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The IMF has failed Greece


Christine Lagarde There is something eerily symmetrical about the decision by the Greek prime minister, Alexis Tsipras, to call a referendum about what he has described as the 'extortionate ultimatum' of 'strict and humiliating austerity without end' coming from the International Monetary Fund, European Commission and the European Central Bank – the troika.

The country that is the cradle of democracy has decided to ask the people if the financial markets have the right to rule over them. Predictably the response has been a mixture of fury and disbelief. 'You are asking the people what they think? We tell you what to think' is the implicit message.

The great absurdity of modern geo-economics is that the world of money, which is just a human construct, is being treated like a natural force that must be obeyed, much as we have to respect the law of gravity. One might call it the cart-before-the-horse syndrome. Money is supposed to serve us, but increasingly we are becoming servants to those who run it.

Few are being asked to be more servile than the Greeks. When the IMF came in with what is amusingly referred to as its austerity 'plan', the Greek economy was expected to grow at over 2 per cent, unemployment was below 9 per cent and the debt was about 120 per cent of GDP. By 2014, after the 'plan' had taken effect, the country’s economy had shrunk by a quarter, unemployment was over 25 per cent, youth unemployment was over 50 per cent and the debt had risen to over 170 per cent of GDP.

The IMF’s abject failure to provide a sound strategy was hardly a surprise. IMF prescriptions have a long history of failing, and countries that ignore them are often the ones that do surprisingly well. One especially prominent example was the reaction of Malaysian prime Mahathir during the Asian Financial Crisis in 1998. He was roundly criticised for ignoring the IMF prescriptions, instead fixing the currency and imposing capital controls. Malaysia performed best during the crisis and it was later hailed as a master stroke. It is almost a case of the best strategy is to ask the IMF what to do, then do the opposite.

It is not just the IMF and its partners that are not being held to account. The absence of responsibility is even worse with the banks. It was the banks and the wider European financial sector who, by 2010, had recklessly loaned €310 billion to Greece. Since then, the troika has loaned €250 billion to the Greek government, less than 20 per cent of which was used to bail out Greek banks. Sixty per cent of the funds were used to bail out the original debts and the interest from reckless lenders.

One theory is that the reason there is so little concern with a realistic solution for Greece is that the creditors are determined to establish the principle that they can over-lend to a country and force the country to pay by selling public assets and cutting pensions and social services of citizens. The creditor banks then profit by financing the privatisation of public assets to favoured customers.

That may be so, but the general recklessness of the financial sector goes a lot deeper than that. Derivatives, the extraordinary pyramid scheme that the financial sector has created (financial instruments 'derived' from conventional forms of finance; essentially a side bet) continue to spiral. This $700 trillion mountain of gambling money sits above the banking sector.

One of the biggest holders of derivatives is Deutsche Bank, whose derivatives exposure is $54 trillion. As became evident during the Global Financial Crisis, a problem in the 'real' economy can set off cataclysmic repercussions in the very unreal world of derivatives (in 2008 it was mortgage default in the US housing market). It is very likely that it is why the bank lenders to Greece were bailed out by the IMF, ECB and European Commission.

What we are left with is a situation where the extraordinary recklessness of a wealthy elite in the financial markets is blamed instead on those who are anything but wealthy, such as Greek pensioners. But it remains the case that these are only rules that have been invented by the finance sector. Political leaders can also attempt to establish their own rules.

One of the truisms in economics is the so-called trilemma: the argument that it is impossible to have a stable exchange rate, free capital movement and an independent monetary policy. This may be valid, but if Greece does go to the drachma, why should it have a free floating currency? China has created the most spectacular period of wealth creation in the history of the world with a fixed yuan. Mahathir defied the Asian financial crisis by fixing the ringgit. Some control over capital flows might also be desirable when you get money from such irresponsible financial institutions.

If Greece is rejected by the financial elites, it might also want to consider rejecting many of their economic orthodoxies as well. If there is one lesson from the series of debt crises that have plagued weaker countries since the 1970s, it is that solutions only emerge when those country’s leaders stop playing by the rules imposed on them. 

David JamesDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.

Christine Lagarde image by Shutterstock

Topic tags: David James, economics, Greece, IMF, austerity, economics, finance



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Existing comments

I endorse what David James writes. I would add two points. Firstly, the architects of the EU and the Euro appear to want to go to almost any lengths, including supporting risky financial dealings, in order to justify, and paste over, the faults inherent in their creation. Secondly, Greece is not without fault: it lied about its financial situation in order to enter the Euro; its pensions are equal to 96 % of previous earnings compared to OECD averages of 59%; over 130 employment categories are closed shops where there is no competition; there is massive tax evasion and pension fraud; and no Greek leader has tried to tackle these real problems.

Ross Howard | 30 June 2015  

H.D.Kitto observed that the climate of Athens was a significant contributor to the development of democracy. Perhaps it also contributes to the economic straits in which Greece today finds itself. (Not that the the IMF, of course, should be totally exonerated, as David James shows.)

John | 01 July 2015  

I applaud this cogent elucidation of the economic forces underlying the current situation in Greece. Thank you very much for clarifying what are the complex and generally oversimplified or misinterpreted issues implicated in the formidable challenges to the stability of Greece.

Jena Woodhouse | 01 July 2015  

I liked this article...it expressed what I also think about Greece and its present situation...AND I am not Greek. We owe them so much in other ways.

elizabeth lynch | 03 July 2015  

This is a very naïve opinion. The Greek governments of the past few years have been incredibly stubborn and refused to make structural reforms such as what Italy and Spain have done when faced with a similar economic crisis. Both Italy and Spain have made significant economic recovery in the last few years. People should also understand that the IMF under Christine Le Gard's leadership has been proactive in lobbying the European Commission, the Banks and the German Government for some debt write-offs as part of Greece's economic management. The underlying cause of economic mismanagement around the world in recent times is ideological obsessiveness to the reliance on debt in lieu of taxation and the lack of reasonable standards of moral and ethical behaviour by the private finance industry.

Mark Doyle | 05 July 2015  

Greece is not without fault in that past governments allowed themselves to be driven into excessive borrowing to offset the damaging effects of the euro on the country's economy and finances. Although constantly repeated, the charge that Greece 'lied to enter the euro' is hardly justified. It suggests the eurozone administration was fooled by Greece. In fact the EU elite disregarded the fact that Greece was not ready for the euro as they were anxious to get countries to join their new currency. In any case, in 1999 when Greece applied for entry to the eurozone its divergence from the narrow criterion applied (deficit to be no more than 3% of GDP) was not very significant and comparable with other member countries.

Peter Prineas | 30 July 2015