IMF failed to anticipate dreadful eurozone crisis, watchdog says

Flickr © International Monetary Fund

The IMF’s watchdog – Independent Evaluation Office (IEO) - has recently published an assessment of the Fund’s engagement with the euro area during the period of financial assistance to Greece, Ireland and Portugal. The report blames the IMF for not foreseeing the magnitude of the risks that would dominate the eurozone’s concerns such as the oversized Irish banking system and the consequences of reckless lending.

Overall, existing literature regarding the IMF’s conduct was mainly critic, underlying causes for the crisis such as policy failures and external borrowing that was not productively invested. The Fund was also criticised for being overly realistic with projections for Greece and Portugal. More realistic forecasts would have made structural reforms and fiscal consolidation more progressive and therefore less devastating for the poor and middle class segment of society.

The IEO’s methods of research were however confronted with some difficulties, as “the IEO did not have full access to confidential IMF documents in a timely manner.” Nonetheless, after eight years since the onset of the financial crisis, a dominant factor seems to be on the root of the financial woes and public finances of the economies of the Member States: banks issued billions of euros in loans with relaxed lending standards during times of financial prosperity and economic stability.  

In terms of surveillance, it seems that the IMF should have been more attentive to reckless lending. After all, according to article IV, the IMF is responsible to conduct economic and financial surveillance in the member countries.

Faulty Euro's Architecture 

Daniel Dåianu, a Romanian Economist and Professor, identifies the roots of the strain in the European Union. To begin with, a flawed financial intermediation system is one of the root problems. More specifically, this refers to mistakes in macroeconomic policy, the same errors — lack of regulation, excessive securitisation, inadequate risk-assessments models — that contributed to the emergence of the American crisis.

Another issue is related to the premises of the European Monetary Union (EMU), which are those of a single market, but lacking a coherent risk management policy. The EMU has never solved several issues related to the distribution of responsibilities between home and host country. In addition, the EMU was not built on detailed burden-sharing arrangements in the event of a crisis.

The third problem is the failure of the Europe 2020 strategy to combine centralised decision making with national or regional initiatives in economic policy making. And, last but not least, EU has always suffered from a lack of integration and harmonisation among member states, this meaning that “conflicting views and interests among EU member states reduce its internal cohesion and harm its power projection externally.”

IMF and Interest Rates

In an article entitled "IMF Go Home", Daniel Gros, Director of the Centre of European Policy Studies, made a brief analysis on the interest rates applied by the IMF and the European counterparts. Hence, his main findings indict the IMF of setting up on higher interest rates compared to the interest set up by the European homologues.  According to Gros, the IMF’s assessments of debt sustainability in Greece are undermined by a deep conflict of interest and more important, IMF credits are too expensive.

"The IMF is charging a much higher interest rate (up to 3.9%) than the Europeans (slightly above 1%, on average), largely because it has surcharges of up to 300 basis points on its own funding costs, compared to less than 50 basis points for the European lenders. Moreover, IMF loans are to be repaid in just 5-7 years, on average, compared to up to 50 years for the European funding."

"There is a broader point as well. Greece is not the only country suffering from the high cost of IMF loans. The outstanding IMF loans held by Ireland and Portugal, which amount to another €23 billion, should also be re-financed. If IMF loans are replaced with European Stability Mechanism financing, eurozone taxpayers will save hundreds of millions of euros per year."