All sides are feeling sore but divorce seems unlikely

Euro bailout Troika nears end of road with patchy record

By Paul Taylor

If the Troika that handles bailouts of distressed euro zone countries were a soccer team, it would probably be looking for a new manager after achieving a track record of one win, one loss and one draw.

The uneasy trio of European Commission, International Monetary Fund and European Central Bank was assembled in haste in March 2010 after Greece's public debt and deficit exploded and it was about to lose access to market funding.

Last week's IMF "mea culpa" report about the failures of the Greek program blew the lid off the fiction that the three institutions saw eye-to-eye on the rescue packages they designed and are enforcing in Greece, Ireland, Portugal and now Cyprus.

Behind closed doors, they clashed over whether Greece should restructure its debt, forcing investors to take losses, and whether Ireland should make bondholders in its shattered banks share the cost of a financial rescue.

They still differ over whether European governments should write off some loans to Athens to make its debt sustainable in the long term, an idea that is politically explosive before a German general election in September.

The public airing of such differences raises the question of whether the Troika has reached the end of the road. All sides are feeling sore but divorce seems unlikely.

The IMF says it lowered its standards to support a flawed program for Greece; the European Commission says it "fundamentally disagrees" with the IMF's view that Greek debt should have been written off sooner; and the ECB says the IMF is applying misleading hindsight.

The Europeans contend that in the acute market panic of 2010, before the euro zone had begun to built a financial firewall, letting Greece default or making it restructure its debt could have caused massive contagion to other countries and perhaps swept away the single European currency.

"It would have been Europe's Lehman moment," EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters, referring to the 2008 collapse of U.S. investment bank Lehman Brothers that sparked a global financial crisis.

"I don't recall the IMF's managing director Dominique Strauss-Kahn proposing early debt restructuring, but I do recall that Christine Lagarde was opposed to it."

Lagarde was French finance minister at the time and replaced Strauss-Kahn as IMF head in 2011.

NUMBERS MASSAGED?

The most damaging suspicion raised by the IMF study of the Greek program is that the Troika made over-optimistic growth forecasts and massaged the debt numbers because euro zone political leaders exerted undue influence on the process.

Wrapped in the forensic jargon of financial analysis, the IMF experts say European leaders made Greece's economic crisis worse by delaying an inevitable debt write-off, buying time for their own banks to cut their losses at taxpayers' expense.

"The Troika is a unique set-up which has institutionalized political influence in IMF decision-taking," said Ousmene Mandeng, a former IMF official. "Decisions were perceived to be taken in Berlin and Brussels rather than by the IMF board.

"The IMF should never again be a junior partner in this way," Mandeng said, arguing that the Fund should either pull out of the Troika now or take sole control of the rescue programs.

ECB president Jean-Claude Trichet initially opposed bringing the global lender into the euro zone, arguing that Europe should be able to sort out its own problems. He also rejected debt restructuring or making bank bondholders share losses, saying it would ruin the euro area's standing in financial markets.

EU paymaster Germany and its north European allies insisted on IMF involvement because they feared the Commission would be too soft on indebted member states and too willing to commit taxpayers' money.

While the IMF never felt in command, EU officials felt it held a de facto veto on the bailout programs.

But the IMF is not the only body to harbor misgivings.

Some ECB stakeholders, notably in Germany, are worried about potential conflicts of interest if the central bank stays in the Troika while it is backstopping euro zone government debt at the same time with its OMT bond-buying program and is soon to take charge of supervising banks that lend to troubled sovereigns.

ECB executive board member Joerg Asmussen told the European Parliament that once the current crisis is over, the Troika should be replaced by the euro zone rescue fund and the European Commission. But not now.

ROSY FORECASTS

Many independent economic experts argued from the outset that Greece would never be able to repay its debt mountain and questioned the Troika's rosy forecasts for the Greek economy.

The initial Greek program projected that gross domestic product would contract by just 3.5 percent between 2009 and 2013. In fact, it crashed by 22 percent.

Troika officials repeatedly increased the amount Greece was supposed to raise by privatizing state assets, even as its economy crumbled and investors fled.

Growth forecasts for Portugal, where the outcome of a EU/IMF adjustment program remains uncertain, were also over-optimistic, though not by the same order of magnitude.

The biggest errors occurred in predicting unemployment - a key measure of economic damage in bailed out countries.

In Greece, the Troika originally foresaw a peak jobless level of 14.8 percent this year. The real figure is 27 percent.

Even in Ireland, the one "success" which returned to growth and expects to get back to market funding this year, the Troika underestimated job losses and the related social damage.

Now non-European IMF members in Latin America and Asia, who endured harsh lending terms in the 1980s and 1990s, are loath to pour more money into one of the world's richest regions.

"Operationally and financially, the IMF has become much more involved in Europe than its global shareholders deem sustainable," said Jean Pisani-Ferry, outgoing director of the Bruegel economic think-tank in Brussels.

An IMF source, speaking on condition of anonymity because he is still involved with the bailout programs, said the real problem with the Troika was that no one was in charge.

"It's more like a soccer team with no manager and no clear definition of who plays where on the field," he said.