The International Monetary Fund (IMF) acknowledged on Wednesday that it made “notable failures” in the Greek bailout, underestimating how much the austerity measures it pushed would pinch the country’s already faltering economy.
The IMF made the unusually frank admission in an evaluation of the Greek crisis over too much government debt, which broadened out to infect other European countries.
The Greek economy has been kept afloat for the past three years by rescue loans from Europe and the IMF in exchange for harsh austerity measures that have worsened the recession, currently in its sixth year. It has so far received about 200 billion euros ($258.8 billion) in loans from a rescue program totalling 240 billion euros ($310.5 billion).
While the measures have reduced Greece’s budget deficit, they have left the country mired in a much deeper recession than what the IMF and its European partners in the bailout forecast three years ago. Unemployment is 27 per cent.
The report said the IMF and its partners in the bailout had significantly underestimated a key measure of how much austerity measures, such as spending cuts and tax increases, would impact the economy. However, the fund insisted that it could not have slowed the pace of belt tightening.
In another misstep, it said Greece missed three of the IMF’s four main criteria required to qualify for such bailouts. On one of the criteria, debt sustainability, the IMF has asserted repeatedly that Greek government should be able to fully repay its debt burden on time. However, the report said there was much uncertainty surrounding this assertion.
The IMF said there were notable successes in the bailout as well. Greece remained in the eurozone and the spillover effect on the global economy was relatively contained.
“However, there were also notable failures,” it said.
It described the first two years of the rescue program as a “holding operation” while the other 16 European Union countries that use the euro currency grappled with the enormity of the unfolding crisis and built “firewalls” to try to stave off a contagion effect. And the report said rescue lenders had allowed Greek debt to remain too high until private bonds were eventually restructured last year.
Some of the failure was blamed on Greece itself, with the IMF saying it had stalled on structural reforms of its economy such as privatizations and improving tax collection. The document said the lending agency and its partners had been too optimistic about the political conditions for pushing forward with such reforms.
In Athens, the left-wing main opposition party, Syriza, said the country’s conservative-led coalition government should seek a swift change of course following the IMF’s admission.
“We should immediately abandon these harsh austerity policies that have brought the country to the brink of a humanitarian crisis. These policies are not working. ... The dogmatic insistence in pursuing these policies should end,” Syriza spokesman Panos Skourletis said.
“This also provides the government with an additional argument to seek the cancellation of a portion of the debt we are talking about the debt held by the official sector.”
Greece has been locked out of international bond markets since its economy imploded in 2010, and many feared the country would have to leave the group of countries that use the euro currency.
The deeply resented austerity measures included slashing incomes, hiking taxes and overhauling an inflated, largely inefficient public sector.
The central bank said this month that the country’s economy is likely to contract by a further 4.6 per cent in 2013, with unemployment set to reach 28 per cent.
Greece restructured its privately-held bonds last year. But the country is still struggling to stabilize its national debt - which is set to rise to 175 per cent of its annual output this year.
The country has been promised additional relief from the eurozone if Athens delivers its promise to balance its budget this year. What form that relief will take remains unclear and speculation has increased that a further debt restructuring is on the cards.