As the deadline for a further financial bailout for Greece approaches, a new report by the IMF’s own watchdog has heavily criticised its initial handling of the eurozone financial crisis. The report by the Independent Evaluation Office outlined a number of failings by the fund in its intervention when the crisis started in 2010.
According the report, while the IMF’s pre-crisis surveillance “mostly identified the right issues”, it did not foresee the true extent of the risks to the eurozone. The IMF, the report claims, failed to take the risks building up in the monetary union’s banking system as seriously as it should have, due to an idea that “Europe is different”.
The IMF’s pre-crisis surveillance did not foresee the true extent of the risks to the eurozone
When the eurozone crisis first erupted in Greece, the IMF’s executive board approved funding to Greece without demanding debt restructuring. This, the report notes, was a mistake, due to the unsustainability of the country’s long-term sovereign debt. The fund, however, took this decision in order to protect against the risk of contagion in the eurozone.
The IMF, which prides itself upon its independence, also potentially subjected itself to political considerations from the eurozone. Without any clear framework for how the IMF would provide monetary assistance to eurozone members, the fund opted to work with the European Commission and European Central Bank, forming a so-called troika.
The report claims this proved to be an “an efficient mechanism in most instances for conducting programme discussions with national authorities”. However, it also meant that European Commission negotiated on behalf of the group, meaning that the “troika arrangement potentially subjected IMF staff’s technical judgments to political pressure from an early stage”.