IMF rapped over handling of Greek bailout

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), listens to a question at the Federal Reserve Bank of New York on July 18.
Christine Lagarde, Managing Director of the International Monetary Fund (IMF), listens to a question at the Federal Reserve Bank of New York on July 18.PHOTO: AFP

It failed to demand debt relief as part of conditions in 2010 despite staff's views that this was critical: Auditor

WASHINGTON • The International Monetary Fund (IMF) failed to demand debt relief as part of Greece's 2010 bailout despite widespread staff views that this was critical to the programme's success, an internal audit report showed.

The IMF also did not make a serious attempt to quantify the risk of financial contagion throughout Europe that was used to justify its granting of "exceptional access" funding to Greece when the country's debt was widely viewed internally as not having a high likelihood of repayment, the report last Thursday said.

Summing up the auditor's view, Britain's Telegraph newspaper said the IMF's top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of an impending crisis and collectively failed to grasp an elemental concept of currency theory.

The decisions, made in the throes of a growing debt crisis, contributed to a programme that proved unsustainable as Greece's economy collapsed, the IMF's Internal Evaluation Office (IEO) said.

The €30 billion (S$45 billion) IMF programme for Greece needed renegotiation in 2012, and the IMF is not yet a participant in a third bailout as it is now insisting that European lenders provide debt relief to Greece.

"Critically, there was no rigorous attempt to articulate a convincing path to restoring debt sustainability in Greece, other than a programme of official financing, fiscal adjustment and structural reforms," the IEO said of the IMF's actions in 2010.

The IEO said the IMF's rules on granting exceptional access, which requires early board involvement, were "followed only in a perfunctory manner".

Amendments to create a "systemic exemption" that allowed the Greek bailout to proceed departed from the fund's usual deliberative process where major decisions receive careful review, the IEO said.

In January this year, the IMF eliminated the special exemption which also paved the way for bailouts of Ireland and Portugal and enacted new rules governing such large bailouts.

Even though some senior IMF staff did not believe that the Greek debt in 2010 was sustainable, the report cited "pressure" to agree to the bailout, adding that then managing director Dominique Strauss-Kahn decided "to go along with the decision already reached by European policymakers and take a chance" that stability in Greece could be restored without pre-emptive debt restructuring.

By contrast, the IMF's bailouts of Ireland and Portugal went far more smoothly, the IEO report said, helped by strong "national ownership" of the programmes and implementation of required reforms.

IMF managing director Christine Lagarde said in a statement that she believed the IEO did not adequately prove that the fund's technical analysis came under undue political pressure and disagreed with the need for new procedures.

Including Greece, Portugal and Ireland, she said, the IMF's involvement in the euro zone crisis programmes was a "qualified success".

"Greece, however, was unique: While initial economic targets proved overly ambitious, the programme was beset by recurrent political crises, pushback from vested interests and severe implementation problems that led to a much deeper-than-expected output contraction," said Ms Lagarde, who replaced Mr Strauss-Kahn in 2011 after he resigned amid a sexual assault scandal.


A version of this article appeared in the print edition of The Sunday Times on July 31, 2016, with the headline 'IMF rapped over handling of Greek bailout'. Print Edition | Subscribe