"The International Monetary Fund’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 impending crisis, and collectively failed to grasp an elemental concept of currency theory.
This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.
It describes a "culture of complacency," prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.
The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way European Union insiders used the fund to rescue their own rich currency union and banking system.
The three main bailouts for Greece, Portugal and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000pc of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the fund between 2011 and 2014.
In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive "ad-hoc task forces". Mrs Lagarde herself is not accused of obstruction.
“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff," it said.
The report said the whole
approach to the eurozone was characterised by “groupthink” and
intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a
multinational currency union – because they had ruled out any
possibility that it could happen.
“Before the launch of the euro, the IMF’s public statements tended to emphasise the advantages of the common currency," it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.
“After a heated internal debate, the view supportive of what was perceived to be Europe’s political project ultimately prevailed,” it said.
This pro-EMU bias continued to corrupt their thinking for years.
“The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro-area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said.
The IMF persistently played down the risks posed by ballooning current account deficits and the flood of capital pouring into the eurozone periphery, and neglected the danger of a "sudden stop" in capital flows.
The possibility of a balance of payments crisis in a monetary union was thought to be all but non-existent,” it said. As late as mid-2007, the IMF still thought that “in view of Greece’s EMU membership, the availability of external financing is not a concern".
At root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt crises. States facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk.
“In a monetary union, the basics of debt dynamics change as countries forgo monetary policy and exchange rate adjustment tools,” said the report. This would be amplified by a “vicious feedback between banks and sovereigns”, each taking the other down. That the IMF failed to anticipate any of this was a serious scientific and professional failure.
In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed.
The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.
The IMF was in an invidious position when it was first drawn into the Greek crisis. The Lehman crisis was still fresh. “There were concerns that such a credit event could spread to other members of the euro area, and more widely to a fragile global economy,” said the report.
The eurozone had no firewall against contagion, and its banks were tottering. The European Central Bank had not yet stepped up to the plate as lender of last resort. It was deemed too dangerous to push for a debt restructuring in Greece.
While the fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bailout sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability.
A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced to cut – what ex-finance minister Yanis Varoufakis called "fiscal water-boarding".
“The automatic stabilisers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report.
The attempt to force through an
"internal devaluation" of 20pc to 30pc by means of deflationary wage
cuts was self-defeating since it necessarily shrank the economic base
and sent the debt trajectory spiralling upwards. “A fundamental problem
was the inconsistency between attempting to regain price competitiveness
and simultaneously trying to reduce the debt to nominal GDP ratio,” it
said.
The IMF thought the fiscal multiplier was 0.5 when it may in reality have been five times as high, given the fragility of the Greek system. The result is that nominal GDP ended 25pc lower than the IMF’s projections, and unemployment soared to 25pc instead of 15pc as expected. “The magnitude of Greece’s growth forecast errors looks extraordinary,” it said.
The strategy relied on forlorn hopes that the "confidence fairy" would lift Greece out of this policy-induced nose-dive.
“Highly optimistic” plans to raise $50bn from privatisation sales came to little. Some assets did not even have clear legal ownership.
The chronic “lack of realism” lasted until late 2011. By then the damage was done.
The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union.
Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report.
The IMF thought the fiscal multiplier was 0.5 when it may in reality have been five times as high, given the fragility of the Greek system. The result is that nominal GDP ended 25pc lower than the IMF’s projections, and unemployment soared to 25pc instead of 15pc as expected. “The magnitude of Greece’s growth forecast errors looks extraordinary,” it said.
The strategy relied on forlorn hopes that the "confidence fairy" would lift Greece out of this policy-induced nose-dive.
“Highly optimistic” plans to raise $50bn from privatisation sales came to little. Some assets did not even have clear legal ownership.
The chronic “lack of realism” lasted until late 2011. By then the damage was done.
The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union.
Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report.
“If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said. Better late than never."
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Added: From UK Telegraph article: "Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece– is finally recognised in the report."
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Added: "Full transcript of the Yanis Varoufakis | Noam Chomsky NYPL (NY Public Library) discussion," Posted on by
"The full transcript of my discussion with Noam Chomsky at the New York Public Library (26th April 2016)"
Yanis discusses Jan. 2015 election in Greece: Leading up to the election, media relentlessly attacked Greek citizens, said they were the problem, that the world would collapse if they didn't vote the EU preferred way. Greeks may not have had any good choices in the election, but one thing they knew is they were sick and tired of being berated in the media:
Yanis discusses Jan. 2015 election in Greece: Leading up to the election, media relentlessly attacked Greek citizens, said they were the problem, that the world would collapse if they didn't vote the EU preferred way. Greeks may not have had any good choices in the election, but one thing they knew is they were sick and tired of being berated in the media:
In the April 2016 conversation with Yanis Varoufakis, Chomsky mentions those who govern only do so as long as people consent:
"It is by consent alone that the powerful are able to govern. Meaning that if the governed refused to consent, to use your words, the game is over."...
"NOAM CHOMSKY:...He was probably quoting David Hume, who in “The First Principles of Government” makes that point very clearly. He says it’s surprising to see the easiness with which the great mass of the population is subordinate to their governors, because power is in the hands of the governed, and if we inquire into the means by which this wonder is achieved we see that it is by consent alone that the powerful are able to govern. Meaning that if the governed refused to consent, to use your words, the game is over.
YANIS VAROUFAKIS: That’s exactly right....Because you’ve got to remember our government won the election in January 2015 with a mandate to speak truth to the powerful, to say no to them....We had the whole media of Greece and the world completely and utterly, militantly against us....The banks were closed, people didn’t have access to their money. Pensioners were fainting in line in front of closed banks to get some money out in order to feed themselves. The press is bombarding, terrorizing people in their living rooms on their television sets, saying to them that if they went with us against the troika, Armageddon is going to come, and we’ll be expelled from the universe, not just Europe. (laughter) And those crazy, magnificent Greeks gave us 62 percent. Why? Because the one deficit they could not bear was the deficit of dignity."...
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Yanis is asked if what happened in Greece was inevitable:
YANIS VAROUFAKIS: "To say that it was inevitable that we would surrender and that the alternative would be worse is effectively to confirm that there is no alternative to barbarism, and I shall not confirm this."...
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Comment: I identified with Greek citizens being attacked around the clock by the media for the benefit of bankers. In America's case, these attacks by the globalist political class and media have been ongoing for decades. You'd think it would be enough for them to have destroyed this country, destroyed lifetimes of work and sacrifice, but it's not. They insist on filling the air with their seething hatred of us, usually that we're racists and xenophobes for wanting to have a country. (We don't have a country right now because we don't have a southern border. You can't be "xenophobic" about a country you don't even have). You'd even think they'd be happy that many impoverished Americans are quietly committing suicide these days, but no. They mock the dead for allegedly being stupid (white) hicks. In 2006, George W. Bush, called us racists for not wanting to give Arab governments control of our ports. (The failed Dubai Ports deal). It's 2016 now, so this has been going on for a long time. P.S. I'm familiar enough with Noam Chomsky that I wouldn't normally seek him out for inspiration. His words happened to be helpful in this case.
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