The IMF’s Big Greek Mistake

By Ashoka Mody, Visiting Professor in International Economic Policy at Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments. Originally published at Bruegel

The Greek government’s mounting financial woes are leading it to contemplate the previously unthinkable: defaulting on a loan from the International Monetary Fund. Instead of demanding repayment and further austerity, the IMF should recognize its responsibility for the country’s predicament and forgive much of the debt.

Greece’s onerous obligations to the IMF, the European Central Bank and European governments can be traced back to April 2010, when they made a fateful mistake. Instead of allowing Greece to default on its insurmountable debts to private creditors, they chose to lend it the money to pay in full.

At the time, many called for immediately “restructuring” of privately-held debt, thus imposing losses on the banks and investors who had lent money to Greece. Among them were several members of the IMF’s Board and Karl Otto Pohl, a former president of the Bundesbank and a key architect of the euro. The IMF and European authorities responded that restructuring would cause global financial mayhem. As Pohl candidly noted, that was merely a cover for bailing out German and French banks, which had been among the largest enablers of Greek profligacy.

Ultimately, the authorities’ approach merely replaced one problem with another: IMF and official European loans were used to repay private creditors. Thus, despite a belated restructuring in 2012, Greece’s obligations remain unbearable — only now they are owed almost entirely to official creditors.

Five years after the crisis started, government debt has jumped from 130 percent of gross domestic product to nearly 180 percent. Meanwhile, a deep economic slump and deflation have severely impaired the government’s ability to repay.

Virtually everyone now agrees that pushing Greece to pay its private creditors was a bad idea. The required fiscal austerity was simply too great, causing the economy to collapse. The IMF acknowledged the error in a 2013 report on Greece. In a recent staff paper, the fund said that when a crisis threatens to spread, it should seek a collective global solution rather than forcing the distressed economy to bear the entire burden. The IMF’s chief economist, Olivier Blanchard, has warned that more austerity will crush growth.

Oddly, the IMF’s proposed way forward for Greece remains unchanged: Borrow more money (this time from the European authorities) to repay one group of creditors (the IMF) and stay focused on austerity. The fund’s latest projections assume that the government’s budget surplus (other than interest payments) will reach 4.5 percent of GDP, a level of belt-tightening that few governments have ever sustained for any significant period of time.

Following Germany’s lead, IMF officials have placed their faith in “structural reforms” — changes in labor and other markets that are supposed to improve the Greek economy’s longer-term growth potential. They should know better. The fund’s latest World Economic Outlook throws cold water on the notion that such reforms will address the Greek debt problem in a reliable and timely manner. The most valuable measures encourage research and development and help spur high-technology sectors. All this is to the good, but such gains are irrelevant for the next five years. The priority must be to prevent Greece from sinking deeper into a debt-deflation spiral. Unfortunately, some reforms will actually accelerate the spiral by weakening demand.

On April 9, Greece repaid 450 million euros to the IMF, and must pay another 2 billion in May and June. The IMF’s Managing Director, Christine Lagarde, has made clear that delays in repayments will not be tolerated. “I would, certainly for myself, not support it,” she told Bloomberg Television.

Inevitably, debt relief will be provided — but in driblets and together with unrelenting pain. The Greek government will need to withhold payments to suppliers and workers, and will raid pension funds. Five years from now, the country’s economic and social stress could well be even more acute. The question will be: Why was more debt not forgiven earlier? No one is willing to confront that unpleasant arithmetic, and wishful thinking prevails.

Having failed its first Greek test, the IMF risks doing so again. It remains trapped by the priorities of shareholders, including in recent years the U.K. and Germany. To reassert its independence and redeem its lost credibility, it should write off a big chunk of Greece’s debt and force its wealthy shareholders to bear the losses.

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  1. Nell

    The IMF is riven by contradiction. It is no longer fit for purpose. Greece is another country, in a long line of countries that have had their economies undermined, and in some cases wrecked by IMF policies enforced by loans. The IMF needs to be disbanded. All the countries that pay into the IMF should withdraw their funds immediately.

    1. Ben Johannson

      Originally it was a necessity under the Bretton-Woods system, but since the dawn of the neoliberal era it has functioned as a financial enforceer and international bully-boy.

      1. different clue

        Didn’t the IMF help bring in the Neo-Liberal era? Isn’t that what the real secret purpose of the IMF always was, right from the start? If so, hasn’t the IMF been a total success for the people it was secretly intended to be a success for?

        1. John Hope

          Yes indeed it was . What we are now witnessing is the final stages of that con-trick being played out . The sooner the whole fucking thing collapses the better – and it will – because truth will out no matter how long it takes.

