What went wrong at the International Monetary Fund concerning Greece ?

The subject of today’s post is an occassional but regular theme of this website as I mull not only what has been done to the International Monetary Fund (IMF) but the sometimes dire consequences of this for individual countries of which Greece comes immediately to mind. There were two major drivers here of which the first was a change in the modus operandi of the IMF and the second were the subsequent increases in its capital. These have led to its current position which is of an institution certainly in an existential crisis and on the edge of a real one.

What changed at the IMF?

Back on the 26th of April 2010 I explained the way that under the leadership of the French (ex) politician Dominique Strauss Khan the role of the IMF had been altered.

I have also previously pointed out that its original role was to help countries with balance of payments problems. Now whilst Greece does have a balance of payments problem her real problem is a fiscal deficit so the role of the IMF is morphing from its original objective to become a type of fiscal deficit policeman.

This was quite a shift and to my mind a major driver of the failures in Greece and if you look at the economic depression which has been exacerbated some dreadful consequences have ensued. The European Commission adjustment program was designed to reduce a fiscal deficit which had risen to 13.6% of GDP (Gross Domestic Product) in 2009 and the IMF leadership kowtowed to this. Tucked away in the May 2010 adjustment program was an admission of something that the IMF had – in my view shamefully abandoned.

Results based on the current account norm approach point to an overvaluation of the Greek REER of about 10% in 2010………The BEER (behavioural equilibrium exchange rate) method yields an overvaluation of about 15%.

Thus under the old IMF methodology an exchange rate depreciation or in this instance devaluation of the order of 15% would have been recommended as part of its efforts to reduce the balance of payments deficit and rebalance the Greek economy. Yes there would have been some austerity but much less than relying on austerity alone. The reason that austerity had to do the job single-handed was that the European establishment saw Greece leaving the Euro as unthinkable. Instead they set Greece on a downward spiral of spending and wage cuts which collapsed the economy and made reducing the fiscal deficit ever harder.

It has not worked in Greece

The IMF has belatedly woken up to this as Peter Spiegel of the Financial Times reports today.

Mr Thomsen said initial data the IMF had received from Greek authorities showed Athens was on track to run a primary budget deficit of as much as 1.5 per cent of gross domestic product this year.

As opposed to this.

Under existing bailout targets, Athens was supposed to run a primary surplus — government receipts net of spending, excluding interest payments on sovereign debt — of 3 per cent of GDP in 2015.

That is quite a miss in a country which has the European Commission, the ECB and the IMF supposedly policing its financial situation! Of course the truth it is yet another miss in an already large sequence of them as yet another bailout target sings along to PM Dawn.

Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why,
but reality used to be a friend of mine.

All that hurt, all that suffering,all that economic pain for what exactly? The calamity goes on and even worse those responsible for this made wild accusations that the “default and devalue” arguments made for example by me would have collapsed  the Greek economy. Whilst I accept that they are experts and specialists in collapsing economies the point was to get it growing again not spiral it downwards.

The IMF is in a panic

Whilst the IMF should be in a moral panic after what it has done you may be wondering why it is in something of a financial panic as indicated below.

Officials said Mr Thomsen specifically mentioned the need for debt relief during the three-hour meeting.

When did default become “debt relief”? Anyway the important point is that this means that the 2012 default called PSI was a failure because it failed to involve the official creditors who now own around 80% and rising of Greece’s national debt. Thus we come to the other issue I raised back on April 26th 2010.

I have a question for my readers here and it relates to the recent increase in loan capital for the IMF. This was announced to great fanfare at the April 2009 G20 meeting by the UK Prime Minister Gordon Brown. He announced it as if it was a rabbit from a hat. However there are potential implication from it, for example what would happen if some of the money was lent and the loan was not repaid? Who is then liable? Has there in any country been a debate on this? As the largest player the biggest potential burden is on the taxpayers of the United States but all G20 countries are involved and liable. This strikes me as an off-balance sheet liability for the taxpayers of the G20 nations.

So five years later we see that this particular chicken if not home to roost is on its way! Either the IMF has to accept what would be large losses or the Euro area bailout mechanism the ESM has to accept a proportionately larger share. If we stick with the IMF we see that this poses a problem. The official view is shown by this from the Cato Institute.

U.S. treasury secretary Robert Rubin claimed that “the IMF has not cost the taxpayer one dime.” The number-two man at the IMF, Stanley Fischer, concurs, asserting that “contributions to the IMF are not fundamentally an expense to the taxpayer; rather, they are investments.”

Ah but what if the investments go wrong? Like for example in Greece? It will be especially awkward for Stanley Fischer in his new role as a member of the US Federal Reserve.

Who is going to want to have to tell their taxpayers that money they had apparently never spent has been lost? Now you understand the reason for the bile contained in the recent statements from the IMF about Greece as its own house of cards looks vulnerable. It is all a long way from the hype of 1998 when the IMF Managing Director was full of hype,hot air and bombast about what the world gets from the IMF.

First, if I may be just a little bit immodest, it gets the most effective vehicle yet created for improving economic performance in countries around the world.

