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 report
is 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.
[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.
I would argue that this has been and will be the cause of much suffering for the majority, and a tiny inconvenience for the wealthy (but we know that tiny inconvenience=huge suffering in the eyes of those pea princesses). If 25% unemployment isn't a lot of suffering, I don't know what is.
ReplyDeleteThe IMF doesn't speak with one voice. The legalistic, "German" view still persisted unter Strauss-Kahn. Yes, the research wing of the IMF speaks a different language now, but then, these people are the spearhead. It's going to be hard for any politician who has been in power for several years, to simply say, "oops, the economists of the IMF got it wrong the first time. We need to be more lenient." That would also not be good for economics either.
ReplyDeleteOn the contrary, it would be very good for economics. One of the very positive things to say about the IMF is that their ex-post economic analysis of their own decisions by staff members can be very candid - but this analysis is not necessarily accepted by those in charge.
DeleteFrom the point of view of a scientist, you're right, I think. But politicians like Mr. Schäuble will see it as a confirmation of their beliefs that "with five economists in one room, you get five opinions, and if a macroeconomists is among them you get six".
Deletesource in German: http://www.tagesspiegel.de/wirtschaft/diw-feiert-geburtstag-fuenf-oekonomen-fuenf-meinungen/11998460.html
Alexander:
DeleteThat shows that Schäuble, though a lawyer, knows something about economists.
You say that "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)".
ReplyDeleteBut that fear doesn't refer to 2012 when ECB stated the "whatever it takes" policy. If this latter had been said back in 2010 when the fresh greek wound was bleeding, it would have been analogous as letting any major US commercial bank to go under when the american crisis had begun.
As far as I recall two years after this event there was still serious concern about recovery, so that if the EU had cut Greece loose by then (2010), simultaneously announcing "whatever it takes", it would have been a little presumptuous to sustain the belief that every other EZ member were solvent in the long run. Worse, following your line of reasoning, the complaint would had been why Greece; and before the obvious answer, there would have given no 2nd chance to redeem herself from past accounting misdeeds.
Conflating policies that happened 2 years apart doesn't look appropriate.
This comment has been removed by the author.
ReplyDeleteAs an advocate of full reserve banking, I was much amused to see the fractional reserve bank system being rescued from its own follies in 2010 in Europe. Meanwhile across the Atlantic, the Fed had to lend $13trillion at sweetheart rates of interest to fractional reserve incompetents.
ReplyDeleteIn contrast, under full reserve, banks or bank subsidiaries which lend (as opposed to accepting deposits) are funded just by shares. So when silly loans are made, shareholders get a nice big haircut. That happens automatically. No need for taxpayers to be robbed. It also means that silly loans would tend not to be made in the first place.
That would have meant austerity started earlier for Greece, but as SW-L suggested in an earlier post (probably rightly), a longish period of mild austerity is better than a shorter period of extreme austerity. And possibly the amount of cost cutting that happens under mild austerity is just as much per annum as under extreme austerity.
Ok but almost the entire political economy of the planet is centered on fractional reserve banking and any change would dislodge the ruling elites that run the system. Whatever happens has to happen within that structure and there are other avenues open for reform. I do agree that fractional reserve banking is toxic at this moment in history, btw?
Delete''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.''
ReplyDeletethird reason: to use as carrot (or stick if you want) approach, first reforms, than debt relief (Lagarde said this herself).
BTW: please stop using ''the Germans'' if you mean the troika. surely the troika and eurozone countries are agreement about this approach.
if the emphasis on a surplus is such a waste, and the output gap is easy to close with fiscal stimulus, bringing in additional tax revenues, why doesn't Greece ignore the troika, and loan money from the capital markets?
ReplyDeleteIf they can't borrow on the capital markets (at least not at reasonable rates), isn't this evidence the capital markets do not have faith in your output cap predictions?
No, not because of the gap, because of the debt.
DeleteFootnote 2 has a calculation based on primary surplus of 1 per cent. Has this surplus been calculated with any improvement in tax collection or does it assume continued levels of tax evasion.