  2. Christer Kamb

    Simple math back in 2010 came up with the obvious(for Greece). Default. Of course a Grexit before default would have been rightful but a total disaster for the financial markets(not prefarable!). Still Greece should not be a member of EMU without a single EMU-bond and a common fiscal budget(any thoughts Herr Pohl?).

    The neo-liberal EU-elite have deregulated the european banks in a way that was far worse than in the US. Germany have done most harm. German banks have traditionally been local and regional savingsbanks transferring low risk-capital to german (export-)manufacture–industry. But in the early 90s a new banklobby started to sell the idea that Frankfurt should be the money-center of Europe(not London). Later german financial elit(incl Pohl) allowed german banks to transform themselfes from savingsbanks(relations-banking) to investmentsbanks(selling and trading). Germany´s first bad bank was created after i.e DB and CB sold US MBS(toxic derivatives) for one trillion USD(total in Europe but biggest part to Germany)to pensionsfunds and “old school” regional savingsbanks(Landesbanks). That is how the small Deutche Bank(DB) could raise itself from the deepest bottom of less profitable banks to become the biggest threat to european economies. Commerzbank(CB) is another example how the repeal of Glass Steagall have induced and magnified the euro-havoc. The idea that eliminated currency-risks within EU would stimulate trade was instead multiplying credit-risks due to too low interest-levels for low-productivity countries like Greece etc. A strong Euro(think Germany) against the dollar did also hurt countries like Greece were debt doubled in euro before the crises(0,80 to 1,60).

    To tell the truth! EU-elites have never cared for the interest of the small member countries. They never bothered themselfes to examine the structural risks growing inside the peripheries. How much do you spend and on what? Very simple questions to ask Herr Pohl.

  3. Schofield

    The current big question for human beings is whether a genuine partnership can be established between government and banks (with government the senior partner) for the creation of money without the use of totalitarianism as we see in China or the West as we see in the near totalitarianism of the ECB and the IMF.

    1. susan the other

      Oil and water. You can’t just give private banks an inch because their business model is based on inevitable tragedy of the commons. They will seek a profit no matter what. And at a level that distorts all social organization. Private banks should never be allowed to create credit unless they use their own private currency. Nor should they ever be allowed to demand that the currency of the state, the people’s money, should remain strong so that the banks’ accumulated wealth remains valuable. The IMF is an umbrella privateer because it preys on all nations. If private banks wanna continue doing this, let them print their own goddamn money.

    2. Jim

      What are some good historical studies/articles on the relationship between banks and the State?

      It certainly seems to be the case that in modern history the State has assumed the role of last-resort financing for the private banking system with disastrous consequences for democracy and economic equality.

      1. Noonan

        Here are some historic quotes which are applicable to our current situation:

        “I believe that banking institutions are more dangerous to our liberties than standing armies.” –Thomas Jefferson

        “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.” -James Madison

        “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” -Abraham Lincoln

        “Issue of currency should be lodged with the government and be protected from domination by Wall Street. We are opposed to…provisions [which] would place our currency and credit system in private hands.” – Theodore Roosevelt

      2. financial matters

        Michael Hudson talks about how most lending goes to assets already in place. Mazzucato in Entrepreneurial State talks about how the govt has deep pockets to fund research such as with the NIH and Darpma but how these products often get usurped by private pharmaceutical companies or tech companies such as Apple.

        Ellen Brown talks about public banking and of how central banks function best when they serve the needs of the nation rather than the international finance community under BIS.

        She mentions examples like the German Sparkassen, the Japanese Post Bank, the central banks of the Asian Tigers, early central banks of Canada, Australia and New Zealand.
        Mainly where countries realized they could leverage their own sovereignity (labor) and not have to rely on foreign banks or a private banking system for funding.

        The banking system seems to function mostly as a system of leverage to provide funding/credit for various endeavors. If this is democratically focused it can fund a lot of useful endeavors. If not it can end up funding M and A and various types of speculation.

  4. financial matters

    Thanks for this very good article. This together with how the IMF is operating in the Ukraine is giving us a clear picture of this destructive organization. In the Ukraine it is supporting a repressive govt while privatizing the gas and agriculture for US corporations.

    Michael Hudson: ‘IMF policy in Ukraine is smash and grab with Soros etc doing the grabbing.’

    Similar to extreme extraction of fossil fuels, repressive IMF policy if moving into areas with more ability to fight back and making their actions harder to ignore.

  5. kolyn phlabyn

    Five years from now, the country’s economic and social stress could well be even more acute. The question will be: Why was more debt not forgiven earlier?

