by The Independent Evaluation Office of the International Monetary Fund released a critical report on IMF supported policies in Greece, Ireland and Portugal. It questions the legitimacy of certain decisions. The executive summary states that [t]he IMF’s pre-crisis surveillance mostly identified the right issues but did not foresee the magnitude of the risks … missed the build-up of banking system risks … shared the widely-held “Europe is different” mindset … Following the onset of the crisis, however, IMF surveillance successfully identified many unaddressed vulnerabilities, pushed for aggressive bank stress testing and recapitalization, and called for the formation of a banking union. … In May 2010, the IMF Executive Board approved a decision to provide exceptional access financing to Greece without seeking preemptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability. The risk of contagion was an important consideration … The IMF’s policy on exceptional access to Fund resources, which mandates early Board involvement, was followed only in a perfunctory manner. The 2002 framework for exceptional access was modified to allow exceptional access financing to go forward, but the modification process departed from the IMF’s usual deliberative process whereby decisions of such import receive careful review.
Topics:
Dirk Niepelt considers the following as important: Accountability, Conditionality, Debt restructuring, Exceptional access financing, Greece, International Monetary Fund, Ireland, Notes, Portugal, Surveillance, Transparency, Troika
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The Independent Evaluation Office of the International Monetary Fund released a critical report on IMF supported policies in Greece, Ireland and Portugal. It questions the legitimacy of certain decisions. The executive summary states that
[t]he IMF’s pre-crisis surveillance mostly identified the right issues but did not foresee the magnitude of the risks … missed the build-up of banking system risks … shared the widely-held “Europe is different” mindset … Following the onset of the crisis, however, IMF surveillance successfully identified many unaddressed vulnerabilities, pushed for aggressive bank stress testing and recapitalization, and called for the formation of a banking union. …
In May 2010, the IMF Executive Board approved a decision to provide exceptional access financing to Greece without seeking preemptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability. The risk of contagion was an important consideration … The IMF’s policy on exceptional access to Fund resources, which mandates early Board involvement, was followed only in a perfunctory manner. The 2002 framework for exceptional access was modified to allow exceptional access financing to go forward, but the modification process departed from the IMF’s usual deliberative process whereby decisions of such import receive careful review. Early and active Board involvement might or might not have led to a different decision, but it would have enhanced the legitimacy of any decision. …
The IMF, having considered the possibility of lending to a euro area member as unlikely, had never articulated how best it could design a program with a euro area country … where there was more than one conditional lender, the troika arrangement … proved to be an efficient mechanism … but the IMF lost its characteristic agility as a crisis manager. … the troika arrangement potentially subjected IMF staff’s technical judgments to political pressure …
The IMF-supported programs in Greece and Portugal incorporated overly optimistic growth projections. … Lessons from past crises were not always applied, for example when the IMF underestimated the likely negative response of private creditors to a high-risk program. …
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. … Some documents on sensitive issues were prepared outside the regular, established channels; the IEO faced a lack of clarity in its terms of reference on what it could or could not evaluate; and there was no clear protocol on the modality of interactions between the IEO and IMF staff. The IMF did not complete internal reviews involving euro area programs on time, as mandated, which led to missed opportunities to draw timely lessons.
It lists the following recommendations:
… should develop procedures to minimize the room for political intervention in the IMF’s technical analysis. … should strengthen the existing processes to ensure that agreed policies are followed and that they are not changed without careful deliberation. … should clarify how guidelines on program design apply to currency union members. … should establish a policy on cooperation with regional financing arrangements. … should reaffirm their commitment to accountability and transparency and the role of independent evaluation …
In her response, the IMF’s Managing Director emphasizes that the IMF-supported programs did work in the cases of Ireland and Portugal (and in Cyprus) while Greece was a special case. She supports the report’s last four recommendations but disagrees with the premise of the first.