ReplyDeleteLet me try to lay out the logical structure of the troika's argument, expressing the implicit premises that actually do the work. The creditors (i.e., the captured troika) say, 'What we want is the reduction or elimination of social programmes, and we want a government that represents the interests of us, the creditors, and not "the people", who are "scroungers and skivers" [as George Monbiot puts it], and we shall have it.' That is their argument in full; the claim that reduction of social programmes is the most desirable solution is logically based solely on that premise, i.e., that that's what they want, plus their moralising emotional impulse to punish the Greeks for being who they are. All the rest is dishonest nonsense which we all must accept anyway by force (of money). The key point indeed is that the creditors do not have the interests of the community as a whole at heart, and that only their own interests (specific or vaguely understood, it doesn't matter) are taken as axiomatic. The creditors, they say, should get what they want because they are more important and morally superior, more worthy as human beings. It is indeed childish. In the interaction with the people of Greece this creates an illegitimate imbalance toward the power of money; the principle of nevertheless recognizing the human dignity of a person who is struggling is ignored and overridden. Where is the love? The fundamental principle of equality is being violated here.
ReplyDeleteI don't think morality has much to do with it other than a propaganda used by the Euro elites. The real issue is that this crisis reflects the general trend towards fragmentation of power. The West is in disarray because various factions all have different agendas and lack common ground, ironically, because morality indeed is not recognized as a way to achieve common ground. Doing the "right thing" rarely enters into any political-economic issue other than as propaganda or a tool to manipulate others. The system, using a game-theory concepts, has already eliminated those who are swayed by morality using the Washington maxim "no good deed goes unpunished" because the game is set up to penalize those that do not act in a strictly Machiavellian manner.
DeleteThe fact that ethical principles are violated left and right, and even the fact that entrenched laws and institutions allow and encourage the continued violation of those principles has absolutely no effect on the validity of those principles. "No good deed goes unpunished" and "strictly Machiavellian manner" as attempts to express the principle actually being followed in the world economic system as currently set up are way too crude. You need a much more specific formulation, and it would be helpful if you could come up with a good formulation, because then "the people" would become aware of the gap and see clearly how unacceptable it is. Ethical principles work for "the people" and against the power principle. Your objections concern praxis; if "the people" were able to get a clear understanding of the current ethical situation, the power of public pressure might have a positive effect on the level of praxis. I admit it would be no easy task to bring about such an understanding. I think you are misunderstanding the role the the common awareness of ethical principles has in governing human activities, including economic interactions. (I distinguish between ethical principles, properly speaking, and "morality", which is what I adverted to in the case of creditor behaviour above. Actually, a conventional idea of "morality" in this sense on the part of the creditors (as opposed to a decentred ethical understanding) is one of the things getting in the way of arriving at a practically effective solution to the problem in this case.)
DeleteThe IMF has had some good anti austerity posts. Apparently these folks are working in the basement. Then there's Germany . After WW1 France demanded severe debt reperations and we got you know who in Germany . Didn't go well.
ReplyDeleteThen after WW2, after a bit, the US had the Marshall Plan to help Germany. Because it was in OUR INTEREST. Communism and all that.
I think the referendum is a bad idea, it created uncertainty. But it will bad for the North if South atrophies or leaves.
I hate simplified macro metaphors. But if your neighbor is out of work, angry, resentful and desperate, is that good for you? They can't buy your goods. And why be mean them? Love thy._.You know.
Go US women's NT in WC final.
That France caused Hitler is an anti-French myth. Prussian imperial forces proceeded under orders, to destroy most of the economy in North-East France. Dynamiting factories, castles, flooding mines, even destroying all telephone poles.
DeleteThe French government, naturally enough, asked the German government to repair some of the damage. However, it, and its central bank preferred to make its currency worthless. Then the French asked at least to send over telephone poles, to replace the ones they destroyed, but were told there were not enough trees in Germany, and so on.
Keynes and its ilk, supported racist prejudice in Germany at the time, with an anti-Polish, and anti-French campaign. That helped bring Nazism to power. As did the opinion that Germany was not responsible for its own destructions.
"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...
DeleteThe 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."
It maybe good to put it in one word, and introduce the concept of the banksterocracy we live under.
https://patriceayme.wordpress.com/2015/07/04/banksterocracy/
Hello Simon,
ReplyDeleteRemember that the Fund as often said publicly that Greek debt should be restructured; this option was rejected by EU member states. Given this rejection, the only way for Greece to balance its budget was more stringent austerity, even at the expense of GDP growth (an effectively binding budget constraint). So the IMF was maybe adopting this very hard line (being tougher than the EU) as a second best, BECAUSE the EU was refusing debt restructuring...?