Oh and yes Michel Camdessus who made that statement was French as is usual for IMF Managing Directors.

Back to Greece

I am sorry to have to tell you that the economic calamity and depression continues as “Grecovery” disappears into the mist. In spite of what is an overall upbeat economic forecast the European Commission tells us this.

the economy is now forecast to grow by around ½% in 2015, considerably lower than in the previous forecast.

Mind you there is still an air of “reality was once a friend of mine” as it discusses the return of bank deposits to Greece when they have in fact been leaving on a grand scale. Of course my rule that in official forecasts next year is always sunny and rose-tinted is confirmed one more time.

In 2016, real GDP growth is projected to strengthen to 2.9%, as investment rebounds on the back of structural reforms.

Greek GDP growth has been forecast to return to 2% next year for year after year now! It would be funny if it were not a sign of the underlying tragedy. The horrible truth is that they have to forecast this otherwise the relative size of the national debt balloons again. Do economists or politicians make this decision?!

Sadly the reality is dreadful if we recall that all of this pain was supposed to bring the Greek fiscal deficit into surplus.

Accordingly, the forecasts for the headline balance in 2015 and 2016 have been lowered to -2.1% of GDP and -2.2% respectively.


The IMF faces a dilemma right now. Threatening to stop providing funds to Greece means that Greece is less likely to repay it. On the other hand giving more money to Greece means that any default grows in size. This however highlights a much deeper issue which is the way that it found itself in this position. Politicians and as it happens French ones took control of it and have used it for political ends in terms of fiscal issues rather than balance of payments ones. The French part is significant in that the new philosophy has been applied with enthusiasm in the Euro area which of course has particularly suited French – as well as German – banks. Here we have the crux of the matter which is why did taxpayers from the rest of the world have to contribute to a bailout of French and German banks? Even worse why were they lied to and told it was a rescue for Greece?

Taxpayers around the world have found that in the words of the Harry Enfield creation Loadsamoney their politicians have done this on their behalf.

Whop your Wad, Whop your Wad
Whop your Wad on the counter

What they have not done is accounted for it as it has been “free”, what could go wrong? Well step forwards Greece….

Speaking of accounting for such international organisations what about the European Investment Bank or the European Financial Stability Mechanism? Or can we expand them forever at no cost?


26 thoughts on “What went wrong at the International Monetary Fund concerning Greece ?

  1. Shaun,
    Is there any reason why the IMF ever has to book losses? Could it just carry on pretending it will eventually be repaid? These are genuine questions, I have no idea what kind of accounts or accountability arrangements exist for the IMF.

    • Accountability implies that Strauss-Kahn, Trichet, Lagarde, Juncker, Sarkozy and Merkel join Bernie Madoff in a US slammer for financial fraud. The odds look slim

    • Hi Ian

      I am sure that you are right and the IMF will always “extend and pretend” if it can. After all the 3 year loans to Greece are now 30 years plus for example. But should Greece declare a default it would do so in the public gaze…

      • The ratings agencies did not call the 2011 “haircut” a default.
        They have already intimated that they will not call unrepaid debt to official bodies a default, even if that debt began life as bonds on the open market.
        Face it, Greece cannot “default”, as that would trigger many derivatives, like CDSs, and the financial is shit-scared that they will be revealed to be worthless.

  2. Forecasting ‘jam tomorrow’ postpones having to actually admit there is a problem and then to have to do something about it. I used to take managers to task on this very issue when I was shown long range plans that admitted there is a problem now but it would all come good in future – without convincing arguments as to why that would happen! I would like to ask these forecasters on what basis they assume an improvement in Greece in future and just what would have to be achieved (and how likely that is on past performance) for it to happen. I bet that if you pinned them down it would turn out to be unsubstantiated fluff!

    • Hi Pavlaki

      The EC Spring Forecast tells us this.

      ” In 2016, real GDP growth is projected to strengthen to 2.9%, as investment
      rebounds on the back of structural reforms. ”

      That is pretty much it so as you say “jam tomorrow” looks somewhat hollow in terms of backing.

  3. Shaun,
    We now seem to have zombie organisations (World Bank, IMF ) as well as businesses (Co-Op plus banks) in this time of deregulation/laissez faire. Even the John Lewis partnership seem to paying their Chief Exec well above the rest – sign of the times?

    • Hi Chris

      I did not know that about John Lewis which seems a shame, but sadly it blotted its copybook last year on staff holiday pay. A shame as it used to have such a good name. And as you say a sign of the times.

      Perhaps soon we will have a zombie government, although mind you it did Belgium little harm!

  4. Hi Shaun

    Some would say that the IMF is little more than an enforcement agent for the neoliberal project. After all what is its main enforcement tool, the SAP (Structural Adjustment Programme), other than a means of entrenching capitalism raw in tooth and claw in client states? Of course the powerful creditor nations that founded, and continue to run, the IMF have never had that sort of capitalism, preferring a heavily qualified type reliant on state(taxpayer) support but that is just common or garden hypocrisy.

