IMF swayed by politics during eurozone crisis, say inspectors
The International Monetary Fund repeatedly succumbed to political pressure from European governments during the eurozone debt crisis, according a damning internal report on bailout strategy that will fuel debate over whether it should continue to fund Greece.
Their assessment raises fresh questions over the failure to restructure Greek debt at the time of its first bailout in 2010. The report, released on Thursday, said key decisions had already been reached in Europe by the time the fund became involved in the rescue effort.
Christine Lagarde, the IMF’s managing director since 2011, backed some of the inspectors’ recommendations for improving internal procedures but dismissed calls from the independent evaluation office (IEO) to fortify the fund’s defences against political interference.
“I support the principle that the IMF’s technical analysis should remain independent,” she said in a statement. “However, I do not accept the premise of the recommendation, which the IEO failed to establish in its report, and thus do not see the need to develop new procedures.”
The fund’s involvement in eurozone programmes had been a “qualified success” in the face of unprecedented systemic challenge, Ms Lagarde said.
Nonetheless, the report is likely to fan suspicions of some emerging market IMF shareholders and some of its staff that it repeatedly bent its own rules to help out the eurozone.
“It highlights the concerns of many — both inside and outside the fund – that the fund’s treatment of developing and emerging market economies is quite different from its treatment of advanced economies,” said Eswar Prasad, economics professor at Cornell University and former IMF official.
“Political factors seemed to play a bigger role than pure technical considerations in matters involving advanced economies.”
The inspectors said the troika arrangement — in which the IMF worked alongside the European Commission and European Central Bank — potentially subjected the technical judgment of IMF staff “to political pressure” from an early stage.
“The European Commission, in the area of emergency crisis lending, acted as the agent of the eurogroup, which in turn represented member states and decided whether to provide assistance.
“Interviews and some internal documents suggest that political feasibility in creditor countries was an important consideration for [European Commission] staff and that IMF staff occasionally felt pressured to accept a less-than-ideal outcome.
The inspectors said the IMF executive board, responsible for the fund’s day-to-day business, was in the dark on sensitive policy questions for Greece and Ireland, which also received a bailout in 2010.
Some executive board members, who usually meet several times each week, learned more from the press throughout the crisis period than from informal board meetings.
The board approved the first Greek deal in May 2010 “without seeking pre-emptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability”.
“The risk of contagion was an important consideration in coming to this decision. The IMF’s policy on exceptional access to fund resources, which mandates early board involvement, was followed only in a perfunctory manner.”
The fiscal troubles of Greece remain unresolved, fanning concern about regional instability at a time of upheaval in Turkey. In recent days the US has pressed the country’s European creditors to allow a debt restructuring to restore order in its finances.
The inspectors, led by Japanese academic Shinji Takagi, found the IMF had considered the prospect of lending to a eurozone country to be unlikely and had never set out how such programmes might be designed.
The report said IMF managers had moved some time before the Greek rescue to explore contingencies. Still, the work of special task forces “was so secret that few within the institution knew of their existence, let alone the content of their deliberations”.
Ms Lagarde said IMF-backed programmes bought time to build firewalls, prevented the crisis from spreading, and restored growth and market access in Ireland, Portugal and Cyprus.
“Greece, however, was unique: while initial economic targets proved overly ambitious, the programme was beset by recurrent political crises, pushback from vested interests, and severe implementation problems that led to a much deeper-than-expected output contraction.
“On the other hand, Greece undertook enormous adjustment with unprecedented assistance from its international partners. This enabled Greece to remain a member of the euro area — a key goal for Greece and the euro area members.”