Regrets? The IMF has few

Anti-austerity advocates will be disappointed, but the IMF stands by its actions in Greece. Harsher spending cuts, it says, would have been even better.

Regrets? The International Monetary Fund has had a few.

But those seeking to hold up a new report by the Fund on its Greek bailout as a clarion call for anti-austerity will be sorely disappointed.

The report “Greece: Ex post evaluation of exceptional access under the 2010 stand-by arrangement”  looks at the aftermath of the first bailout package for Greece.

Assembled in May 2010, the bailout consisted of  €110 billion in funding, including  €30 billion from the IMF. This, as the fund notes, was its biggest ever bailout. 

In return, Greece signed up to its now infamous austerity measures including raising taxes, including the Value Added Tax, personal income taxes and a new property tax. There were also cuts to public sector salaries, bonuses and allowances.

European private bank creditors were left untouched as the Greek government was forced to do all the heavy lifting to meet debt reduction targets.

So how did that work out?

The intention of the austerity measures was to reduce public sector debt to GDP to 120 per cent by 2020. But overly optimistic forecasts for GDP and inflation mean that debt is still in line to be at 180 per cent of GDP by then.

Greece’s real GDP last year was, in the event, 17 per cent lower than in 2009. The bailout assumed only a 5.5 per cent decline. Greece’s jobless rate has soared to 25 per cent. The IMF had expected 15 per cent.

Wages did not fall by as much as expected, meaning higher unemployment than otherwise.

The severity of the recession ultimately put Greek banks under more pressure from non-performing loans. When the largest state owned bank, ATE, failed a stress test in mid-2010, it had to be recapitalised. This sparked fears about the banking system leading to a rush of bank deposit withdrawals.

The Greek economy remains mired in recession.

So the IMF is admitting its austerity package was wrong, right? Well, no. The IMF report is unrepentant that austerity was needed. 

“It is difficult to argue that adjustment should have been attempted more slowly,” the report authors conclude.

Doing so would have meant a more costly bailout bill or that Greek debt would not have been on a sustainable reduction path - a precondition for IMF funding.

The IMF does berate itself for its forecasts. In a relatively closed economy with no independent exchange rate, the shock from fiscal contraction was likely to be more  concentrated than first assumed. The assumed fiscal multiplier of 0.5 was “too low”, the IMF now accepts. A lack of liquidity for households and a lack of effective monetary policy meant a fiscal multiplier of nearly double that was appropriate.

While the IMF is still happy with the size of austerity, it now thinks it should have been achieved through harsher spending cuts rather than revenue measures like tax hikes. In the event, the contribution from both was about 50:50.

The IMF wishes there had been more public sector sackings, instead of just wage cuts and the agreement to replace only one fifth of retiring public servants.

This lack of action on public sector jobs meant more lay offs in the private sector. The IMF thinks this is evidence that “The burden of adjustment was not shared evenly across society.” 

The IMF would also have preferred a “liberalisation” of wages setting in the private sector so that wages fell more sharply.

More could also have been done to crack down on tax evasion by high income earners, the Fund concedes.

At the end of the day however, the Fund’s biggest regret seems to have been the failure to have a bigger haircut on Greece’s debts to private sector lenders. 

But this, argues the Fund, was not its fault, but that of the European Commission. 

“An upfront debt restructure would have been better for Greece although this was not acceptable to the Euro partners.”

It’s hard to argue with that.

Ultimately, European countries like Germany and France acted to protect their investors against large-scale write downs. Perhaps that was legitimate, given the widespread risk of financial contagion and concerns about bank collapses that a haircut would have created in the early days.

But that bank haircuts were eventually accepted by all parties was a sign they should have been attempted more from the start, reducing the need for harsh austerity.

So is this report an admission of a failed austerity program, as some overnight headlines would suggest? 

Hardly. The IMF report ends with a pat on the back that the bailout was successful in giving the Euro area time to build a “firewall” to protect other vulnerable members. 

The IMF is critical of the decision not to pursue debt haircuts sooner. But it blames this on the European leaders, refusing to accept any responsibility for not pushing that avenue more aggressively itself.

So would they do it all again?

In a heartbeat. The bailout was necessary and the austerity measures were necessary too. “Fiscal adjustment was unavoidable, as was the sharp pace of deficit reduction,” the IMF concludes.

Some leopards never change their spots.