Greece Financial Crisis
In a 50-page critique released last week, the IMF has admitted that it was a bit too optimistic with its predictions about the effects of austerity on Greece and its people. As part of its bailout package in 2010, the “troika” – the IMF, European Commission, and European Central Bank, forced Greece to adopt measures to balance its budget and rein in public spending. Forecasts by the three organizations predicted a drop in GDP of just 5.5% in 2010, and an unemployment rate of 15% for 2012. The reality was much more dire, with a drop in GDP over three times the predicted figure, and an unemployment rate of 25% last year.
The IMF report highlighted three main mistakes that it made in rolling out the Greek bailout. The first was that sovereign debt was not restructured immediately, with a haircut on government bonds being delayed until early 2012. This allowed investors to sell their holdings before the haircuts were made. The second was what we previously mentioned, that the IMF underestimated the macroeconomic impact of austerity on growth. Lastly, it admitted that the troika had much difficulty in balancing the different interests of individual stakeholders, including Germany.
The evaluation also criticized the fact that the IMF was too reliant on tax increases to balance the Greek budget. Its Stand-By Arrangement (SBA) in 2010 allowed the IMF to bring in VAT increases, property taxes, higher income taxes, as well as provisions to improve tax collection. The report explains that tax increases were chosen instead of spending cuts as they were quicker to implement and faced less resistance. This was despite the fact that much of Greece’s deficit came about through unbridled spending in the 2000s.
“Notable” failures as a result of the program were also mentioned. These include a continued lack of confidence in the Greek market, a loss of 30% of deposits in the banking system, and public debt remaining at high levels, necessitating restructuring.
Despite the policy mistakes made by the IMF, there is also a feeling that the Greek government hasn’t done enough in the way of reforms and ensuring that it is on the path to recovery. Economics professor Yanis Varoufakis believes that Greece is still in a similar situation as in 2010, with an unsustainable debt, an enduring recession, and a dysfunctional banking system. The government continues to blame the troika for its current situation, and has been reluctant to accept responsibility for its actions.
While the admission of its shortcomings by the IMF means that future approaches to sovereign crises may be less unilateral, all parties must share the burden of responsibility for succeeding measures to be effective.