Managing Director of the International Monetary Fund (IMF) Christine Lagarde said on Tuesday that it was a “matter of honour” for the IMF to acknowledge its forecast error on the fiscal multipliers in the case of Greece and other Eurozone member states.
Addressing the European Economic and Social Committee in Brussels, Lagarde clarified that even in the case that the specific error had been promptly discovered, the IMF’s policy recommendations to Greece would have been the same, but expanded over time.
The IMF head explained that the error with the multipliers was that the impact of the austerity policies implemented in Greece and other eurozone member states was incorrectly calculated in relation to the extent of Greece’s economic recession.
Mrs Lagarde she attributed the error to lack in related expertise in the global economic scene.
The International Monetary Fund has admitted to major missteps over the past three years in its handling of the bailout of Greece, the first spark in a debt crisis that spread across Europe.
Over the last three years a number of senior IMF figures , including Managing Director Christine Lagarde have repeatedly said that Greece's debt level was ' sustainable ' likely to be repaid in full and on time . But at the same time there were many assumptions of errors .
Let us recall that in June 2013 the International Monetary Fund has published a scathing report about how it and the European Union handled Greece’s first €110bn bailout, saying growth assumptions were too optimistic and that debt restructuring should have occurred earlier. In the internal document marked "strictly confidential," the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece's economy, which has been mired in recession for the last six years.
The IMF conceded that it bent its own rules to make Greece's burgeoning debt seem sustainable and that, in retrospect, the country failed on three of its four criteria to qualify for aid.
But the fund also stressed that the response to the crisis, coordinated with the European Union, bought time to limit the fallout for the rest of the 17-nation euro area.
And while IMF officials said the lessons learned would lead them to take a tougher stance in future bailouts, they also said that there was little else the fund could have done at the time.
"If we were in the same situation…we would have done the same thing again," said Poul Thomsen, the IMF's lead negotiator in the bailout talks, referring to its signing on to the deal in 2010 despite the lack of any debt relief.
According to the report , the decision to force losses on private holders of Greek bonds should have occurred much earlier than October 2011, but it argues that resistance from Europe made that impossible.
“Not tackling the public debt problem decisively at the outset or early in the programme created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output,” it says.
“An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners. A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands.”
Once it became clear Greece’s first bailout was not working, IMF and Eurozone leaders agreed to a second €172bn bailout in February last year, a deal that included the €200bn restructuring of privately held debt.
It remains the largest sovereign default in history, and Eurozone officials have vowed they will not repeat the haircuts in other heavily indebted Eurozone countries.
The report argues that IMF staff knew imposing a fiscal squeeze on Greece would be especially painful, but failed to translate that into their growth forecasts, assuming a low “multiplier” from tax rises and government spending cuts.
“The programme initially assumed a multiplier of only 0.5 despite staff’s recognition that Greece’s relatively closed economy and lack of an exchange rate tool would concentrate the fiscal shock,” it says.
The report also says that IMF staff were too optimistic about Greece’s ability to implement reforms. “As it turned out, ownership of the programme did not extend far and little progress was made with politically difficult measures such as privatisation, downsizing the public sector, and labour market reforms.”
It says that there were “occasionally marked differences of view” within the troika of the IMF, EU and Europe seemed to view the arrangement as ideal” but, given that, “co-ordination seems to have been quite good under the circumstances”.
Despite all the self-criticism, however, the IMF says that it was correct to go ahead with the Greece programme
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