When the European phase of the debt crisis erupted, involving the IMF was controversial. However, its money, expertise, and credibility carried the day. It became integral to the aid efforts within the monetary union. It has reportedly signaled it does not want to participate in additional efforts to assist Greece.
There have been several critical errors in dealing with Greece, and these errors are partly of the IMF’s doing. Many officials have expressed concern about the moral hazards that distort the incentive structure for Greece, but what of the moral hazards for the official creditors, like the IMF?
A few years ago the IMF admitted that it under-estimated the fiscal multiplier. The austerity it demanded produced a deeper and longer lasting economic contraction (depression) than the IMF, and its army of economists had expected. This acknowledgment did not seem to prompt a change in the IMF’s behavior.
The size of the IMF’s initial involvement was much larger than its own internal rules and procedures permitted. Staff objections were reportedly over-ruled at the highest levels of the IMF. The IMF exposure to Greece in the first aid package, given the size of the Greek economy unprecedented. The IMF participated somewhat less in the second assistance package. And now it signals, according to press reports, that it does not want to participate at all in a third program.
The IMF and the EU were reluctant to allow Greece to restructure its debt for two years after the initial aid effort. Apparently EU officials were concerned about the impact on their banks due to the exposure to Greece. Moreover, by the time that the restructuring was approved, many non-Greek banks had reduced their exposures by selling them to the ECB.
This made the restructuring when it did take place too small to reduce Greece’s debt burden to sustainable levels. Officials allowed the private sector to shovel their Greek exposure to the public sector and then refuse to restructure that debt on grounds of protecting the taxpayers.
