Greece Is at the Crossroads With the IMF in Tow


The future of Greece is not the only thing at stake these days. Along with Greece, the International Monetary Fund has been going through a bit of a rough patch following criticism from Europe and its European institutions.

Debt-stricken Greece, having just passed an additional and highly controversial austerity package (worth 13.5 billion Euros) through parliament on November 8, is still waiting for the disbursement of the loan tranche of at least 31.5 billion Euros. This disbursement is part of a 240-billion-euro loan from the country’s Troika of lenders (the European Union, the European Central Bank and the IMF) approved in the spring of 2010 to help solve Greece’s liquidity problem and make its debt sustainable by 2020. A total 150 billion Euros has so far been disbursed to Greece. The delay of the latest disbursement is due to the fact that the IMF and its Euro partners are no longer seeing eye to eye on the prescribed solution.

Greece’s economic crisis and that of the Euro has magnified the differences between the IMF and its Euro partners. The IMF, which was created after World War II with a mandate to provide budget support to war-stricken Europe and to prevent deep and prolonged economic crises such as that of the Great Depression, now finds itself in the odd place of helping a rich country with structural deficiencies.

What’s happening now?

In the news today is talk about how the IMF and Eurozone governments are trying to reach a mutually-accepted solution for Greece’s crisis. They locked horns over how Greece’s debt should be brought down to sustainable levels of 120 percent of Gross Domestic Product. But with economic forecasts bringing it to much higher levels (189 percent in 2013 from 175 percent in 2012), the IMF has warned that the debt is unsustainable and that Greece will never manage to pay it off. The Fund insists that anything above the 120 percent target for 2020 is unmanageable.

The Eurozone (namely Germany — Europe’s largest economy and the biggest contributor to the EU bailout funds) has agreed to extend the loan repayment deadline by two years (from 2014 to 2016). The Fund, however, still finds this unsustainable as a direct response and wants a drastic write-off of Greece’s official debt in order for the country to meet its expected debt to GDP levels. The Eurozone, however, is not too keen on any additional debt restructuring for Greece because this would mean taking losses on their holdings of Greek government bonds.

It remains to be seen how the two sides will resolve the issue. The outcome of today’s Eurogroup meeting may come up with a resolution, but I don’t think it will be a complete solution because the current situation remains dire and the outlook for next year is rather gloomy — not only for Greece, but for other Eurozone countries like France.

What is certain is that the IMF has a half-century of technical experience and an undisputed reputation in economic crisis management. This means that no recipe for a solution to Greece’s crisis should be accepted if the IMF is not included in the mix. The financial markets will react badly to an IMF withdrawal. The Fund’s involvement, therefore, is a crucial ingredient. This is why a solution that will mend the relationship between the IMF and its Eurozone partners is essential.

Should the IMF back down to its two European lending partners, its authority would be diminished and quite possibly its reputation hurt. It’s a rather sticky situation the Fund has found itself in and it’s all because it allowed itself to get caught up in Eurozone politics when it agreed to partner with two politically astute institutions – the European Commission and the European Central Bank. The only way out of this predicament now is for the IMF to stick to its guns and convince its European partners to follow its lead.

What this means is that the Fund needs to put politics aside and get back to the basics. Politics are not its job. There’s an urgent need for it to start using its technical assistance muscle more. At the end of the day, it is crucial for the IMF not to become just another continuous bailout provider, but a critical source of knowledge and best practices for Greece.

Misdiagnosing the crisis

As I have repeatedly stressed, Greece’s crisis was misdiagnosed from the start. It was not an accounting or liquidity crisis. Greece was not experiencing a temporary cash flow problem and needed help getting back on track. Greece didn’t just fall off the tracks one day, the tracks had been broken for a long time. Greece’s crisis is a quintessential structural crisis that produces high levels of informality. It is very much a textbook case.

In hindsight, the IMF with its two Euro partners intervened in Greece with an adjustment program that underestimated the gravity of the situation. Assuming that just a little bit of austerity would do the trick, the need for structural reforms was mentioned only for the sake of being mentioned. None of the three lending partners have the know-how to actually apply such reforms. Usually, this is a job for the World Bank — missing from this partnership. The outcome has been a very weak ability of the country to make any radical reforms while the recession deepened.

At the decision table, it seems there was an underestimation of the broken tracks regarding Greece’s productivity — the very high administrative burdens, high levels of bureaucracy, non-integrated land registry and unfriendly business environment. The policy recommendations were based on, I dare say, inappropriate assumptions which in many cases resulted in the weakening of the middle class (the engine to growth). The outcome is an unprecedented rate of unemployment: 25 percent (more than 50 percent among youth).

What needs to be done?

Greece, itself, needs to find its own solution with a strong internal reforms team that can help the country pave its own path of reforms and structural changes. Structural reform does not simply mean quick or rushed privatizations. What it should mean is sustainable growth through an inflow of innovation and technology so the country can promote long-term growth rather than financial bubbles.

While Greeks need to do more internally to help themselves, the IMF’s modus operandi should also change and go back to its basics so that Greece does not become another loan addict, but an economic success story.