    Forgiving debt is anethema to the governing elites. for them a social democratic government cannot be allowed to succeed because it sends the wrong message to other states – that there’s an alternative to austerity. so if the sadistic, unnecessary and cruel torture of the greek population is the price to maintain the idea that there’s no alternative to austerity then so be it, elite circles see that as preferrable than giving even a glimps of hope that a challenge is possible.

    chomsky speaks about this concept a lot describing it as “failure by design”… his main argument is “a region that falls out of control can become a virus that will spread contagion, inducing others to follow the same path.”

    foe the european elites, greece must be disciplined, submit to their will and disgard any notion of independent policy or else it can simply fail. its a rather depressing conclusion

    1. MyLessThanPrimeBeef

      There is no debt forgiving with the Mafioso.

      I mean the ‘real’ Mafioso, and no the ones portrayed on TV…the real ones Michael Corleone wanted to join, but couldn’t.

    2. Mr. G

      interesting point. Here’s another lens to that…Tsiprias and Varoufakis don’t fit well in the Euro order. Why? Because they left-wing neo-communists? No. It’s because they aren’t bureaucrats and politicians. They are leaders. Leaders often polarize everyone, live with strong convictions, and seek transformational change. A silver platter to augment fiscal unity has been laid Europe’s doorstep. Rather than just save Greece….they should seize this moment to acknowledge Italy, and bring forth a truly sweeping change. One that would enshrine Europe as the Hyper-power they want to be. Rather than muddle over whether Greece will get avg GDP of 1.2% or 2.2%……….they should vest their energies in creating a fiscal structure that would avoid this calamity for ANY future euro member. Are we really paying millions in salaries for the Eurozone leaders, IMF leaders, ECB, and now the u.s… figure out a budget for Greece???? Fix the bigger problem.

  6. EoinW

    IMF independence and credibility? Are we to always be trapped in the old and deceitful narrative? These multi-national institutions – IMF, EU, NATO etc… – are no longer the good guys. It’s questionable if they have ever been good guys. Maybe they have contributed to our enrichment in the West but what price have others had to pay so we can live it up? Are we not simply accessories after the crime – crimes we care not to ever see?

    What’s going on now is basic Naomi Klein Shock Doctrine 101. Must we be a society of thinkers forever stuck in Grade 9?

  7. Cugel

    Since the debt is unsustainable it will not be sustained. This is the logic that escapes the Troika entirely. Right now, they are pushing for Grexit under the notion that they can extract as much wealth as possible and then write Greece off as an example of proper chastisement for lazy, greedy southern Europeans.

    Greece may maneuver around to try and find ways to pay the IMF loans, but they really cannot continue much past June. They are running out of money and out of options. The latest trip to Russia and the Russian advance on money from the oil pipeline was only the last in a series of desperate maneuvers that cannot contribute much to the economy. Meanwhile the tightening squeeze continues:

    “Thomas Wieser, a top EU official, all but ruled out hope of a deal being reached by the eurogroup at the end of the week: “The clock is ticking. There won’t be a new list in Riga, but over the course of May it must finally be reached.”

    Failure to reach an agreement would be “catastrophic” for Greece, said finance minister Yanis Varoufakis, who hinted that the two sides were gradually getting closer to striking a deal to unlock €7.2bn of bail-out cash.”

    But the key indicator is the rapid fall of popularity for Syriza due to their failure to get any relief:

    “In a further sign of domestic troubles for the Leftist government, approval ratings for the government’s negotiating strategy have fallen to just 45pc in April, down from 72pc in February.”

    Their popularity has fallen 27 points in a little over a month. This means they cannot continue to agree to the Austerity conditions demanded by the Troika without a collapse of the government. The left faction will bolt and the rump will be no more capable of implementing continued austerity that PASOK was.

    It is important to remember that the only reason Syriza is in power in the first place is the complete collapse in support for PASOK between 2010 and now. Any party that tries to negotiate continued Austerity will simply lose all credibility and collapse.

    Meanwhile Germany will get its way of pushing Greece out of the Eurozone amid catastrophic economic collapse in the blind arrogant belief that the “threat of contagion is contained.” For maybe 6 months it will be, but beyond that? Austerity breeds catastrophe, and will generate more crises like a dung heap draws flies. The Troika will be faced with similar problems in Spain and Italy next year.

  8. Christer Kamb

    Greece is not Argentina, able to devalue it´s currency. Greece is not Latvia either. Internal devaluation in Latvia also had a high price but still possible(compared to Greece) because to it´s younger economic infrastructure. Latvia devalued it´s currency Lats(ca 50%) and got extra financing from EU/IMF for their banks and government. Foreign banks were bailed out as usual. Latvia also have many european wage-arbitrage factories which could regain profits in the economic recovery in Europe/tradepartners. Greece has not. Still Latvia lost aprox. half of their younger generation who left the country in the massive unemployment that followed their overindebtness(asset-crash).

