When the IMF Evaluates the IMF

Yves here. This post recaps where the IMF admits that it screwed up, as well as identifying a core methodology that the agency ignore that is prone to errors and gaming.

By Charles Wyplosz, Professor of International Economics, Graduate Institute, Geneva. Originally published at VoxEU

The IMF has now released its self-evaluation report on the programme for Greece between 2012 and 2016 (IMF 2017). This report admits most, if not all, of the glaring mistakes and calls for significant changes. Unfortunately, it does not always get to the bottom of why these mistakes were made.

The requirement that the IMF self-assesses and publishes its interventions in the case of programmes with exceptional access was adopted in the wake of the highly controversial East Asian crisis. Exceptional access occurs when the amounts lent by the Fund exceed the normal ceiling of 145% of the country’s quota per year, or a total of 435%. (At the time the limits were 200% and 600%, respectively). A first programme provided for 3200% of the Greek quota. As it was going astray in 2012, it was interrupted and replaced with a second programme worth 2159% of the quota. These are numbers never seen before.

What’s Good

The report is candid on a significant number of mistakes. It acknowledges that its forecasts were “overly optimistic”, which justified the front-loaded and historically deep budget deficit reduction condition that created one of the longest and deepest contractions ever recorded. This, in turn, led to a rising debt to GDP ratio, the opposite of the stated goal. The IMF has already admitted this failure, based on low fiscal multipliers (Blanchard and Leigh 2012). The report further notes that export price elasticities were expected to be large and that the banking system was presumed to be healthy throughout.  The report goes further by listing the implications of this mistake, including political turmoil, the rise in non-performing loans (NPL) that undid banks several times over, and failure to meet a number of programme conditions that appear ex post as unrealistic.

Exceptional access can only be granted if the staff certifies that the debt has a ‘high probability’ of being fully serviced. With considerable internal misgiving, the staff obliged. It did so not once, by twice, for each programme. Its assessment was based on its highly optimistic forecasts, which is open to the interpretation that optimism was endogenous to the need to certify debt sustainability. At the same time, well aware that the debt situation was dicey, the IMF supported the deep budgetary measures that it now regrets. The IMF offers two explanations. The first one is that a deep debt-restructuring would have hurt some systemic foreign banks. So soon after the Lehman Brothers collapse, it was feared that the Global Crisis could be reignited. This led the staff to surreptitiously add global systematic stability as a new clause to provide exceptional access. The precedent thus created was explicitly repealed in 2015, effectively acknowledging that it had been a mistake. The second explanation is that the EU and the ECB were staunchly opposed to any form of debt restructuring. This raises even deeper questions of cooperation with a monetary union. The report candidly recognises that it had made no preparation for such an event and that this issue still remains largely untreated.

Several other mistakes are acknowledged. They cannot all be presented here, but a few can be mentioned. One is the failure to recognise early on that the Greek polity did not ‘own’ the programmes, which indeed resulted in backtracking. Another is that the request that a great many structural reforms be designed and implemented exceeded both administrative capacity and political feasibility. Yet another one is a failure to properly monitor bank fragility. In addition, structural reforms were assumed to immediately boost the supply side, in contrast with much accumulated evidence that the benefits come in very slowly. Finally, the report mentions the failure to reform the goods market, in contrast with the labour market – deep labour costs did not lead to significant gains in export competitiveness. More generally, it notes acute problems of governance in both corporations and the government, which have remained largely untreated.

What’s Lacking

The frequent references to the co-management of the Greek crisis with the European Commission and the ECB – the Troika arrangement – suggest that this was a complicating factor that led to conflicts. Rather lamely, the report calls for an in-depth search for procedures to deal with a monetary union. Reading between the lines, one can guess that the IMF considers that the biggest mistakes (optimistic forecasts, no debt restructuring, excessively tight budgetary conditions, etc.) were not due to internal analytical failures, but to its position as junior partner in the Troika. The Troika was a historical precedent. Normally, when it lacks sufficient resources, the IMF single-handedly manages its programmes while calling upon ‘friends’ of the treated country to provide the needed additional resources. With the exception of Latvia in 2008, never before had the IMF accepted a junior role. So far, there has been no explicit analysis of this momentous step. Since it goes beyond the Greek case, the report may not be the place to tackle an issue that is politically hot, as the continuing disagreements between the IMF and the EU show.

