The International Monetary Fund has been criticised by its own watchdog.
That independent body, the Independent Evaluation Office (IEO), said that the Fund failed to see the scale of the eurozone crisis, was guilty of overly optimistic forecasts while giving the impression that it was treating Europe differently.
Its report considered how the IMF dealt with the eurozone crisis, beginning with the 2010 Greek bailout and continuing with those for Ireland, Portugal and Cyprus.
It recognised that dealing with these problems “posed extraordinary challenges”, but that the IMF missed increased banking risks.
“The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro-area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said.
It supported the use of the ‘troika’ (the IMF, the European Commission and the European Central Bank which organised bailout terms), calling it an efficient mechanism for discussions with governments. But, it said, this weakened the IMF’s “characteristic agility as a crisis manager”.
“The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped create the perception that the IMF treated Europe differently.”
The three main bailouts for Greece, Portugal and Ireland were unprecedented in scale and character. These three were each allowed to borrow massively more than their allocated quota and accounted for 80% of all lending by the fund between 2011 and 2014.
For both Greece and Portugal, the report said there had been “overly optimistic growth projections” with lessons from past crises not always applied.
A sub-report on the Greek predicament said that Greece had had to cope with severe austerity without the help of debt relief or devaluation. There followed a downward spiral with only more cuts demanded, leaving just ordinaryGreek citizens expected to pay the bailout costs.
Christine Lagarde, head of the IMF, recognised the extraordinary nature of the euro area crisis. She said that IMF-supported programmes had “succeeded in buying time to build firewalls, preventing the crisis from spreading, and restoring growth and market access in three out of four cases” (Ireland, Portugal and Cyprus).
She admitted that assumptions about growth in Greece had proved much too optimistic. (The Greek economy shrank by about 30% over the past six years, much greater than IMF predictions).
“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.”
She concluded that IMF involvement has been “a qualified success” and that the IMF “took steps that averted what could have been a much more severe European and even global crisis.”
For the full report, or just the executive summary, see:
http://www.ieo-imf.org/ieo/pages/CompletedEvaluation267.aspx
