The IMF’s preemptive smokescreen for covering up another foretold program failure

Having bent its own rules, and after turning a blind eye to its own experts’ assessment of the sustainability of Greece’s 2nd ‘bailout’, the IMF is now preparing for failure. Ms Lagarde found it hard to convince her board to go along Europe down the path of locking Greece into yet another unsustainable future.

Had the IMF applied its own strictures, it would never have offered another truckload of SDRs to a country that managed the feat of defaulting and increasing its debt at once. Just like with the first ‘bailout’, the writing is on the wall: Greek debt will again prove unsustainable only, this time, it will be the official sector’s monies that will face the chop once the chickens come home to roost.

So, what does the IMF do to cover its tracks, and to limit the fallout, once the failure of the new Greek program becomes evident? It issues an official report which predicts the said failure but couches it in a way that minimises the IMF’s responsibility for  having indulged the Europeans along the lines of an inane program.

“Greece remains “accident prone” the report says and, for this reason, it may another default and another bailout. When will this happen, according to the IMF? [I]f it struggles to implement measures attached to a new €130 billion bailout…”

Note the subterfuge. Greece will fail if it struggles. The hypothetical ‘if’ pressed into service to turn what is a tautology into something like a causal explanation. Instead of saying “Jill will crash her car”, the same sentence appears more ‘analytical’ by rephrasing it as follows: “Jill will crash her car if she loses control of it.”

“If the program goes off track, Greece’s capacity to meet its obligations to the fund would hinge critically on the willingness of European partners to continue to backstop Greece’s payments capacity and the Eurosystem’s capacity to backstop bank liquidity while further efforts are put in place to stabilize the Greek economy,” the IMF report warned.

The gist, of course, lies in the fear that the IMF will lose its dough if the Europeans do not come up with another ‘bailout’ loan, in view of the certainty of the current program’s failure. To cover up for the fact that the IMF should never have accepted to participate in the present sham of the program, its report utilises the full panoply of a single word: of the hypothetical ‘if’. Note the way the last quoted sentence began: “If the program goes off track…” The tragic truth here is that everything that follows that hypothetical (i.e. the repercussions of the 2nd Greek bailout’s impending failure) will happen with mathematical precision even if the program remains on track. Assuming that the Greek government sticks to its implementation (fiscal adjustment, structural reforms etc.), the elephant in the room is that the utter lack of liquidity and the dearth of demand (both of which are getting exponentially worse, daily) will guarantee the translation of the implemented cutbacks into lower tax revenues, even lower growth and stubborn deficits.

The IMF’s strategy is clear. They were forced by political considerations to back Europe’s unsustainable 2nd Greek program. They know that its failure is predetermined, as it was foreshadowed by the IMF’s own sustainability analysis. They fear that the next logical step is a partial write down of official sector debts, including the IMF’s. And what they do? They use a contrived hypothetical, a little ‘if’, to turn a tautology into an analytic-looking thesis so as to cover their track and do that which has become a bit of a habit recently: blame the Greek economy for not responding to poison as if it were the appropriate medicine.


  • it should be very helpful if your articles were also in greek,and it should also helpful for all of us if you continue writting in greek blogs.Me personally and some friends we would like to thank you for your alternative and helpful view of our crisis.

  • Let me translate it for you:

    “If Greece engages in unwanted pursuits (i.e. democratic elections) instead of obeying the strict orders of the firm which subcontracted us (Merkel Horribilis Limited), we may have to default her again”.

    In other words, the affable Ms. Lagarde is saying that free will time is over and if the prisoner does not cooperate with the authorities, further measures will be taken. She could have easily said “wake up people, you now belong to a forced labor camp” and we would have understood it just the same.

  • Believing that patients should respond to poison as medicine sounds like homeopathy. The advantage of homeopathy over economics is that it prescribes minute, not massive, amounts of poison.

    Choose your pseudoscience carefully.

  • The old saying goes that when you see someone smiling among the ruins, he has found somebody to throw the blame. IMF and the European leaders have done just that. “If whatever we say does not happen, it’s because the greeks screwed up again”; and then they smile contentedly. Obviously the greeks have a limitless ability to spoil all the good plans the wise europeans lay out, and somehow at the same time, miraculously move all the banks’ losses to the public coffer. The strange thing is not that every government points righteously to Greece, but that there are still people who actually fall for this idiocy.

    Obviously the Rich-Europeans have no intention of acknowledging ever having done something wrong. So after Greece falls, it will be the bad Portuguese, the lazy Spaniards and the stealing Italians. Then I suppose the French, Belgians and Austrians will follow, with the Dutch closing the door. Finally, they willl have to pass laws obliging all afomentioned parties to buy German and Scandinavian products, for their own good of course, and to sign agreements forfeiting any future claims to national resources, in the name of european solidarity and stability.

    Just as long as the banks don’t take any losses, all is good and nice.

  • I just skimmed the report and I see that there is a lot of pessimism about the future of the program, if Greece stays in the EZ.

    By contrast, the arguments on EZ exit, although presented in neutral language and tone, seem to give a nudge in that direction. In the end, it is said that it all comes down to “commitment” on behalf of Greece and the rest of the EZ. I wonder how many weeks it will be before this is brought more to light.

    Yanni, are you still strongly opposed (vs weakly opposed, or in favor) to a coordinated EZ exit?

    PS. If, right after exchanging the bonds for foreign law, we get a “nudge” out, the biggest haircut in history should be renamed as the biggest swindle in the long history of banking fraud.