The report emphasises the unusual amount of uncertainty affecting the programme. It considers that the programme was extraordinarily risky and that its chances of success were limited from the start. The lesson it draws is that, in such a situation, the conditions required from a country must be gradual and spaced out over a long period. Neither the observation, nor the implications are explained. Of course, many weaknesses pre-existed in Greece, but this is standard fare in most countries that need IMF support. Two factors made Greece special. First, it could not devalue to counterbalance budgetary stabilisation, and second, it did not have access to lending in last resort. Devaluations, however, are not a panacea. In this case, not only would it have aggravated indebtedness, already excessive, but Greece would had had to leave the Eurozone, a momentous move for which neither Greece nor the Eurozone had made the slightest preparation. The proper conclusion, therefore, would indeed have been to be gradual with budgetary stabilisation – but not for ‘risk’ reasons – and to encourage the ECB to fulfil its (implicit) lending in last resort duty. Diplomatically, the report does not touch upon the role of the ECB, its fellow Troika member.

What’s Wrong

Two critical mistakes are not mentioned. The first one is technical. In view of the exceptional, but not unique, access situation, debt sustainability was a crucial issue that remains at the heart of current debates. The IMF has developed a Debt Sustainability Analysis (DSA) procedure, which goes as follows. It starts with assumptions about the path of future primary budget balances, interest and growth rates over some 30 years or more. A straightforward simulation then delivers the future path of the debt ratio. The IMF then compares this path with some benchmarks. As with all compounding exercises over long horizons, the results are extremely sensitive to small changes in the assumptions. The debt path, therefore, is no more than the unstable representation of assumptions, as are the benchmarks (Wyplosz 2011). Assumptions over long horizons are highly uncertain, however. It would seem natural to associate the simulation results with confidence intervals. Zettelmeyer et al. (2017) show that the confidence intervals are very wide, casting doubt on whether any policy conclusion can be drawn from DSA. Sadly, there is no hint in the report that the Fund is ready to question this procedure.

It may be true, as US and European policymakers forcefully argued at the time, that a Greek default would have sparked global systemic effects. Preventing the crisis was therefore in the interest of a large number of important countries, which raises the issue of burden sharing. Fairness and feasibility argue in favour of sharing the burden. Instead, as we know, Greece was instructed to borrow, which means that the burden has fallen entirely on its taxpayers. The burden is so heavy that the IMF now calls for a debt reduction, which would be ex post burden sharing. As the world’s benevolent referee, it should have refused ex ante to be complicit and part of such an imbalanced approach. The issue of burden sharing is not even mentioned in the report. The implicit answer is that political realities had closed that door, but then it raises grave concerns about the Fund’s independence. It also reminds us of Keynes’ two famous lost battles. First, after WWI, he had opposed German reparations. Second, in Bretton Woods, he had raised the issue of symmetry. Greece represents his posthumous third loss.


The IMF must be commended for imposing self-evaluation reports upon itself. They sometimes come on top of reports by the IMF’s Independent Evaluation Office (for the report on Greece, see Wyplosz and Sgherri 2016). It is about speaking truth to yourself, which can be delicate because the programme’s actors, most of whom are active in the building, have skin in the game.

These reports can fulfil an extremely important role if they identify mistakes that should not be repeated in the future. Does it happen? A previous self-evaluation took place after the first Greek programme. Many of its observations are the same as those of the second report, which is disheartening. The Fund argues that, because the first report was published after the start of the second programme, its conclusions could not be taken on board. It calls for a faster production of the self-evaluation reports. Would that be enough? Scepticism is warranted when we observe that a number of the mistakes reported in this report were already mentioned after the East Asian crisis.

With all its limitations, the fact that self-evaluation occurs and that the report is made public deserves to be commended. The procedure should be a model for the two other Troika institutions, the European Commission and the ECB. Most regrettably, self-evaluation is not part of their institutional culture. They seem to follow the prescription attributed to Napoleon: “In politics never retreat, never retract, never admit a mistake”.

