IMF ‘weakened’ by political interference during debt crisis

Posted on July 28, 2016

WASHINGTON, DC - MAY 16: The International Monetary Fund Headquarters 2 building is seen thorugh Eduardo Chillida's 1969 sculpture "Around the Void V" May 16, 2011 in Washington, DC. A potential candidate for the French presidency and current IMF Managing Director Dominique Strauss-Kahn was detained May 14 on a departing airplane after he was accused of trying to rape a maid in a $3,000-a-night suite at a New York City hotel. (Photo by Chip Somodevilla/Getty Images)©Getty

The IMF has identified political interference as one of many weaknesses in its handling of the Eurozone’s debt crisis, in a damning internal report that will fuel debate over whether it should continue to fund Greece.

In-house inspectors highlighted a litany of flaws in the IMF’s “uneven” response, prompting calls for greater clarity over the fund’s rescue strategy for eurozone countries.

    Their assessment raises fresh questions over the failure to restructure Greek debt at the time of its first bailout in 2010. The report, released on Thursday, says key decisions had already been reached in Europe by the time the fund became involved in the rescue effort.

    Christine Lagarde, the IMF’s managing director since 2011, backed some of the inspectors’ recommendations for improving internal procedures but dismissed calls from the independent evaluation office to fortify the fund’s defences against political interference.

    “I support the principle that the IMF’s technical analysis should remain independent,” she said in a statement. “However, I do not accept the premise of the recommendation, which the IEO failed to establish in its report, and thus do not see the need to develop new procedures.”

    The fund’s involvement in eurozone programmes had been a “qualified success” in the face of unprecedented systemic challenge, Ms Lagarde said.

    The inspectors said the troika arrangement — in which the IMF worked alongside the EU Commission and European Central Bank — potentially subjected the technical judgment of IMF staff “to political pressure” from an early stage.

    “The European Commission, in the area of emergency crisis lending, acted as the agent of the eurogroup, which in turn represented member states and decided whether to provide assistance.

    “Interviews and some internal documents suggest that political feasibility in creditor countries was an important consideration for [European Commission] staff and that IMF staff occasionally felt pressured to accept a less-than-ideal outcome.

    “Because all members of the troika needed to agree on a unified position before jointly approaching the borrowing country for a programme negotiation or review, this set-up potentially exposed IMF staff to political decisions at an earlier stage than would normally be the case.”

    The inspectors said the IMF executive board, responsible for the fund’s day-to-day business, was in the dark on sensitive policy questions for Greece and Ireland, which also received a bailout in 2010.

    Some executive board members, who usually meet several times each week, learned more from the press throughout the crisis period than from informal board meetings.

    “In May 2010, the IMF executive board approved a decision to provide exceptional access financing to Greece without seeking pre-emptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability.

    “The risk of contagion was an important consideration in coming to this decision. The IMF’s policy on exceptional access to fund resources, which mandates early board involvement, was followed only in a perfunctory manner.”

    The fiscal troubles of Greece remain unresolved, fanning concern about regional instability at a time of upheaval in Turkey. In recent days the US has pressed the country’s European creditors to allow a debt restructuring to restore order in its finances.

    The inspectors, led by Japanese academic Shinji Takagi, found the IMF had considered the prospect of lending to a eurozone country to be unlikely and had never set out how such programmes might be designed.

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    The report said IMF managers had moved some time before the Greek rescue to explore contingencies. Still, the work of special task forces “was so secret that few within the institution knew of their existence, let alone the content of their deliberations”.

    Ms Lagarde said IMF-backed programmes bought time to build firewalls, prevented the crisis from spreading, and restored growth and market access in Ireland, Portugal, Cyprus.

    “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.

    “On the other hand, Greece undertook enormous adjustment with unprecedented assistance from its international partners. This enabled Greece to remain a member of the euro area — a key goal for Greece and the euro area members.”

    Chronicle of a crisis

     

    Oct 2009:

    George Papandreou’s Socialist party wins the Greek elections. Shortly after, the Greek government says that year’s fiscal deficit is likely be 12.8 per cent of GDP, more than three times the previous forecast.

    February 2010:

    Following their first emergency summit on Greece, EU leaders pledge to take “determined” action to safeguard financial stability in the eurozone if needed. The IMF offers to provide “expertise and support as necessary”.

    May 2010:

    Together with the European Commission and ECB, the IMF agrees on a three-year €110bn loan package for Greece.

    November 2010:

    The Irish government requests financial assistance. The IMF agrees to contribute €22.5bn over three years.

    April 2011:

    After credit downgrades by Fitch and Moody’s, Portugal requests financial assistance from the EU and the IMF. The IMF provides €26bn for Lisbon.

    October 2011:

    Spain and Italy are hit by a flurry of rating downgrades.

    November 2011:

    The Italian government requests monitoring of its economic policy implementation by the IMF. Italy’s prime minister loses his majority in parliament and resigns. Mario Monti is appointed.

    December 2011:

    Italy adopts an emergency “Save Italy” austerity budget. IMF staff visit Italy for discussions.

    June 2012:

    The eurogroup agrees to provide €100bn to Spain to help it recapitalise its banks. The IMF to help monitor reforms in the country’s banking sector.

    April 2013:

    The IMF reaches a staff-level agreement with Cyprus on an economic programme to be supported jointly with the EU and the ECB.

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