    • To be perfectly honest, I have started to have serious doubts if staying in the Euro is a good thing.
      If the economy was hardly eligible to enter the euro back in 2002, it is now totally unsuitable for the euro.

      Furthermore, if the internal devaluation target was 10-20% then staying in the euro would be ok. But it now appears that the target is 40%ish, and it is impossible to achieve that level of internal devaluation without most people loosing their houses (mortgages), extending loans to 30-40 years (forever in debt) and zero investments and exponential taxation.

      It appears that internal devaluation is many times more destructive for the economy than external devaluations we were used to.
      If we go from default(private) to default(official) for next 10 years in a ever downward death spiral, I doubt anything will be left in this country by 2020…

  • Talk of moral hazard: isn’t the real lesson here that a country that finds itself in an impossible predicament (i.e. Greece circa early 2010) would be better off looking after its own interests, abandoning so-called solidarity with its partners, and proceed to default forthwith?

    Other countries will think twice of subjecting themselves to the kind of scapegoating and economic destruction that Greece has subjected itself to.

  • It is unbelievable. Todays interview of Kathimerini with Mr.Thomsen (IMF). Thomsen, being asked, if the IMF would have chosen a “lighter” austerity path for Greece if it were not Germany, he answered: Yes, the IMF proposed to slow down the austerity, but the *greek government* (!!!!!) opposed to that, it feared the reaction of the markets and so it chose to follow the present plan. Now, what do you call that in psychotherapy???????

    • @Xenofon
      Surprisingly enough,the notorious IMF is ending up being softer than the other members of the Troika.

      The latest IMF staff report on the Greek economy contains a detailed analysis of the fund’s view on the economic situation in Greece and its future prospects. Key elements of the report include:

      The economy is expected to contract by 5% in 2012, with the debt ratio leveling at 167% of GDP in 2013.
      Bank recapitalization due to the PSI and NPLs is projected to approach 50 billion €, lowering gains from the PSI deal (actually government debt will increase since new funding for the period 2012 – 14 will be close to 173 billion €).
      Budget adjustments of 2.75% of GDP are required for 2013 and 2014, in order to achieve a sustained primary balance of 4.5% of GDP (2012 balance projection is close to 1%).
      Potential growth is calculated around 2%, while long-term growth is lowered to 1-1.5%, making long-term debt sustainability challenging.
      ULC competitiveness deficit stands at 15% and is required to be eliminated within the next 3 years, mainly through real wage adjustments.
      Overall, the task of stabilizing the Greek depression, without destroying the social fabric seems challenging (to say the least). Debt sustainability is based on almost impossible terms, which include strong continued fiscal consolidation of more than 5.5% of GDP, closing of the competitiveness gap and a sustained rebound in economic activity within the following year.

      What is very interesting is the fund’s own view on the capacity of internal devaluation schemes to produce working results, especially compared to the route of currency devaluation. In general, it seems that even the IMF is not sure about its own medicine having positive effects, while projected cumulative output loss is comparable to those of Argentina and Latvia.


      Internal devaluations are almost inevitably associated with deep and drawn-out recessions, because fixed exchange rate regimes put the brunt of the adjustment burden on growth, income, and employment. Depending on the size of the imbalances, the strength of adjustment measures, and the responsiveness of key macroeconomic variables, the duration of the initial adjustment period has ranged from 5 quarters (Hong Kong) to 15 quarters or more (Argentina before abandoning convertibility), while the depth of the downturn has varied from shallow growth recessions (Germany, Netherlands) to deep economic collapse accompanied by devastatingly high unemployment and emigration (Latvia).

      Restoring competitiveness by way of internal devaluation has proved to be a difficult undertaking with very few successes. Countries with outright exchange rate devaluations usually recover faster.

      Country experience suggests several factors are needed for internal devaluation to work. The most important preconditions are an open economy with high factor mobility and a high degree of wage and price flexibility.

      Despite deep nominal declines in wages and pensions, real effective exchange rate depreciations have been regularly only modest due to only limited pass-through to prices (Baltic states, Argentina, Greece). Furthermore, private sector corporations are more likely to cut employment than to fully adjust wages, even in fairly flexible labor markets (Latvia). It also takes a long time for resources to shift from the non-tradable to the tradable sector, and both persistent skill mismatches and lack of increased investments in the tradable sector preclude full factor reallocation (former East Germany, Latvia). External adjustment therefore works predominantly through import compression rather than an expansion of exports—and oftentimes imports contract long before any real depreciation of the exchange rate. Finally, the often observed deterioration in asset quality and large increases in non-performing loans suggest that balance sheet effects are not limited to outright exchange rate devaluation—they only materialize more slowly in the process of internal devaluation as incomes fall but debt service does not.

      The experience of Argentina in 1998–2002 shows that an economy can get trapped in a downward spiral in which adjustment through internal devaluation eventually proves impossible, and the only way to an eventual recovery remains default and the abandoning of the exchange rate peg.

      Argentina ended convertibility in January 2002, almost four years into a deep recession that saw a 20 percent cumulative loss in output, culminating in sharp increases in interest rates, bankruptcies, unemployment, and poverty; deep cuts in wages and pensions; deteriorating asset quality, and deposit runs. The banking system collapsed and economic activity came to a virtual standstill in the first quarter of 2002. Nevertheless, only one quarter later the economy embarked on a rapid and sustained recovery, achieving 8.5 percent average real GDP growth over the following six years. The pre-recession output peak was exceeded after three years. Interestingly, despite a large and permanent real depreciation of more than 50 percent and a significant price boom in Argentina’s agricultural export products during this period, net exports contributed positively to GDP growth only in 2002, before turning negative again in the following years.

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