Panayiotis Roumeliotis: IMF wanted haircut to bonds earlier
You have told the New York Times that the IMF knew “from the very beginning that this program was impossible to be implemented.” Later, in your book on the behind-the-scenes negotiations for the bailout mechanism, you suggest that the IMF was initially optimistic about the success of the program.
I did tell the New York Times what you said. But I explained just after that the reason that the program could not be implemented was that Greece, as a member of the eurozone, could not devalue its currency in order to restore its competitiveness, which is something that the IMF suggests to the countries that have signed on to its program. The solution that was finally chosen was that of internal devaluation, which is a very difficult endeavor, triggers a drawn-out recession and has succeeded in very few cases, just as the IMF said in its last report on the country [in March 2012]. The same report stresses that the conditions for the success of an internal devaluation are absent in Greece because, among other reasons, the public debt is very high.
Also in the New York Times, I argued that it is not so much the delays in structural reforms as the significant reduction in salaries and pensions that limited demand and therefore contributed to the big contraction in GDP. This opinion was applauded the following day in the same newspaper by Paul Krugman [Nobel laureate in economics], who cited my statements and also said that talk of Greeks not trying enough had to stop. This reference by the famous American economist alone strengthened the current government’s negotiating position in its efforts to break the vicious cycle of recession.
What happened to send things on a negative course?
I must note that many members of the IMF’s Executive Committee believed from the outset that the Greek program could not be implemented without a debt restructuring. The same view was shared by the IMF’s Strategy, Policy and Review Department. However, the Fund’s experts informed the members of the Executive Committee that the Greek authorities themselves had dismissed the possibility of a debt restructuring. Therefore, the Executive Committee approved the Greek program, despite the fact that the experts could not assure, with any great certainty, the members of the Executive Committee that the debt would be sustainable, something that is required of the Fund’s statutes in order for a program to be approved. Because of this, the Executive Committee, under pressure from its legal adviser, amended the statutes to say that even if the chances of the debt being unsustainable are large, the Fund can approve a program on the condition that its nonapproval could lead to serious systemic risks, meaning shaking the global economy.
Unfortunately the IMF’s concerns regarding the program’s implementation problems were confirmed a year after its approval. And so we went to the second memorandum, which included a sizable debt haircut and changes to the terms of the first (such as a longer grace and repayment period for the 110 billion euros and additional funding). However, during the first phase of the program’s implementation, the fiscal targets and some of the structural reforms were met to a satisfactory degree. In contrast, the greater-than-originally-anticipated recession and delays in further structural changes and reforms derailed the program from the start of 2011. This is actually quite common for such programs. They are implemented at first and then fatigue sets in when it comes to pushing them through.
In your book you say that you went to the IMF with a mandate to explore the possibility of Greece receiving funding from the IMF in order to avert a default. However, you also say that it was obvious that recourse to the Fund was not yet in the pipeline as the discussions for the eurozone funding Greece were proceeding in Brussels. Given that nothing had been decided at the time, what would have happened if there was no European Support Mechanism [ESM]?
Greece could not -- mainly for legal reasons -- resort to the IMF for bailout funding without the prior agreement of the eurozone. At the start of 2010, the European Central Bank believed that the Greek problem had to be dealt with within the framework of the eurozone. But the Greek side was concerned about whether the markets would refinance its debt. It was exploring alternative solutions in order to avert a default. In fact, in late 2009, early 2010, the Greek government’s official adviser at the time, Lazard Ltd, had warned the Greek authorities that the debt crisis in Greece had all the characteristics of a credibility crisis, meaning difficulty and/or inability to pay off the debt. So they knew that it was very likely that Greece would be excluded from the markets because of the likely widening of the spreads. So Lazard had suggested that the government ask its partners for an immediate debt restructuring.
If the European Support Mechanism had not been set up for Greece, then the country would have declared bankruptcy and would have inevitably been led to a debt write-down because the IMF would have been able to cover just a small part of its funding needs.
When was the issue of debt restructuring first discussed at the IMF?
In March 2010, when the IMF had concluded its first evaluation on the course of the Greek economy.
What do we mean when we say restructuring? Is it only a write-down or is there more involved?
As I say in my book, the term restructuring means either a reduction in the nominal value of bonds or an extension to the debt repayment period, or even a combination of the two.
Were the objections and information coming out today regarding the restructuring ever the subject of discussion by Greek authorities?
As I explained, the adviser to the government, Lazard, had tabled the issue of a debt restructuring in late 2009, early 2010.
Given that many analysts, even within the IMF, as we have learned, claimed that a restructuring of Greek debt was unavoidable, why wasn’t it included in the program from the start?
The Europeans, and the ECB in particular, did not want to upset the financial stability of the eurozone with a Greek debt restructuring. Also, foreign banks were pressuring their governments to avert a restructuring because their exposure to Greek debt was very large (about 76 billion euros).
In your discussions with Dominique Strauss-Kahn, did you ever get the impression that he believed that the Greek program would fail?
He believed that without a restructuring, a longer fiscal adjustment period and a lower rate of interest, it would be extremely difficult, if not impossible, to implement the program. Unfortunately this was confirmed over time.
Why did you champion the program if you believed it was doomed to fail?
My role as Greece’s representative at the IMF was to support the official Greek position. My role was not political, meaning that I did not make any decisions, just like any other ambassador for this country abroad. But, together with the managing director at the time, we pressured the government to bring up the issue of restructuring with the eurozone soon. I fought for this up until the last minute despite the reactions from certain of the prime minister’s aides.
Why did the IMF agree to bankroll a program that was doomed to fail, and to the tune that it did for Greece?
In order to avert the systemic risks of turmoil in the eurozone and the destabilization of the global economy.
What was the stance of the other IMF members toward the Greek program?
Emerging countries wanted the debt restructuring to be included in the Greek program. The Europeans were against it for the reasons I mention above. So, the IMF adapted its statutes in order to provide funding for Greece without the IMF’s experts being able to give firm assurances that the Greek debt would be sustainable.
Did the IMF’s stance change with the change of its managing director?
No. It insisted on the restructuring of the Greek debt and additional funding for Greece in July and in October 2011, in order to make the debt more sustainable.