I think the IMF had, and still has, much more power than you suggest.
DeleteOkay, thanks for sharing your view... Which thus means that the Fund's Managing Director (Lagarde) and its Executive Board have aligned with the EU institutions in rejecting the IMF Research Department work that is critical of Greek austerity. Could it be that it is the Lat Am and Asian countries that side with the "German view" because they do not want "Old Europe" countries to receive "better" treatment than they got from the Fund in the 1990s during their own crises, thinking that they were forced to go through very tough austerity and survived and so should Greece now? Of course, if this is the reasoning behind the Fund's hard line position on Greece, these countries forget that contrary to them, Greece has no independent central bank and no own currency...
Deletethere is another reason why Germany (but shared by most eurozone countries don't want to offer debt relief (at least not now):
ReplyDeleteWith taking over Greece debt, a first line was crossed: the no bailout clause of the Lisbon treaty. Private creditors took a haircut, but the eurozone governments did not. And I think this was on purpose, this was about trying to stay as close as possible to the Lisbon treaty that says that eurozone governments are not responsible for paying debt of others.
Now if the other eurozone governments would give Greece debt relief, than that would mean the no bailout clause will be dead and buried, a precedent has been shaped, and if there is a first, future bailouts can be expected. At least that is how voters in creditors nations will look at this, it will greatly undermine confidence in the eurozone. Until now the creditor nations can say to their taxpayers: yes, we took over debt, but Greece will pay it back. With debt relief, they can't claim this anymore.
For outsiders in the UK and US this may be difficult to understand how big this point is, but for the Northern creditor nations this is an important issue, as the thing they fear most is having to bailout more (much bigger) debtor nations.
there might be a legal aspect to this too: with debt relief, taxpayers maybe could go to the European court claiming it's illegal to become liable for debts of Greece under the Lisbon treaty.
DeleteBut why were the private sector creditors only given a partial haircut (and so late in the day)?
DeleteIf fear of bailing out bigger governments was the key, a better strategy would have been to offer Greece nothing, and let the IMF do all the work.
The actual strategy was almost certain to lead to the undesired outcome - by taking over unsustainable private sector debts, the EZ governments were almost certain to end up giving debt relief to Greece (or losing it when Greece defaults). I agree that the fears you mention are very real, and I have some sympathy with them, but the Troika is at fault for ignoring these fears at the crucial point when they bailed out private sector creditors.
Mr Wren Lewis, may I ask what you think about Dominique Strauss Kahn's statement?
ReplyDeletehttp://fr.slideshare.net/DominiqueStraussKahn/150627-tweet-greece
Germany will never accept a realistic deal. There are only two ways, in real terms, Germany can be paid: By confiscating a large quantity of real Greek assets, or by accepting a long running trade deficit with Greece. That is Germany would elect to become a net importer of Greek production. This is unlikely in any case because Greek industry is in shambles after years of itself running a trade deficit and austerity.
ReplyDeleteThe talk about money is just smoke and mirrors. German industry made out from the trade surplus with Greece. They don't want the unavoidable costs, the necessary depressed demand for domestic production, that come from running a deficit.
The Greeks do have to put their house in order. The Germans can demand that. But to demand money from Greece now will prevent that from ever happening.
"When governments borrow too much, and cannot repay, it generally falls to the IMF to sort things out. "
ReplyDeleteWhen governments borrow IN A FOREIGN CURRENCY too much, should say.
Germany must invade Greece to get back there money.
ReplyDeleteA very interesting post indeed. In my view the Greek episode has led to more soul-searching by the IMF than previous episodes. During the Asian Debt Crisis and Latin American Debt Crisis the IMF's policy prescription was austerity as a condition for debt relief - and included wholesale privatisations and drastic macro-contraction measures to stabilise currencies. The likes of Stanley Fischer (yes Paul Krugman's mentor) were behind this, not the Germans. So really these policies are very deeply rooted in the IMF, and so we should be careful in tracing them back to German influence. (Some economists, notably Jeff Sachs, were critical of the IMF during these episodes, but frankly, not enough were.)
