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Brexit and the City
09 June 2013

Wolfgang Münchau: Hail the outbreak of honesty about Greece's bailout


The IMF's admission is welcome but the hard part will be acting on it, says Münchau in his FT column.

It was the most honest and clear-headed analysis by an official body on the eurozone crisis yet. In just 50 pages, the International Monetary Fund produced a concise and sober analysis of what went wrong in the Greek rescue programme. This month’s report is also an outcry against the European policy consensus. Commentators – including me – have been attacking this consensus for more than three years. It is the first time an official institution has joined in.

According to the IMF, the fundamental error was excessive optimism about economic growth. The error was fundamental in the sense that it caused other misjudgements – about deficit reduction, financial sector stress, the speed of reforms and debt sustainability. Moreover, it was not an error of bad luck. The severe economic consequences of the agreed Greek adjustment were not merely visible; they were actually foreseen by many critics, as the IMF openly admits.

The other big regret expressed in this paper concerns the excessively long time it took to agree a debt restructuring for Greece. When the agreement came, most private sector investors had already pulled out.

The consequences of these accumulated errors are grave. More importantly, they make it impossible to solve the crisis within the present parameters. In a separate analysis, the IMF concluded that the debt sustainability analysis underpinning the 2012 Greek bailout is already for the birds. It concluded that there has to be more debt relief than envisaged – some 7 per cent of gross domestic product – to meet the debt sustainability target of 124 per cent in 2020, and of 110 per cent in 2022. The 2012 agreement acknowledged a hole of 4 per cent, which has yet to be plugged. The increased estimate does not sound much but it, too, is based on positive assumptions. And it is, as ever, a minimal number.

What effect on policy will the IMF’s analysis have? The fund certainly did not apply this level of new thinking when it negotiated the bailout for Cyprus. Its prediction last month that the country would return to growth in 2015 was ludicrous – especially in view of what happened in Greece. It is hard to escape the impression that the IMF may not be speaking with one voice here. When Poul Thomsen, mission chief in Greece, said the IMF would do it again if faced with the same information, one did not get the impression that he endorsed the message of this paper. While Washington sent its mea culpa, Mr Thomsen retorted: je ne regrette rien.

Judging from the furious reaction of Olli Rehn, European commissioner in charge of economic policy, my best guess is that eurozone policy-makers will ignore the recommendations. The German government will almost certainly not accept these findings either. If the IMF is serious about its own analysis – and it should be – it should either force a policy change, or be ready to leave the troika.

Full article (FT subscription required)


© Financial Times


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