Ever since Greece received its first giant package of emergency loans in May 2010, the International Monetary Fund (IMF) has come under criticism for joining a rescue effort that flopped at saving the Greek economy from disaster. Most controversially, the IMF changed one of its own rules designed to keep it from piling more loans atop countries with potentially unpayable debts.
A newly declassified IMF document puts the Fund’s role in an even harsher light. Official minutes of the IMF’s executive board meeting that approved the rescue on May 9, 2010 reveal the depth of misgivings among the Fund’s directors about whether Greece would end up saddled with a hopelessly massive debt burden. The minutes also show that confusion reigned among the board’s members about the rule change. Several among the two dozen directors expressed surprise when they realized they were changing the rule, and some of the most dismayed even questioned whether the move was being snuck past them.
This document has drawn no public attention for two very good reasons. First, it’s buried in the IMF’s online archives, having just been posted under a procedure giving the public access to board minutes after five years. Second, all eyes are on the extraordinarily fraught situation in Greece following Sunday’s referendum in which Greek voters decisively rejected the terms of a compromise offered by international creditors. The “No” vote has inflamed the already-tense relationship between Athens and other major European capitals, raising the likelihood that Greece will soon be forced to abandon the euro, which would plunge its economy into unimaginable chaos for at least a few months if not more.
But the minutes of the May 2010 meeting illuminate current events in Greece by providing revelatory information about one of the most crucial episodes in that fateful first rescue. As in 2010, one of the biggest bones of contention right now is Greece’s debt burden — specifically, whether the country has any reasonable chance of getting its economy on stable footing without a substantial degree of relief from its obligations. The IMF is taking a much tougher position on this issue in 2015 than it did five years earlier. Just a few days ago, the Fund issued a headline-generating report pointing to the conclusion that although Greece’s left-wing government must embrace a painful new round of sweeping economic reforms, its European creditors must also provide massive debt relief, perhaps by forgiving a significant portion of the principal amount of their loans to Athens, which the Europeans are extremely loath to do. IMF officials have even suggested that they cannot participate in a new rescue in the absence of such a compromise, because doing so could violate Fund rules.
The new disclosures about the May 2010 meeting help explain part of the motivation for the IMF’s current hard line — namely, its desire to redeem its institutional credibility. In 2010, the Fund engaged in legal acrobatics to facilitate the Greek rescue, circumventing its “exceptional access policy” — or, as I prefer to call it for simplicity’s sake, the “No More Argentinas rule.” These terms refer to restrictions the Fund imposed on itself in the aftermath of one of its worst debacles, an effort in 2001 to rescue Argentina that ended a few months later in an economy-crushing default and currency collapse. Under the No More Argentinas rule, the IMF could make large loans only to countries whose debt was deemed sustainable with “high probability.” Instead of abiding by the rule in Greece’s case, the Fund created a loophole allowing it to give large loans to a crisis-stricken country when there was a risk of “systemic spillovers” — that is, widespread financial turbulence threatening the stability of other countries.
For taking this approach, the IMF was castigated as a toady of Europe’s big powers, especially after the unsustainability of Greece’s debt became glaringly obvious. My CIGI colleague Susan Schadler, a former deputy director of the IMF’s European Department, has been the most trenchant critic, accusing her former employer of having “bowed to short-sighted pressure from Europe” in making the rule change. Others have advanced similar arguments, and the Fund itself has acknowledged that the restructuring of Greece’s debt to private bondholders, which finally took place in 2012, should have happened earlier.
I have chronicled the IMF’s role in the first Greek rescue in detail, and an article in the Wall Street Journal reported how deeply divided the Fund’s board was in May 2010 about whether the bailout would work, based on confidential documents containing some of the directors’ comments at the board meeting. But until now the full board minutes have been unavailable. In addition to providing extensive new evidence of the wariness on the board regarding the rescue, the minutes indicate that at the time of the meeting the directors did not understand the implications of the change in the No More Argentinas rule until the meeting was nearing its end. This raises governance concerns; the board represents the IMF’s 188 shareholder countries, and its members were evidently not briefed beforehand about the rule change, which was tucked into a jargon-laden passage on the 19th and 20th pages of a long document prepared by the Fund staff.
Readers who want to get a glimpse into the IMF’s inner workings at a momentous juncture in its history are invited to read the minutes and judge for themselves. But for those interested only in the most relevant bits, I offer the following excerpts, starting with three of the most insightful — and prescient — warnings about how the Greek rescue might go awry since it did not involve debt restructuring. (I am excluding the excerpts already cited in the Wall Street Journal article.) After these excerpts comes the interplay regarding the rule change. Then, at the end, comes an enlightening and testy exchange involving John Lipsky, who was then the IMF’s First Deputy Managing Director. Lipsky was chairing the meeting because Dominique Strauss-Kahn, then the Managing Director, was in Basel, Switzerland for high-level meetings with central bank officials that day.
Unsurprisingly, some of the most caustic observations about the Greek rescue at the meeting came from Paulo Nogueira Batista, the executive director from Brazil who represented a constituency of nine countries. As the euro zone crisis progressed, Nogueira Batista became an increasingly outspoken detractor of the role played by the IMF, which he believed was bending over backward to accommodate European interests. Although his style often irritated his board colleagues, as well as IMF management, he cannot be faulted for the foresight of remarks like this one, in the statement he submitted for the May 2010 board meeting:
In an especially Panglossian passage of the report [submitted to the board], staff expresses the expectation that growth will follow a V-shaped pattern. We fear that growth may follow an L-shaped pattern, with a very sharp contraction of GDP in 2010 and 2011 and negligible recovery thereafter.
Using more diplomatic language, Christopher Legg, an alternate executive director from Australia who represented a constituency of 13 countries, also voiced skepticism about the rescue’s prospects for success:
We have to avoid being trapped a la Argentina on an unworkable path where we always seem to be behind the curve. We do not want that situation to occur again.
I understand why there is a huge reluctance to countenance any hint of debt restructuring… But it is clear that the markets are not convinced that the program will be sufficient. While we must not speak the unspeakable, certainly not outside this room, we need to be thinking the unthinkable.
And there were these words of wisdom from Pablo Andres Pereira, the executive director from Argentina, who represented a constituency of six countries:
Harsh lessons from our own past crises are hard to forget. In 2001, somewhat similar policies were proposed by the Fund in Argentina. Its catastrophic consequences are well known. Today, other countries are involved, but the Fund’s policies remain the same. Beyond economic theories, there is an undisputable reality that cannot be contested: a debt that cannot be paid will not be paid without a strong process of sustainable growth….
In Argentina, we know too well what the real consequences are of making believe that solvency crises are liquidity crises. Our own experience proves that bail-out packages or debt restructurings that disregard “debt sustainability” and economic growth as a main feature of its design, leaving it to “future market access,” are destined to be short lived.
The discussion of the change in the No More Argentinas rule, though more technical, was where greater tension arose — understandably so, because some board members clearly felt that the process was out of line with proper global governance principles. Many if not all directors understood that the rule was being waived in Greece’s case because of the risk of financial “contagion.” But many if not all had failed to grasp that by approving the Greek program, they were changing the rule for future cases.
A little background is in order here. Considerable haste had been involved in drawing up the documents and preparing for the board meeting. Approval of the Greek rescue was a matter of urgency, because without the bailout funds Athens would default on an €8.5 billion payment due to bondholders on May 19.
In a follow-up post, I will delve deeper into minutes and highlight specific concerns raised by constituency members regarding the the No More Argentinas rule change. Stay tuned!