IMF Internal Watchdog Blasts Fund Over Euro Reaction

The International Monetary Fund’s Independent Evaluation Office (the IMF’s equivalent of an Inspector General) has weighed in on the Fund’s reaction to the pre-2016 phases of the eurozone crisis. The short version: the Fund’s position as technical anlayst and economic policy doctor was waylayed by political pressure to keep the eurozone’s heavy hitters happy.

In some cases, this meant the transparency on which the IMF depends to keep the support of its contributors (namely, the world’s governments) was nonexistent (Irish Times).

The inspectors said the IMF executive board was in the dark on sensitive policy questions for Greece and for Ireland, which also received a bailout in 2010. Some members had learnt more via the press throughout the crisis than from informal board meetings.

I’ll grant that “informal board meetings” creates enough space for bureaucrats to see themselves safely home from criticism, but that won’t help with this piece of information (same link).

The report, released Thursday, said key decisions had already been reached in Europe by the time the fund became involved in the rescue effort.

Neither statements will make Asian, African, and Western Hemisphere governments very happy.

Even worse, the “information asymmetry” spread to decision-making and consultations as well (Financial Times).

On lending to Greece – the modified use of the IMF’s “exceptional access” clause for debtors should have been given more consideration by the board: “The Board was not consulted on this question” of modifying the provision for exceptional access.

…

Late and inadequate information on the Greek bailout meant the “management’s discretion and decision-making powers were left effectively unchecked.”

As bad as all of that was, arguably the most egregious example of Fund mischief was its decision to go against its own staff in favor of its “European partners” on Ireland (same link).

IMF staff “concluded that senior unsecured creditors of Irish banks should be bailed in, but this position was overruled by the European partners, who were concerned about the spillover to the euro area’s integrated banking market”

One could argue this is what started the whole problem. The full bailout of Irish banks turned Ireland’s banking crisis into an Irish government funding crisis, while locking into place the moral hazard that allowed the Mediterranean to ignore its own eurozone misalignments (though, in the case of Greece, not for particularly long).

Tim Worstall – who cites an excellent column by Ambrose Evans-Pritchard that I left out due to concern that AEP’s obvious antipathy for Brussels might lead readers to question this post – explains how and why this went from bad to worse in Greece (Forbes).

The IMF knows how to deal with this and there’s a standard procedure. First, there’s a haircut on the creditors, whatever it takes to get the debt to sustainable levels. Second, there’s a devaluation of the currency in order to produce a nice jolt of stimulus. Third, the IMF provides the local government with financing until the short-term effects are dealt with and it is possible to finance the government again at market rates from those markets.

The politics of the euro, of that project of ever-closer European integration and union, simply could not allow this to happen. For it was just not politically possible, given those goals, that anyone should leave the euro. Given that there could be no bounce from a devaluation–and thus no chance at all of being able to return to market financing of the Greek government. This in turn meant that the debt had to be (or at least was) taken over by varied governmental and EU organizations rather than busting the other European banks that had lent most of the money with a haircut. There was a haircut of some of those bonds but the vast majority of the debt was shifted off bank books and onto public ones.

At which point debt forgiveness or a haircut were not politically possible. Because those European politicians could not admit to their own voters that they’d just lost a hundred billion euros or two in pursuit of that European ideal. People tend to go off such ideals when they find out how much they cost, and that would just never do.

In other words, the Greeks (and the Irish, and the Spanish, and the Portugese, and the Italians) were made to suffer for Jean-Claude Juncker’s fantasy. Now the IMF is finally admitting the truth to itself.