    You sound mildly surprised but, really, you shouldn’t be.

    • You have just posted, but more eloquently, precisely my thoughts.
      The problem is, we’re HEADING for just that type of capitalism.

    • I’d disagree with counter-examples. Google “US robber barons” this should show the US has had raw capitalism.

      IMF involvement in the 1996 Bulgarian financial crisis was a success, default, devaluation and disciplined spending brought about a quick & healthy recovery.

      I’d suggest that certain IMF managers misused the IMF to prop up exposed French banks.

    • Here , here! Bob J … you see it on the streets of Britain everyday. A fake kind of capitalism with rigged markets and tacit Government “oversight”. That is why we hwve this productivity fiasco.

  5. Hi Shaun,

    An excellent blog as always.

    I think we have a very dangerous situation for the IMF, where the French IMF President(s) had a vested political interest in bailing out Greece at the time to save the French and German banks from major losses. There should surely an exclusion process for those with a vested interest in any bailout. This is not the only major international institution with this fatal flaw.

    Gordon Brown has been better than most of our recent politicians at losing our money. Tripartite bank regulation, badly constructed bank bailouts, too loose money, followed by panic to create a self-induced recession/depression, running deficits at the top of the economic cycle (like King Canute changing the length of the cycle will fix that!), selling UK gold at the bottom of the cycle, to name but a few. So adding IMF losses is hardly going against a well proven trend. The good news is that there is no reputation to be tarnished!

    I read this interesting article a few months ago on greek history, which I though put everything into context very well:


    The current Greek politicians don’t seem to understand their flawed logic to the other Eurozone members. We haven’t done what we said we would do, we consistently haven’t met our targets, we are running out of money, we can’t pay you back, so will have to default, but if you lend us even more money, everything will be okay, you will get back every last Euro! What could possibly go wrong.

    What Greece need to face is that they are bankrupt, they cannot pay their debts. The only way out is that well trodden Greek path of default, and this time it also involves leaving a currency, they should never have joined, the Euro. This reality, as you constantly suggested, should be done ASAP to end the agony of this Greek tragedy

    If this had been done at the time of the first Greek bailout, they would now have recovered with Drachma issued at parity to the Euro at the time of default, now probably at about 10,000,000 to 1 Euro, but taking up the slack of their uncompetitive and inflationary economy!

    • and hasn’t leaving the Euro been mixed up with leaving the Union ?

      I heard that old carrot today by some daft business man 9 who no doubt will cease trading soon !)

      leaving the Union will mean I cant trade within the Euro zone – false ! the EFTA exiists and I suspect the Greeks could do the same

      leave the Empire and the currency and trade still within the EFTA

      Still gotta wonder if there will be any Greece left to rescue soon …..


      • “leaving the Union will mean I cant trade within the Euro zone” – correct!! If Greece leaves the Euro it will automatically default as it’s new Drachma will be next to worthless at this stage and the EU member states, all of whom have lent to Greece via the EFSF and Target 2 will exact their revenge.

    • You have mega-rich Greek politicians (with remarkably small declared taxable incomes) who flood the Greek media with Nazi scare stories to divert attention from the question “In whose bank account did the borrowed billions end up ?”

      Don’t expect these kleptocrats to help their fellow country people, they’re only interested in pocketing as much Euro taxpayers money as possible.

      • Like Russia and Ukraine then, where politics is all about self-enrichment for you and your cronies at the country’s and electorate’s expense.

        Jury still very much out on, if the latest Government in Ukraine will be any better.

          • As bad but on a much smaller scale, where expenses were small fry compared to what is appropriated in Greece, Ukraine and Russia (Putin is alleged to have over $200bn). As one Russian politician said at the height of the expenses scandal, UK politicians were pathetic as such small amounts weren’t worth the effort!

            The bigger scandal in the UK are politicians and their families being able to take advantage of government money through the passing of the human rights act, energy subsidies and other ‘climate change’ subsidies. In Eastern Europe in fact in Europe as a whole IME the further south you go the worse corruption and obeying the law gets!

            Then of course there is the EU, where no accountant will sign the accounts off as a fair reflection of their financial position and sums of money have actually been used for what they were allocated!

  6. it’s worth repeating that the traditional IMF remedy (default, devalue and disciplined spending) has a good track record of successes. Iceland also applied this strategy – with much better results than achieved in Greece.

    • Hi ExpatnBG

      I also much prefer the “old” IMF which as well as the 3 d’s that you quote also set out to deal with balance of payments problems. It was not there for fiscal problems – although of course its policies usually improved the fiscal situation – and it was especially not there for countries which by definition of their Euro area membership cannot devalue unless by chance.

      Hence the current failures.

      • In layman’s terms it’s about monetary stability. Currency/monetary failures of any sort cause increased poverty, hunger and potential political instability. Currency instability reduces society’s wellbeing – which begs the question why our current idiotic leaders are running so many stupid risks with currency/financial stability.

  7. Pingback: IMF admits Greece needs extra help to make debt sustainable | edwardprescott99

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