Poul Thomsen, Greece And IMF Cynicism


For the casual reader, Poul Thomsen’s recent piece on the role of the IMF in the bailout review negotiations taking place between Greece and the Troika would seem balanced and reasonable. At the end of the day, as he has argued elsewhere, the numbers simply need to add up. For that, there is a trade-off between the “ambition of the reforms” Greece needs to impose and the amount of debt relief that can be granted by its European partners. Put bluntly, more austerity implies less debt relief and vice versa.

Thomsen argues that given the contentious character of the negotiations the IMF is simply there as a friendly companion that supports both its Greek and European partners to make the tough decisions required to develop a program that adds up. However, for someone who is more familiar with the role that the IMF in general, and Thomsen in particular, has played in putting Greece in the precarious situation in which it finds itself today, his piece can only be defined as brazen and cynical.

In order to unpack Thomsen’s argument, we need to go by parts:

Ultimately a program must add up: the combination of reforms plus debt relief must give us and the international community reasonable assurances that by the end of Greece’s next program, after almost a decade of dependence on European and IMF assistance, Greece will finally be able to stand on its own”

It’s interesting that Thomsen makes this argument now, when in 2010 he was directly responsible for the structure of the initial bailout agreement for Greece: one that did not include debt relief. Back then, even though several IMF departments had recommended a debt restructuring, Thomsen and the European Department “believed a haircut should not even be considered at this juncture.” When the IMF Board met in May 2010 to approve the bailout package for Greece, Thomsen defended the program even though it was impossible to certify that it would ensure debt sustainability. As this was against the IMF’s lending policies, the board also approved a change in its rules so as to allow loans that do not ensure debt sustainability, as long as there is a “high risk of international systemic spillover effects.”

In simple terms, a loan beyond the economic capacity of a country to pay it back could be granted if it could help to avoid panic in international financial markets. Thus, from the start, both Thomsen and the IMF were aware that Greece was being granted a loan that it couldn’t be expected to pay back, and therefore had no hope of eventually being “able to stand on its own”.

This said, no amount of pension reforms will make Greece’s debt sustainable without debt relief, and no amount of debt relief will make Greece’s pension system sustainable without pension reforms. Both need to come about.

Once the original program had gone off track in 2012, debt restructuring became unavoidable. At this point, foreign creditors had reduced their exposure towards Greece by about €90bn thanks to the funding provided by the first bailout. Furthermore, once debt restructuring was completed, Greek banks were fully protected from the losses derived from their holdings of government debt. However, domestic pension funds were not. As a result of the 2012 debt restructuring, pension funds lost an estimated €14.5bn (see here). Thus, the delayed debt relief provided to Greece came precisely at the expense of the pension system of the country.

There is no doubt that both Greece and its European partners will face politically difficult decisions in the coming months to arrive at a program that is viable—one that adds up. Such difficult decisions cannot be “kicked down the road” through unrealistic assumptions.

It is interesting that Thomsen highlights the role of unrealistic assumptions in kicking the can down the road: this is exactly what the IMF has done over the last five years. For example, the first adjustment program, personally approved by Thomsen, was based on the assumption that Greece was going to be able to achieve and sustain a primary fiscal surplus of 6% of GDP in the medium term. It was clearly absurd to expect that any country could achieve this type of fiscal adjustment but, in order for the numbers to add up, this was the inevitable result of excluding debt relief. Furthermore, despite the problems associated with this approach, the IMF has continued to base its assessments on it: the second adjustment program assumed a medium term target of primary surplus of 4.5%, whereas the third program assumes one of 3.5% for the next several decades. On the face of historical evidence, which shows no country even close to achieving such a large and sustained adjustment, it begs the question of why the IMF continues to endorse this futile exercise of can-kicking.

Thus, assuming that Greece can simply grow out of its debt problem without debt relief—by rapidly transitioning from the lowest to the highest productivity growth within the euro zone—is not credible.