    1. Christer Kamb

      Correction: Of course Latvia did not devalue. The whole idea of comparing Greece with Latvia by the Troijka was if Latvia “succeeded” through austerity then Greece must be able to do the same! Wrong indeed.

  9. Fair Economist

    The IMF policies are a mistake only if they’re trying to make the rich have less and everybody else have more. As it stands a huge bondholder loss affecting (almost) only the wealthy has been transferred to the IMF, an organization funded by tax receipts of various member nations. Transferring it again to the EU member states will then spare the IMF itself from the consequences of bailing out the rich.

    I’m not saying IMF meetings are full of Snidely Whiplash-types cackling about sticking it to ordinary people but they are overwhelmingly very wealthy people and so they stick up for the interests of very wealthy people. Their policies have gained them and their friends tens of billions of Euros; it’s not a “mistake”.

  10. kevinearick

    A politician, including rotating presidents, can represent the majority, but not change its behavior, and all a late stage empire has is increasing control over a shrinking economy, covered by a dress of real estate inflation, which is why this one is moving out, with nowhere to go. Of course Hilary employed the State Dept to grow her network. How do you suppose the majority chooses friends, other than expediency?

    As far as the electrical problem, I have seen too many people, including licensed electricians, electrocute themselves, which is why SOP is to hire a licensed electrician, with the cost flowing through insurance/Warren Buffet, and back to stupid.

    In short, you want to confirm ground, a reference voltage, which you can do with no tools, or an inexpensive gadget meter. Then check for electrical balance, with a meter that will give you a print out of swell, under, over and rush, keeping in mind that dc electronics are specifically designed to create more problems, economic activity, than solutions. Finally, run a breaker series to isolate downstream failures. Don’t be surprised if gravity reaches out to grab you. Insulation, insulation, insulation.

    What can you do with a dc computer, which it was not designed to do? What is a harmonic? (check the neutral) What is your peak, irregular demand?

    Funny, how the empire responds to its own artificial activity, with more artificial activity, correction, calling it economics. The power factor of empire is 0 or 1/0, depending upon perspective. Move along.

    Demand: counterweight, loads.

    What happens when the computer is wrong? Funny, how bureaucrats adjust discretion over a bit on a computer to serve their own bias.

    1. kevinearick

      opensource does not mean connection to all proprietary manufacturers, except to the manufacturers.

  11. washunate

    Virtually everyone now agrees that pushing Greece to pay its private creditors was a bad idea.

    I am intrigued by that claim. Who used to support the socialization of losses that no longer does? When did they have a change of heart?

  12. kevinearick

    Control and resistance to control, empire gravity, CAN be completely explained by circuit analysis, is erased as you go, and will be completely erased when you are gone. All I am saying is that you don’t need to spend more than 10% of your time on it. At the end of an empire cycle, most are spending 90% of their time as automatons. The more they try not to be automatons, the more they become automatons.

    What you want to spend 90% of your time on is your own unique talent, and the skills to employ it. Without HUMAN children, there is no future for humanity. Currently, at the end of a demographic boom, and RE inflation heading to infinity, division by zero real work, at the highest entry threshold, young people having children, with both wishing to participate, requires 40 total hours at wages 4x rent, which means that those capable of building the motor have to be paid accordingly.

    No politician is the solution; discount accordingly. But, go ahead and prove me wrong.

  13. Mr. G

    isnt debt forgiveness, in whatever politically appealing way you want to couch it ( perpetual bonds, GDP linked bonds, maturities of 100years ) part of the package agreed to by both sides right now? I think they are mainly haggling over pension and labor reforms. No one disagrees any longer that greeces total debt burden is too high. It will have to be cut or defaulted upon. Cut would avoid a CDs explosion ( I.e. The contagion that Schauble isn’t including in his estimation that the Eurozone is protected.). A cut would present some balance sheet challenges to the eurozone members. ECB could fill those voids quickly . Very little pain from a cut, and much to be gained. The reasons against it are completely moral and unpragmatic.

    Does Europe want to be right or get results? Pick one.

  14. ErnstThalmann

    What good does it do to read contributors here intellectualizing a problem that so obviously could be righted through the creation of a workers state and the imprisonment, interrogation and public trial of the capitalist perpetrators of this madness. When you have an infestation of vermin, you fumigate. There will be no meaningful change short of the people taking matters into their own hands.

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