Greek lessons for the IMF

With Greece now well on its way to exiting the euro, it is not too early to draw lessons for the International Monetary Fun (IMF) from its unfortunate Greek lending program. Since never before has the IMF lent to a single member country on the scale that it has done to Greece. And never before has an IMF lending program of significance produced such disappointing results.

{mosads}Under normal circumstances, the IMF is not supposed to lend to a country in a single year more than 200 percent of its IMF quota and not more than 600 percent of quota on a cumulative basis. However, as the IMF’s lending to Greece over the past five years amply testifies, under the IMF’s “exceptional access” lending policy, there are virtually no limits on how much the IMF can lend to an individual country. Despite the IMF’s rules that it is not supposed to resort to exceptional access lending when a country’s public debt is unsustainable or when the chances of program success are not good, the IMF has managed to lend to Greece some 1,860 percent of quota. That is more than three times the normal maximum IMF limit for such lending.

When U.S. Treasury officials are questioned in Congress as to whether IMF lending might not put U.S. taxpayer money at risk, they routinely point out that in its 70-year history, the IMF has not had a country of significance default on its IMF loans. However, what Treasury officials omit to inform Congress is that the IMF has never loaned on the scale that it has done in recent years to countries in the European economic periphery. In particular, they fail to note that currently the IMF has loans outstanding to Greece in the amount of around $30 billion. That sum amounts to around 15 percent of Greece’s gross domestic product (GDP) and around half its total exports of goods and services. This has to raise serious questions as to whether the IMF will in the end be repaid.

Lending to a country on such an exceptional scale might have been justifiable had such lending produced beneficial results. However, it is difficult for the IMF to make such a claim. The monumental budget austerity that the IMF imposed on Greece, within a euro straightjacket that precluded devaluation to boost exports, has reduced the country to penury and has destroyed its social fabric. Whereas the IMF had supposed its lending program would soon put Greece back on an economic growth path, it contributed to a six-year Greek economic depression on the scale of that experienced by the United States in the 1930s. Indeed, Greek output today is a staggering 22 percent below its pre-crisis 2008 peak, while unemployment stands at over 25 percent.

A principal objective of the IMF’s lending program was to restore Greece’s public debt sustainability. However, here too the IMF’s program has failed miserably. Far from reducing Greece’s public debt to GDP ratio to 110 percent as planned, Greece’s public debt ratio has skyrocketed to 175 percent despite a major rescheduling of its privately held debt in 2012. Most of Greece’s debt is now owed to official sector creditors, which will make a rescheduling of that debt all the more difficult to achieve.

Bad as these failures might have been, the greatest failure of the IMF’s program would seem to have been that of having delayed Greece’s euro exit. Indeed, a basic objective of the IMF lending program was to keep Greece in the euro for fear of causing financial market contagion to the rest of the periphery that might have resulted in the unraveling of the euro. Yet precisely because of IMF-imposed austerity, the Greek economy now finds itself mired in an economic depression, which has caused its politics to fragment and which has sowed the seeds for its exit. One may well ask, what purpose did putting Greece through an economic depression serve if in the end that depression unleashed the political forces that will have forced Greece to exit the euro?

To its credit, the IMF has conceded that in prescribing austerity for Greece within a euro straitjacket, it grossly underestimated the impact that budget belt-tightening would have on the Greek economy. The IMF also has conceded that it misdiagnosed Greece’s initial problem as one of liquidity rather than one of solvency. If the IMF had its druthers, it would not have delayed Greece’s restructuring of its privately held debt, since an earlier restructuring would have reduced the required amount of budget tightening.

There is an even more important lesson that the IMF should draw from its unfortunate Greek experience. It is that its exceptional access lending policy made it all to easy for the IMF to be used by its political masters as a slush fund to avoid needed debt restructuring and to delay necessary exchange rate adjustment. When the Greek dust settles, one must hope that the IMF will go back to the drawing board and reform its lending access limits policy in a manner that will make the IMF less of a slush fund that can be abused by its political masters and more of the catalytic and conditional lender that the IMF once was.

Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.