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  1. diptherio

    The experts at IMF now regret that they did what so many of us were counseling against at the time. I wonder if this will, perhaps, lead to them seek and follow the advice of those who knew austerity was a counter-productive before this report came out, in the future….hahaha, just kidding! That’ll never, ever happen.

  2. TomDority

    All Europe wants is to settle the debt question with
    out settling the debt.—Akron Beacon Journal.August 1932

  3. Andrew Foland

    “which is open to the interpretation that optimism was endogenous to the need to certify debt sustainability.”

    How terribly coy of you.

    In the words of another famous evaluation of a terrible decision: “the intelligence and facts were being fixed around the policy.”

    The real problems are not technical economic mistakes, but political mistakes. The evaluation would have been much nearer the mark to simply report “IMF and European leadership made, and subsequently enforced, fatally incorrect policy.”

    1. John k

      Ah, you mean fatal to Greece, not fatal to the French and German banks… with the systemically important excuse, though in fact the main reason is that the foxy bankers run the chicken coop.

      Greece and its population obviously not systemic.

      Good word that, fatal. Descriptive.

  4. ChrisAtRU

    The IMF must be commended for imposing self-evaluation reports upon itself.


    Who can commend a charade that doesn’t remotely seek to fix the underlying problems with the EZ and the Troika’s approach to Greece? The fact that the bodies politic and economic in Europe are at this very moment plotting to either impose more austerity on Greece, or kick it out of the EZ is testament to this self-evaluation’s worthlessness.

    It’s akin to someone burning down another’s house on purpose, having the arsonist write a self-evaluation report stating they shouldn’t have done so, and then proceeding on their merry way to burn down others.

    I’ll pass on such exercises …

    1. Jim Haygood

      Diplomatically, the report does not touch upon the role of the ECB, its fellow Troika member.

      One of the unwritten rules of the IMF is that its director is to be European — currently the handsome Chris Lagarde of France, who’s conveniently hanging out at IMF HQ in Washington DC to stay beyond reach of a criminal case in the French courts.

      The IMF and ECB collaborating in a bailout involves numerous political conflicts of interest, and helps explain why the IMF lent an eye-popping 3200% of the Greek quota.

      Speaking of Maynard Keynes, who’s mentioned in this essay, the IMF’s role was to provide balance of payment lending to support the dollar exchange standard which Keynes helped establish at Bretton Woods in 1946. When the dollar exchange standard ended in 1971 upon Nixon’s default, the IMF should have been closed down. Instead, it “reinvented itself,” with predictable consequences.

      Close down the IMF and the exorbitant privilege of its tax-exempt, boodling elite in Washington DC. Like NATO, the IMF is another obsolete, value-subtraction relic of another era.

      1. John

        You think the IMF is around just because a couple of “elites” didn’t want their organization shut down? The IMF has had a tremendous deal of success forcing developing countries to adopt the laissez-faire economic policies transnational capital has been pushing so hard for all around the world. The only other way to open up their markets, aside from hoping local politicians can do the trick, is by force–and the American public can’t always be relied upon to support foreign wars. It’s not obsolete, it does its job very well, and will be around for a long time.

  5. susan the other

    this is an interesting article, almost comprehensible… I don’t understand this part: that the failure to reform the goods market was a mistake; it made things worse. They only imposed reforms on the labor market and that was a well-recognized mistake that produced the opposite effect than intended – it did not improve export competitiveness. Is this saying that corporations, including international corporations involved in Greek business, should have had to rein themselves in? Provide products at a discount? Or what? It does make sense that the unilateral austerity imposed on Greece was a big coffin nail – it’s a no-brainer; but it also makes sense that Greece was in trouble in the first place because it was not “competitive”. So are we talking rock and hard place even if the “goods market” is forced to suffer some austerity also. I don’t get it. What it sounds like is the entire Greek industrial policy was out of whack, and for decades as we know. So how does the IMF categorize remedies that might address this? Doesn’t the IMF demand free markets and other nonsense? etc.

    1. JTMcPhee

      One of the several downsides of national autonomy and “democracy, the fraud.” The various “governments” of Greece, ruling juntas mostly, brought into power by “democratic” means of the sort the US Empire employs, had zero interest in or potential profit from governing to reach a sustainable healthy economy. Neither the inclination, the tools, our the talent. IBG-YBG, “Apres nous who cares?” A very modern dysfunction.

