The International Monetary Fund has published a scathing internal self-assessment of its bailout of Greece three years ago. It isn't pretty.
The IMF underestimated the damage that fiscal austerity would do to the Greek economy in its earliest rescue of the nation in 2010. It was too slow to promote a write-down of the nation's debts to more sustainable levels. And it was compromised by a sometimes unwieldy partnership with major European institutions in what became known as the "troika."
The result of these "notable failures," enumerated in an "Ex-post evaluation" that the IMF published Wednesday, is the depression-stricken nation that is Greece today. The nation's unemployment rate is 27 percent and economic activity remains well below its levels of half a decade ago.
"Market confidence was not restored, the banking system lost 30 percent of its deposits, and the economy encountered a much-deeper-than-expected recession with exceptionally high unemployment." Public debt remained too high, Greece waited too long to restructure its debt, and "structural reforms stalled and productivity gains proved elusive."
The newly released document is an after-action report of sorts, an attempt by IMF staff to grapple with the lessons from Greece. It focuses in the initial Greek rescue package, approved in May 2010, which has since been reworked multiple times.
The staff review argues that there was no avoiding a steep economic contraction, given the excesses of Greek government borrowing and spending in the years before the crisis. "A deep recession was unavoidable," the report concludes. But it also holds that a series of decisions by the IMF and the other members of the troika made it worse than it otherwise might have been.
Back in 2010, IMF staff had believed that spending cuts by the Greek government would have a multiplier effect of only 0.5 percent as less government spending was offset by more economic activity elsewhere. They now think the multiplier is twice that, given Greece's situation.
In those early days of the Greek rescue, the IMF teamed up with the European Commission and European Central Bank to form the troika, a model which would later be used in Ireland, Portugal and elsewhere. But "there was no clear division of labor" and "none of the partners seemed to view the arrangement as ideal," the new IMF report finds, noting that there were "occasionally marked differences of view within the Troika, particularly with regard to growth projections."
It was an unusual situation in which the troika members had to negotiate with each other to arrive at their shared position before in turn negotiating with the Greek government over terms of the bailout.
Indeed, the presence of the ECB and Commission may have been a factor behind one of the biggest failures the IMF review identifies: being too slow to conclude that Greece's debts were fundamentally unmanageable and that its creditors would need to take losses. The ECB in particular was dead-set against any such "haircuts" for bondholders, almost until the day they were finally agreed to in the summer of 2011.
The new report essentially argues that the Greek economy suffered unnecessarily because of delays in recognizing what some felt was obvious as far back as 2010 — that Greece would not be able to repay all that it owed.
"Upfront debt restructuring was not feasible at the outset," the report says. "Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output."
In other words, moving earlier to restructure Greece's debts would have meant more of the losses suffered by banks and others who owned Greek bonds, and less by the Greek population.
Finally, the report concludes that the rescue wasn't adequately focused on the "political economy of adjustment," or making sure that the program of reforms could maintain political support. Reform efforts "might have been more enduring if more visible progress had been made with regard to getting those on high incomes to pay their taxes," the IMF concludes, and "by shielding those on low incomes from cuts in state pensions."