The IMF and Greece

'Serious Errors' and 'Crying Need'

Christine Lagarde, indicating what she thinks of the IMF's rulebook. Overruled by 'crying need'.

by Pater Tenebrarum

Someone at the IMF has leaked a a document marked 'strictly confidential' to the press, which contains an internal critique of how the IMF handled the bailout of Greece. In spite of admitting to breaking the institution's own rules, the IMF's bureaucrats insist that of they 'had to do it all over again', they would break them again. This is how bureaucracies in regulatory democracies generally act. Laws and rules are not meant to be followed in 'emergencies', both real and imagined ones. In the end, no-one is ever punished for breaking the law or skirting regulations. However, that is not even the main problem in this particular case. Let us also leave aside for the moment that a free unhampered market economy using a market-chosen money would have no use for an institution like the IMF at all. Here is a summary of the recent revelations: 

“In an internal document marked "strictly confidential," the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece's economy, which has been mired in recession for the last six years.

The IMF conceded that it bent its own rules to make Greece's burgeoning debt seem sustainable and that, in retrospect, the country failed on three of its four criteria to qualify for aid.

But the fund also stressed that the response to the crisis, coordinated with the European Union, bought time to limit the fallout for the rest of the 17-nation euro area. And while IMF officials said the lessons learned would lead them to take a tougher stance in future bailouts, they also said that there was little else the fund could have done at the time.

"If we were in the same situation … we would have done the same thing again," said Poul Thomsen, the IMF's lead negotiator in the bailout talks, referring to its signing on to the deal in 2010 despite the lack of any debt relief. The Washington-based fund released the document, prepared by IMF staff, on Wednesday after its contents were reported by The Wall Street Journal.

Over the last three years, a number of senior IMF figures, including Managing Director Christine Lagarde, have repeatedly said that Greece's debt level was "sustainable" — likely to be repaid in full and on time. Yet the document described the uncertainties around the rescue as "so significant that staff was unable to vouch that public debt was sustainable with a high probability." Two former IMF officials said the fund's chief lawyer, Sean Hagan, repeatedly warned in mid-2010 that the Greek program was bordering on breaking the institution's rules.

The IMF changed its rules in 2010 to allow "exceptional access" to its credit lines, or much bigger loans than normal. "What happened at the time, and it's much easier with the benefit of hindsight, is that not all criteria of exceptional access as defined at the time were satisfied," Ms. Lagarde said in a separate interview last week. "And yet there was a crying need at the time for support," she said. If the IMF hadn't tweaked its rules, "it probably would have meant no IMF support at that time."

(emphasis added)

See? We don't need to adhere to rules if a 'crying need' is identified. However, we want to look at another aspect of these revelations. Note by the way that there is absolutely nothing surprising about any of this. It has been an open secret for a long time. Only the fact that the IMF itself actually admits its errors represents news.

Liars Everywhere

The bla-bla about faux 'austerity' can be safely ignored. Greece's economy went into a severe bust because of the preceding inflationary boom that collapsed, not because of 'austerity'. Of course the so-called austerity – which hasn't kept the public debt from exploding further – was applied in typical European fashion in a manner designed to leave the size of the government unaltered, i.e. mainly via tax hikes. That this has exacerbated the downturn is undoubtedly true, as the private sector was faced with both the burden of continued government spending and higher tax rates. 

What mainly interests us though are the many lies that were told in the process: 

“Over the last three years, a number of senior IMF figures, including Managing Director Christine Lagarde, have repeatedly said that Greece's debt level was "sustainable" – likely to be repaid in full and on time.”

These lies, which complemented the lies told by various EU officials and politicians, ranging from the former monetary affairs commissar to the former ECB governor (we have detailed some of them in a previous article on the Cyprus bailout entitled 'The Empire of Lies'), have clearly contributed to the downfall of the Cypriot banks. Now, it has to be pointed out that the managers of these banks didn't exactly display very good business sense when they believed the lies of the eurocracy and the IMF regarding Greece.

After all, it was clear that the Greek government had gone bankrupt and that the political will to fully bail out its bondholders was at a low ebb. Neither should bondholders expect such a bailout. Of course the fact that public bondholders such as the ECB were exempted from the 'haircut', which in turn resulted in a proportionately bigger loss for private bondholders wasn't exactly fair either, although the problem was mainly the fact that the ECB bought these bonds in the first place (it would also not have been fair to leave tax payers elsewhere holding the Greek bag). However,  any halfway alert observer of the developments should have been aware that holding on to Greek bonds was fraught with great risk. At the very least, Cypriot banks should have tried to hedge their risk.

Still, even keeping all of this in mind, one cannot help noting that all the officials involved in the Greek bailout were lying about what was going to happen up until shortly before it happened. And evidently, the bank managers in Cyprus believed those lies, which ultimately resulted in the bankruptcy of their banks.

In this context it is also worth noting that the government of Cyprus in turn kept lying to depositors about the likelihood of a depositor 'haircut'. All along depositors were told that what eventually happened would definitely not happen. As a result many people neglected to move their money to safer locations, although it seems that the friends and relatives of high ranking Cypriot politicians had far better luck. While the press has obediently regurgitated the lines fed to it by the eurocracy about the depositor haircut mainly wiping out 'Russian oligarch' money, which is held to be tainted (even though no-one has offered even a shred of proof for such assertions), the reality is that the haircut has mainly wiped out the Cypriot middle class. Owners of small to medium sized businesses have seen their cash reserves and lifelong savings disappear into money heaven.

Depositors in the rest of Europe should carefully weigh their risks: the 'non-template' of Cyprus has in fact become the template for future bank bailouts in the EU. In principle there is absolutely nothing wrong with that; there is no justification for holding tax payers liable for the business mistakes of fractionally reserved banks. The EU's decision to expose bondholders, shareholders and ultimately depositors to losses in the event of banks going under is one of the few recent decisions deserving of support.

However, we also believe that most depositors are not fully aware of how big the risks they are taking actually are.  Across the euro area as a whole, uncovered money substitutes (fiduciary media) issued by private banks amount to €3.76 trillion at last count (as of end of March 2013). This is deposit money that has been created by the fractionally reserved banks from thin air and for which no reserves in the form of standard money exist.

In the event of a banking crisis – and recall in this context that the ECB itself recently stressed that it believes another banking crisis to be likely – depositors may find that at many banks the buffer provided by share and bond capital is a lot smaller than they would like. After all, it has been calculated that many of the biggest banks in Europe (German banks are especially egregious offenders in this regard) are leveraged up to 50:1 with respect to their tangible capital.

And whatever big depositors decide to do, the one thing they should definitely avoid is listening to any assurances that may emanate from the eurocracy, the IMF or any other public bodies. The odds-on bet is that they will be lied to again.