When governments borrow too much, and cannot repay, it generally falls to the IMF to sort things out. In playing this role, the IMF should be pretty tough on creditors. As Interfluidity so lucidly points out, this is where real moral hazard lies.
So what went wrong with Greece? Remember the Troika made a huge mistake in using their citizens’ money to lend to Greece so Greece could partially repay these private sector creditors - that is where most of the Troika’s rescue package went. The IMF’s own internal analysis was deeply flawed (being predictably wrong in how austerity would impact on the Greek economy), and even then the deal failed its own tests, so special dispensation had to be made.
The IMF should have been very worried about motivations here. After all, many of these creditors were banks from European countries, so the motivations of those bailing out these creditors were conflicted to say the least. They were nevertheless persuaded to go along because of fears of contagion. If the worry was contagion to other countries governments that was an obvious mistake, because it happened anyway but could have been solved ‘at a stroke’ by the ECB (as it eventually was). If the worry was a collapse in the European banking system, then that was the responsibility of the governments concerned, and not the Greek people.
To the present, and the negotiations that failed. Forget all the fluff you read in most papers about this. What is quite clear is the following. A deal could have been done if the Troika had allowed debt restructuring to be part of the package. The IMF agrees that debt needs to be restructured, as do most economists. It has made no secret of this, yet it has consistently soft pedalled when it came to dealing with the rest of the Troika. So it was allowed to be kept off the table in the current negotiations by the Troika: vague promises to look at this after a deal had been agreed would never be enough for Syriza to sell the deal. There are two reasons why Germany might have wanted it to remain off the table. One is that it never wanted a deal; the other is that to include it would have been politically embarrassing for German politicians.
What seems abundantly clear is that the IMF should have had no truck with either concern. It has to be tough on creditors, and in this case the creditors were the European institutions. It clearly had the political power to face down European governments on this issue, and if it had done so a deal could have been achieved. The only conclusion I can come to is that the IMF on this occasion has been captured by the rest of the Troika. [1] [2] [3] As Ashoka Mody puts it, it has become trapped by the priorities of [selective] shareholders, including in recent years the U.K.and Germany.
The following are not really true footnotes - they are too important for that - but I wanted to keep the main text crystal clear.
[1] Peter Doyle has also noted how dubious the IMF’s interventions on essential ‘reforms’ are both in economic and political terms. (If this reportis true, it is even worse.) While other parts of the IMF seem to understand multipliers (see [2] below), those in charge of the negotiations seem to take a more German view. [Postscript: Ashoka Mody's verdict on this IMF analysis is restrained but blunt.]
[2] One of the reasons that it is part of the IMF’s job to be tough on creditors is that creditors have no concern for social welfare, by which I mean the aggregate welfare of both creditors and debtors combined. (Although, as Interfluidity says, you might have hoped differently on this occasion.) As this point is hardly ever made in the media let me set it out here (the numbers are based on a FT piece by Martin Sandbu). To achieve a primary surplus of 1% of GDP to transfer to the Troika, the Greek government needs to undertake austerity that will reduce Greek GDP by 3% (assuming a multiplier of 1.5, and a tax/transfer loss from lower GDP of a third). That reduction in GDP is a social loss (the loss to the Greek economy is 3% plus the 1% transfer) - at best pure waste, and probably for some the cause of much suffering.
[3] Here is the former head of the IMF's European department, on the need for both debt restructuring and the dangers of demanding larger primary surpluses.
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