The International Monetary Fund (IMF) said yesterday (5 June) that it lowered its normal standards for debt sustainability to bail out Greece and its projections for the Greek economy may have been overly optimistic. The Commission, however, downplayed the importance of the report.
In a report that looked back at the bailout, the IMF for the first time said it lowered its bar for Greece, which could re-ignite concerns about the lender's impartiality.
The IMF said its support for Greece in 2010 was necessary to prevent the nation's problems from spilling over into the rest of the eurozone and the global economy.
"There was, however, a tension between the need to support Greece and the concern that debt was not sustainable with high probability," according to the IMF's evaluation.
"In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases."
After the Greek programme was approved, the IMF and the other bailout lenders – the European Commission and the European Central Bank – required Greece to immediately cut some of its debt and implement structural reforms.
There were "notable failures" in the results, the IMF said. Greece remained in the eurozone and cut some of its debt, but failed to restore market confidence. The economy plunged into one of the worst recessions to ever hit a country in peacetime, with output falling 22% from 2008 to 2012.
Economic woes continue
Greece's economy is likely to shrink for the sixth consecutive year in 2013.
The evaluation said the IMF's assumptions for the Greek economy can "be criticised for being too optimistic."
The report also said the IMF should have pushed more forcefully for private lenders to take a "haircut" on Greece's debt earlier in 2011, once it was clear Greece's debt was not sustainable.
"Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output," according to the report.
The Fund last year said government spending cuts in general may hurt growth more than it had previously thought, and that countries should postpone deep spending cuts while their economies remain wobbly.
According to the evaluation, the Washington-based lender may have been overly constrained by working with its European partners within a monetary union, and not focused enough on ensuring political support existed within Greece for the rapid economic adjustments called for under the bailout.
The report also said there was a problem getting adequate data from Athens on its economy, and the IMF should be more sceptical of official data going forward.
In 2012, the IMF and the other lenders approved a new, longer programme for Greece to help it bring its economy back into gear, once it was clear the previous bailout was not working.
Greece's problems with providing official data may not be a thing of the past, as the Fund said Greece provided inaccurate information to the IMF in January.
Greece, which has had persistent problems in collecting taxes, promised to move 50 auditors to the tax unit responsible for those with high incomes to comply with the IMF's conditions.
Greece told the IMF it had done so in order to receive its next chunk of aid, but in fact only 33 auditors were moved.
The IMF's board decided to give Greece a waiver for the action. Greece has since corrected the problem, the board said on Wednesday.
Greece's current program also still has issues with debt sustainability, the IMF has said. The country may still need some debt relief from its European partners to ensure it can meet the IMF's targets for debt-to-GDP levels, the Fund said in a separate report on Wednesday.
Greece will have a €4 billion financing gap starting from the second half of 2014, the IMF said. It will need to find savings by collecting more taxes and through other measures, equal to a total of 3.5% of GDP.
"It is positive that the report [about the 2010 program] recognises that there were mistakes in Greece's programme in the past and we hope that they will not be repeated in the future and then create the need for corrective action," a senior Greek government official said, speaking on condition of anonymity.
But the European Commission rejected the IMF view that lenders mishandled the first Greek bailout in 2010 by allowing Athens to delay a debt restructuring to 2012, rather than tackling it from the start.
"The [IMF] report argues that an upfront debt restructuring in 2010 would have been desirable. We fundamentally disagree," Commission spokesman Simon O'Connor told a news briefing.
"The report ignores the interconnected nature of the euro area member states. Private debt restructuring would have certainly risked systemic contagion at that stage," he said.
"It would have also severely undermined the programme. This was the unanimous position of the member states of the euro area and, indeed, of the Troika partners at the launch of the programme," O'Connor said.
Asked about the prospects for future cooperation with the IMF after the criticism in the report, O'Connor said the report was prepared by IMF staff, and not endorsed by the fund's board.
The IMF was one of a trio of international lenders, including the European Commission and the European Central Bank), that in 2010 stepped in to keep the eurozone country from defaulting on its debt and departing the common currency bloc. The IMF pledged about €30 billion to Greece at the time, out of a total package of €110 billion.
Some IMF board members and others criticised the fund for giving Greece so much money in comparison to the size of its economy, accusing the lender of being overly swayed by its European members.
At the time, the IMF insisted Greece's debt levels were sustainable as long as its projections for the economy were accurate.