ReplyDeleteHaving said that, I do feel that the victim of the IMF's policies have been poorer, weaker states, and I suspect the real motivations behind them are the powerful countries and powerful, especially powerful financial, interests and their links to respective governments in powerful countries. But Germany is only one of these, and not the most important. For sure the US centred Anglo-Saxon dynamic is far more influential, and not just during the age of the Washington Consensus.
In short, we are seeing a little bit of soul searching and reticence by the IMF re Greece, but austerity is very much consistent with its practice since the 1980s. Over and over again the result has been small emerging markets paying the price for the excesses of powerful financial interests that have promoted financial deregulation and globalisation, a lot of them US and UK centred.
You should read page 6 onwards of this from Peter Doyle:
Deletehttps://ptdyblog.files.wordpress.com/2015/07/dsa.pdf
I agree that once this would have just been standard fare from the IMF, but I thought they knew better now. I think many of their staff do, but politics gets in the way.
Anon: the IMF would surely feel wholly vindicated by the strong recovery in countries affected by the 1997/8 Asian Debt crisis. Portraying them as victims is grossly inaccurate.
DeleteThanks for the link - essential reading on the DSAs. It was also good to see Max Corden referred to.
Delete"Anon: the IMF would surely feel wholly vindicated by the strong recovery in countries affected by the 1997/8 Asian Debt crisis. Portraying them as victims is grossly inaccurate."
DeleteIt was a tragic episode, especially for Indonesia, Thailand and SE Asian countries. Korea got out of it thanks to an already very strong export sector. Malaysia got out of it probably the strongest - by defying IMF advice and implementing capital controls (to the ridicule of just about everyone at the time save Jeff Sachs). Thailand eventually recovered, but after enormous losses to output. Both Thailand, and especially Indonesia have been left with fragile political environments, the latter only saved by a resources boom - and if you want some idea of the human rights and ecological cost google Freeport Moran mine Grasberg. The latter is a particularly explosive situation given high income and other inequalities and widespread distrust of western capitalism, evidenced in its most extreme form with the Bali bombings.
Even the IMF admitted the SAPs in the aftermath of the Asian Financial Crisis were a mistake (and has specifically said so) and now also endorses capital controls.
Using the Islamist-inspired Bali bombings as some sort of diatribe against capitalism is utterly ludicrous. Anyway, let's not go further down that road.
DeleteAt first sight the 1997 crisis seems not dissimilar to 2008 insofar as it was caused by a credit bubble that resulted in an unsustainable property boom throughout SE Asia. Malaysia's recovery (slower than those who took IMF funds) was due to stronger commodity prices. Their economy was fundamentally healthy with the exception of a few over-extended businessmen with links to the ruling party. Their refusal to take IMF funds was not due to some noble decision to go it alone. They knew their racist policies favouring Malays at the expense of minority races would have to be repealed. By 1999 Thailand's economy was growing by 4%-pretty decent compared with the post 2008 recovery in the west. Some perspective is required-in the 10 years prior to the crisis the Thai economy would have topped world growth tables.
You do realise these SE Asian nations have some of the most hostile laws regarding foreign investment on earth? Portraying the IMF involvement as some sort of US/British conspiracy is unsupported by any evidence. If it were true, surely they would have ensured foreigners were free to invest in land/businesses in Thailand/indonesia/Philippines? Hint: you can't without going through endless bureaucracy. Anyway by far the biggest foreign players in these economies are Japan/Taiwan and china.
The IMF itself has recognised that the SAPS were a mistake. And as I said, it now endorses capital controls - something unthinkable even say five years ago. No, I did not say there is a conspiracy between the US/UK and the IMF. But the IMF is an institution in which the US has enormous influence. It's thinking often reflects the thinking dominant in the country at the time. Come on, most of its economists are educated at MIT. The IMF under Stanley Fischer's stewardship used moral hazard arguments to argue against bail outs and the implementation of austerity. They used incentive arguments and what can be called "sound money" arguments. (My guess is that this reflects Sargent et al influence which was very powerful at the time - even on MIT economists.) I have posted actual quotes from the IMF when it said this in the 1990s, and when it said they were a mistake (last year) on past SWL's actual blog comments - I will dig them up again if I have time. Very clear on their wrongdoings.
DeleteWhat is very interesting is why the IMF last year admitted its mistakes, yet insisted on that Greece pay its debts. I suspect a big internal battle is going on in the institution.
