Friday, August 05, 2016

Greek tragedy wrought by the IMF

So, Greece, which had paid higher yields than others in the Eurozone before it was created, could now borrow cheaply. The obverse of such borrowings was a widening current account deficit. Following the financial crisis of 2007, the markets became sensitive to sovereign risk. They sensed the possibility of sudden stops to capital flows that had financed large current account deficits. Yields on Greek sovereign bonds began to rise. Large amounts of Greek public debt were falling due. It became clear that some private creditors would not be willing to roll over debt and, even if they did, the government could not afford to borrow at the higher yields.

The IMF and the EU stepped in to organise a €110 bn bailout. The objective in any bailout must be to restore an economy to health. The Greece bailout has clearly failed to accomplish that. That's because IMF did not ensure that the terms of the bailout ensured sustainability of debt. This is astonishing because the IMF's rules required exceptional access to finance to be provided only after this condition was satisfied. How this norm and other norms were circumvented is a story that is well told by the IMF's Independent Evaluation Office, the IEO.

More on this in my article in the Wire, How the IMF bungled the Greek crisis

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