      Remember the reporting on the Greek purchase of German-built submarines, that I think still rust in dry dock? One minister who was not even in the chain of “approval” for these assumptions of debt (to German banks?) Testified that a representative of the U-boat builder came into his office and dropped a briefcase full of euros on the divan. Did not even reclaim it when the minister said he did not influence the decision to “look for the German label.” And this sort of corruption shrinks what us more kindly disposed mopes think of as “governance,” applying only a “good for the whole polity” cast to the term which is inherently totally neutral and can and more usually does embrace the Dark Side meaning, shrinks it to the size of a newborn that can easily be stifled by a mound of unmarked bills…

  6. Gman

    The Greek EZ debt crisis served to make the near totally discredited IMF temporarily relevant again.

    This vile, widely vilified ‘creditor friendly’ organisation was called in by the EU and Germany in order to give their punitive extreme austerity programme an air of undeserved international respectability and promote the illusion that this was not exclusively a neoliberal EU or (Franco) German hatchet job on the Greek economy.

    Any mea culpa from the IMF, for whom this has been their modus operandi for decades saddling numerous developing countries with unpayable debts, in many cases asset stripping them and condemning them and their populations to service them in perpetuity, ain’t worth a light I’m afraid….and I’m being kind.

  7. Chauncey Gardiner

    Constructive if belated step by the IMF. But there is a lot more to this story, including the original transfers of debt onto the people of Greece, the basis for the Troika’s policy mandate, what the respective members of the Troika knew and when they knew it, where the Troika’s decisions were made and by whom, and why they have persisted with such deeply damaging austerity and privatization policies in the face of such evident policy failure?

    I have read that the next debt amortization payment which Greece will be unlikely to meet is in July. What I find baffling is the relatively modest size of that payment of about $6 billion in contrast to the massive amounts of money created by the ECB under its “quantitative easing” programs that now total well over 1.2 trillion euros net. And to whom has that money gone?

  8. b1daly

    This post speaks to a comment I made the other day, which nobody agreed with, where I argued nobody actually believes in “neo-liberal” economic theory.

    Even Yves disagreed. Then the other day she had a post where she described the latest round of the Greek debt program as another round of “Extend and Pretend.”

    If anyone believes these theories that Greece can grow it’s way out of debt through ever more severe austerity measures, such a person might be found at the IMF. The extent of that belief would probably not go further than the sort of wishful thinking, where you announce a bold plan, with great confidence to the public, while your fingers are crossed behind your back.

    Anyone who bothered to look would see this ongoing program of extend and “pretend.”

    To the extent that “neo-liberal” economic theory is even a thing, it is used as a mere fig leaf.

    It seems obvious to me, random non-expert on the Internet, that the holders of Greek debt are stuck in some kind of game theoretical deadlock where the strategy for creditors getting paid that is best for the whole system, probably debt relief, is not in the interest of the individual players.

    They are playing musical chairs, fighting to not take a big haircut.

    That’s just my guess, for a thumbnail sketch.

    Does that seem about the size of it to others?

    1. Hemang

      You have missed the clouds of chants going up in the sky:”Greeks are lazy” and “Germans are hard working”. The pathetic Greeks are on the periphery of the Euro zone and they are paying a price of being squeezed further and further by the biggest beneficiary of Euro: Germany. Of course Germany’s 50 percent debt was called off at the London Conference in 1955 and the rest was distributed over a period of 30 years, resulting in the ‘Great German Economic Miracle’. But yesterday’s pauper is today’s Rich Man of Europe, making right noises and wagging its tail appropriately to the orchestra. ‘A non-expert on the internet’ that you may be is more innocent and purer than the Christine Laggards of the world whose real life corruption of making their family members rich by millions of Euros stolen from tax-payers money is revealed in the hideousness of their physiognomy in real life. (As seen strutting about on TV screens even in places like India where I sit).

      1. b1daly

        Well, I don’t live in Europe, but I will take your word that your somewhat hyperbolic and poetic description of the political “sentiment” among vocal segments of cititzens in the region. That sounds like bog standard, populist, scapegoating, which I think speaks for itself. Doesn’t take much for justification for one group to blame another for problems whose causes are outside the control of either.

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