Tag Archives: Portugal

“The IMF and the Crises in Greece, Ireland, and Portugal”

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.

Measuring (Greek) Indebtedness

In a Vox column, Daniel Dias und Mark Wright propose various measures of the Greek, Portuguese and Irish public debt burden and emphasize the large variability of these measures.

The following figure, taken from Dias and Wright, shows the scheduled principal and interest payments of Greece, Portugal and Ireland as a percentage of 2014 GDP in the respective country. Not all public debt components are accounted for.

wright fig1 13 nov

Dias and Wright write:

[B]oth Portugal and Ireland face far larger cash flow requirements, relative to the size of their economies, than Greece for the next ten years. [A]fter this ten-year period, the required repayments on Greece’s debt will far exceed those of Portugal and Ireland, measured as a fraction of their economies. [W]hether or not we view Greece as more or less indebted than Portugal and Ireland depends on how we weigh cash flows in the near future (next ten years) versus cash flows in the far future (more than ten years).

… we can discount a country’s entire debt repayment cash flows by the interest rates embodied in their currently traded debts to obtain an estimate of the market value of a country’s debt. This assumes that the likelihood of repayment of Greece’s EFSF debt, for example, is the same as that for privately held bonds. Under these assumptions, as shown in Table 5, Greece appears to have less than half as much debt as either Portugal or Ireland. These numbers are closer to the estimates computed under the IPSAS standard, which records a debt at market value at the time of issue, and allows for the accretion of this debt if the contracted interest rate on the debt is less than the yield to maturity of the debt. This approach has the counterintuitive implication that the more likely a country is to default, the less indebted it will look.

Dias and Wright contrast a conventional face-value debt measure (the sum of the blue bars corresponding to principal repayment obligations in the figure) with more informative measures. With the latter, Greek indebtedness typically is not as high compared with the other countries as with the first measure.

See also this earlier post and this earlier post on the topic.

Good and Bad Reasons for Greek Debt Relief

In a Vox column, William Cline argues that

it is important to recognise that the headline debt figure overstates the true burden of Greek debt. Because most of the debt is owed to official sector partners at concessional interest rates, the interest burden is much lower than would usually be associated with the same gross debt. Under the Fund’s own criterion for sustainability in these circumstances (ratio of gross financing needs to GDP), Greek debt should remain within an acceptable range at least through 2030. It is questionable to base debt relief policy on problems that might or might not materialise beyond such a distant horizon. Moreover, most of the projected sharp increase in debt could be avoided by carrying out bank recapitalisation directly from the European Stability Mechanism (ESM) to the banks, rather than through the Greek government as an intermediary.

There is still an important potential role for using interest rate relief, for two purposes. First, if fiscal balances fall below target because of lower than expected growth (rather than policy slippage), a portion of interest otherwise accruing could be forgiven to avoid the need for additional fiscal tightening and its recession-aggravating consequences. Second, because Greek unemployment is at depression levels (26%), special employment programmes would seem appropriate, and forgiving a portion of the interest due could provide a significant source of funding for this purpose.

Cline also discusses the claim that Eurozone loans mainly saved Eurozone banks:

  • not true, they received only one-third of the official sector support;

that the Troika called for too much austerity:

  • true, the cyclically adjusted primary balance swung from -13.2% of GDP in 2009 to +5.3% in 2014, much more than in Portugal, Spain or Ireland;
  • but Greece was cut off from financial markets;
  • and Eurozone support as a share of GDP exceeded 100% in Greece compared with roughly 30% in Ireland and Portugal or 5% when the US supported Mexico;
  • “even at the upper bound of the IMF’s upward-revised multipliers (1.7), smaller spending cuts would not have boosted GDP and revenue by enough to pay for themselves;”
  • and the adjustment mostly occurred in the early years when spreads were high and would have been even higher with less adjustment.

Cline estimates that the third rescue package will raise Greek net debt by 10-15 billion Euros.

Greece is not Ireland

In a Credit Writedowns blog post, Frederick Sheehan collected quotes that relate to the European debt crisis (he writes that Dennis Gartman first compiled the list). Some highlights:

“For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil.”
– Jean-Claude Trichet, President, European Central Bank, January 2008

“Spain is not Greece”
– Elena Salgado, Spanish Finance Minister, February 2010

“Portugal is not Greece”
– The Economist, 22 April 2010

“Ireland is not in Greek territory”
– Brian Lenihan, Irish Finance Minister

“Greece is not Ireland”
– George Papandreou, Greek Finance Minister, 22 November 2010

“Spain is neither Ireland nor Portugal”
– Elena Salgado, Spanish Finance Minister, 16 November 2010

“Neither Spain nor Portugal is Ireland”
– Angel Gurria, Secretary-General, OECD, 18 November 2010

“Spain is not Uganda”
– Mariano Rajoy, Spanish Prime Minister, 9 June 2010

“Italy is not Spain”
– Ed Parker, Managing Director, Fitch, 12 June 2012

“When it becomes serious, you have to lie.”
– Jean-Claude Juncker, President, Euro Group, April 2011

“The worst is now over—the situation is stabilizing.”
– Mario Draghi, President, European Central Bank, March 2012

“Uganda does not want to be Spain”
– Asuman Kiyingi, Uganda’s Foreign Minister, 13 June 2012