, that assumes the parties on either side have the political willpower to learn from it.

The report, issued by the Independent Evaluation Office (IEO) of the IMF, is damning in several respects. It concludes that the IMF, at the time of Euro’s creation, allowed itself to come under the sway of European members intent on creating a single currency. The lack of critical distance between the IMF and the Euro project blinded the Fund to a fatal flaw at its heart: a currency union without a complementary fiscal union is an accident waiting to happen, a lesson the European Union has now learned the hard way. In depriving Eurozone members of the ability to devalue their currency or set interest rates, all while leaving the EU without fiscal tools to redistribute resources to states in need of help, the single currency was a half-formed concept forced through for political reasons. As we now know, the IMF allowed itself to get swept up in the tide.

The report goes on to admonish the IMF for its “readiness to take the reassurances of national and euro area authorities at face value.” Nowhere did that misplaced confidence become more glaring than in Greece. Athens famously falsified its budget deficit numbers to gain access to the Euro back in 1999, and continued to do so every year thereafter. Turning a blind eye to the warning signs, the IMF, along with just about everyone else, was taken by surprise when Greece’s debt time bomb finally went off in 2008. In the absence of a plan to deal with the threat of contagion, the IMF signed off on Greece’s bailout and set about implementing its trademark economic doctrine of privatizations and public spending cuts.

This is where the limitations of the Eurozone’s peculiar construction became all too evident: without the capacity to devalue its currency or cut interest rates to boost competitiveness and spur investment, deflationary wage cuts were introduced. This, in turn, killed demand. As unemployment rose and wages diminished, the economy cratered contracting by 25 percent from its pre-crash peak. What lessons, if any, the IMF has learned from the report can be ascertained by looking at the conditions attached to the latest round of funding made available by the troika to Greece as part of its third bailout: in a bold move, the Fund refused to contribute to this tranche unless some kind of debt restructuring plan was on the table.

That the IMF neglected to insist upon this at the beginning was one of the miscalculations pointed out in the IEO. In holding back support for the third bailout until it included a statement on debt restructuring, the IMF committed itself to a battle of wills with Germany, which has been steadfastly opposed to restructuring Greek debt from the outset. The compromise agreement that the restructuring issue will mostly be pushed back until 2018 is regarded as a concession to Angela Merkel, whose own base takes a hardline stance on Greek debt repayments and goes to the polls next year.

The German chancellor may well be trying to avoid making debt relief an election issue, but another reading is that Merkel may be less driven by fear of her electorate and more by a desire to save face. Admitting that Greece needs its debt restructured is to admit, after all, that her austerity measures have failed to grow the economy. This may account for her continued obstinacy over the unrealistic (in the words of the IMF) requirement that Greece achieve an annual budget surplus of 3.5 percent of GDP in 2018 and somehow keep it there for decades. Athens, it should be noted, is expected to undergo this extreme belt-tightening at the same time Italy is arguing for an expansionary budget.

In order to meet Germany’s stringent budget demands, Greece would need to go through yet another round of slashing expenditures and privatizing industries with a degree of enthusiasm even the most neoliberal government would balk at. The current Syriza government, of course, is anything but neoliberal. The begrudging liberalization program Alexis Tsipras has undertaken has devolved into a morass of court cases and angry exchanges with investors, as the government tries to impede and even reverse the sell-offs it is required to make. Examples range from the vacuum at the top of Piraeus Bank, where international creditors have forcibly imposed executive-level shakeups in response to a mountain of bad loans and politicized leadership appointments, to the Skaramangas shipyard, where a site that has already been sold to private owners is now seeing the government trying to expropriate and sell it again to new investors.

Although the recent bailout agreement between Greece and the troika was hailed as a breakthrough, there is still clearly a long road ahead. Unless Germany moderates its budget surplus demands, no amount of restructuring on the Greek part will be enough to match. At the same time, Greece’s political leadership must prove that they can be reliable economic stewards and rational business partners. Otherwise, investors will continue to steer clear and Syriza will have failed to have made Greek economic life better.


The opinions, beliefs, and viewpoints expressed by the authors are theirs alone and don’t reflect any official position of

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