The reference to Bali bombings is not diatribe. The political problems in dysfunctional states is related to the economic problem and a society with extreme differences between winners and losers. Sort out the economic problems in the Middle East and Indonesia and basically you have neutralised the problem of Islamic State. (Once again though we have mainstream economists arguing that income inequality is good for third world growth - they have not studied history or development economics- which thankfully still has a large historical and sociological component.) Yes, Thailand went through a boom (and bust), but likes it political situation, it is on a flimsy economic one.
I might just add that Paul Krugman and others have justified IMF practice in previous episodes on the basis that states were "corrupt" and therefore needed the IMF's reforms (yes meaning austerity). Watch this - and be sceptical. Some are also saying this about Greece. The fact is that institutional structures in smaller states and emerging markets are of course in no position to deal in equal terms with the financial institutions and power structures of major countries like the US or Germany. Imagine them up against the legal and other resources of major corporations, banks and governments in the US or such countries. This is more the problem and the fact they were in no position to defend their positions than the states being "corrupt", which was a generalisation in any case.
ReplyDeleteWhile I applaud this post as being more balanced, I think it seriously misconstrues the IMF. The IMF took a very "austerian" view during the Asian crisis, to the great profit of American financial firms. I'm trying to search my memory, and I can't remember a case where it was hard on creditors. Could someone give an example?
ReplyDeleteI'd also just repeat what other commentators have said. The whole point of the current approach to Greece is to get structural reforms into an economy which is supposedly corrupt. It used the carrot approach: dangle it in front but never so close it might be eaten. I'm not saying I approve of the approach, but that was the idea.
The Troika always set this up as a repeated game: loans always had to be renewed, so giving the Troika a chance to enforce compliance. In a repeated game, if you keep dangling a carrot but fail to give it, you get rumbled. That was the No vote.
Delete"The IMF took a very "austerian" view during the Asian crisis, to the great profit of American financial firms."
DeleteIndeed, and Goldman Sachs did very well out of the slash and burn fire-sales which it later sold on the left over pieces to jaw-dropping dividends shared among their partners. Grotesque vultures.
The author is following Greek propaganda that negotiations actually failed because no debt relief has been granted. I think this is wrong.
ReplyDeleteNegotiations failed due to Syrizas unwillingsness to make the pension system sustainable, the unwillingness to improve public finances by cutting public expenditures instead of tax hikes and the reluctance to enter into further structural improvements that improve competitiveness.
Syriza is the ruling party of the radical left that has little understanding of modernizing the economy by fostering entrepreneurship and liberalize markets. There is simply no willingsness to invest into Greeks future because this is not w´hat Syrizas electoral base represents.
The IMF might have not predicted multipliers in Greece correctly. But aren't these multipliers a direct result of a governments ability to implement structural reform. Creditors rightly complained about the previous governments undermining of structural reforms by subsequently introducing legislation that countered these reform efforts.
Greeks debt looks high but is no burden on the economy since most payments have been moved into the distant future. The Eurozone gave itself a mechanism to deleverage which is financial repression effected by loose monetary policy and QE. Greece could have it in the same way but refuses to accept this.
Some limited debt relief was even considered by the eurozone but Greece made it clear it would not deliver on any structural reforms whatsoever.
Greece can't have it all and both ways.
No structural reforms, debt relief and still staying in the euro.
I wonder what a European referendum on a Greek package would have looked like. Outcome would likely be similar. A majority would rejects such package after this farce of the last 5 months.
I think you really need better sources. Here is Clive Crook, hardly someone of the left:
Deletehttp://www.bloombergview.com/articles/2015-07-01/europe-wants-to-punish-greece-with-exit
The data shows that Greece, at the Troika's insistence, has enacted more austerity than any other country. That inevitably leads to a collapse in GDP: multipliers have nothing to do with 'structural reforms'. It has also enacted a good deal of the 'structural reform' asked of it. The idea that the Greek economy has collapsed because it has not enacted every reform is pure nonsense - it has collapsed because of the measures imposed by the Troika.
I think if anyone is suffering from following propaganda ....
What a load of baseless rubbish. Your anti-austerity agenda is harming the development of macro-economics as a field because you ignore proven facts when concocting your arguments.
ReplyDeleteYou are a disgrace to the profession.
So you keep saying. Would you like to mention some of these proven facts?
Delete