Even the International Monetary Fund makes mistakes. An (initially) internal report released this week points to the biggest blunders with the IMF's first Greece bailout, offering unprecedented answers to the question economists are still asking: "How did we get it so wrong?" Here's where the IMF failed.
After The Wall Street Journal leaked portions of an internal 50-page IMF report analyzing the efficacy of its first Greece bailout, the IMF decided to release its full findings Wednesday evening. Dated May 20, the "Ex Post Evaluation" covers both the successes and shortfalls of the IMF's May 2010 to March 2012 Stand-By Arrangement. While it patted itself on the back for Greece's retained EU membership, fiscal consolidation, steadier pension system, and "relatively well-contained" global spillover, the majority of the report focuses on the IMF's failures. Here are five major lessons learned from this bailout blunder.
1. Keep it snappy
Stakeholder agreement and consensus gathering is all well and good, but dire straits call for swift action. The IMF admits that earlier debt restructuring would've put the government on steadier ground, as well as stem the private credit exodus that put even more pressure on Greece's then-prime minister, George Papandreou, and the public sector.
2. Keep it specific
The IMF's Stand-By Arrangement (SBA) is no new invention. Since 1952, the IMF has used the SBA as its "workhorse lending instrument" for developing and developed countries. But a workhorse isn't always what a financial crisis needs. In this case, the IMF concedes that it should've tailored its lending policies to Greece's EU member status. As the IMF jumped in, it allowed other EU members to take a step back, shifting responsibility and paving the way for multiyear gridlock and finger-pointing .
3. Don't forget the 1%
No number crunching can overcome an angry mob. The IMF notes that its effort "might have been more enduring if more visible progress had been made with regard to getting those on high incomes to pay their taxes," as well as avoiding pension cuts for Greece's poorest citizens.
4. Own it
And even if major reforms had been successful, the IMF reflects that Greeks felt resentful about the lack of ownership over their own economic recovery, creating opposition to seemingly positive policy changes. IMF analysts flooded Greece's government offices with technical assistance and, regardless of efficacy, "these efforts are unlikely to be able to substitute for political ownership."
5. Spread the risk
There's nothing like an economic crisis to show you where the cracks are. The seemingly stable and unified European Union was hit hard by Greece's fall, and many members would've preferred flight over fight. But the EU architecture kept countries combined, even as a lack of risk-sharing arrangements or banking unions made any concerted efforts seemingly impossible.
But there's hope
While this report puts fuel on the fire of Greece's bailout blunders, there's an obvious bright spot to this report's findings. The IMF knows it messed up, and it went to the trouble of finding out how and why. The eurozone crisis isn't over, and the global recession is far from wrapped up. Economies that seem strong today might crumble tomorrow and, if they do, we can hope the IMF will remember well its lessons learned.
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