Greece

It's Saturday, the sun is shining, the Olympics have started, the football season has kicked off and this blog keeps rolling along, most recently I see with a spirited discussion on VLO's and appropriate pay banding after I'd gone to bed. 

I've nothing probation-based to say today, so have decided to go 'off piste' and highlight something I feel is extremely important, but as far as I know has gone almost completely unreported. Regular readers will be aware that we generally take a liberal view of going off on tangents as long as it doesn't hijack things at key probation moments and a change is as good as a rest as they say. 

In January 2015 I wrote about the dire economic and political situation in Greece and the unresolved historical matters of reparations legitimately owing to them from the Second World War. Angela Merkel refused to discuss the matter and said it was 'all a long time ago' etc and I guess it fell into the 'too difficult to deal with' category for the rest of Europe to be bothered with. I'm still not sure how the issue was resolved - probably just swept under the carpet, but we do know Greece was publicly humiliated by the rest of the EU and its citizens punished and made to suffer harshly in order to pay for their so-called economic failings. Some say this treatment has helped to fuel anti-EU feeling in other nations, concerned they might be next to be made an example of. 

Purely by accident, I came across this astonishing article in the Daily Telegraph a week or two ago and I really feel the content needs to be spread widely, not least because it helps explain the growing anti-EU feeling across Europe, why it is a 'failed' project and that an apology is owed to the Greek nation. All of us would do well to take note:-
  
IMF admits disastrous love affair with the euro and apologises for the immolation of Greece

The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. This is the lacerating verdict of the IMF’s top watchdog on the fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions.

It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking breakdown in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation.

The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde. It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way European Union insiders used the fund to rescue their own rich currency union and banking system.

The three main bailouts for Greece, Portugal and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000pc of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the fund between 2011 and 2014. In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive "ad-hoc task forces". Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff," it said.

The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen.

“Before the launch of the euro, the IMF’s public statements tended to emphasise the advantages of the common currency," it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled. “After a heated internal debate, the view supportive of what was perceived to be Europe’s political project ultimately prevailed,” it said.

This pro-EMU bias continued to corrupt their thinking for years. “The IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro-area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value,” it said.

The IMF persistently played down the risks posed by ballooning current account deficits and the flood of capital pouring into the eurozone periphery, and neglected the danger of a "sudden stop" in capital flows. “The possibility of a balance of payments crisis in a monetary union was thought to be all but non-existent,” it said. As late as mid-2007, the IMF still thought that “in view of Greece’s EMU membership, the availability of external financing is not a concern".

At root was a failure to grasp the elemental point that currency unions with no treasury or political union to back them up are inherently vulnerable to debt crises. States facing a shock no longer have sovereign tools to defend themselves. Devaluation risk is switched into bankruptcy risk. “In a monetary union, the basics of debt dynamics change as countries forgo monetary policy and exchange rate adjustment tools,” said the report. This would be amplified by a “vicious feedback between banks and sovereigns”, each taking the other down. That the IMF failed to anticipate any of this was a serious scientific and professional failure.

In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed.

The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.

The IMF was in an invidious position when it was first drawn into the Greek crisis. The Lehman crisis was still fresh. “There were concerns that such a credit event could spread to other members of the euro area, and more widely to a fragile global economy,” said the report. The eurozone had no firewall against contagion, and its banks were tottering. The European Central Bank had not yet stepped up to the plate as lender of last resort. It was deemed too dangerous to push for a debt restructuring in Greece.

While the fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bailout sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability.

A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced to cut – what ex-finance minister Yanis Varoufakis called "fiscal water-boarding".

“The automatic stabilisers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report. The attempt to force through an "internal devaluation" of 20pc to 30pc by means of deflationary wage cuts was self-defeating since it necessarily shrank the economic base and sent the debt trajectory spiralling upwards. “A fundamental problem was the inconsistency between attempting to regain price competitiveness and simultaneously trying to reduce the debt to nominal GDP ratio,” it said.

The IMF thought the fiscal multiplier was 0.5 when it may in reality have been five times as high, given the fragility of the Greek system. The result is that nominal GDP ended 25pc lower than the IMF’s projections, and unemployment soared to 25pc instead of 15pc as expected. “The magnitude of Greece’s growth forecast errors looks extraordinary,” it said.

The strategy relied on forlorn hopes that the "confidence fairy" would lift Greece out of this policy-induced nose-dive. “Highly optimistic” plans to raise $50bn from privatisation sales came to little. Some assets did not even have clear legal ownership. The chronic “lack of realism” lasted until late 2011. By then the damage was done.

The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report.

“If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said. Better late than never.  

Ambrose Evans-Pritchard

--oo00oo--

The article led to the following analysis by prolific blogger on such matters John Ward:-

Yesterday’s mind-blowing piece from Ambrose Evans-Pritchard at the Daily Telegraph may not have reverberated around the world just yet, but it should. The article not only features a coruscating condemnation (by its watchdog the Independent Evaluation Office – IEO) of the IMF’s actions in relation to ClubMed austerity, but also an apology from the IMF board and Lagarde herself for the appalling suffering inflicted upon Greece, and the level of mindless collaboration with mad EC debt policy involved.

The News

The IEO report finds that the whole approach to the eurozone was characterised by “groupthink” and going native with Brussels. They had no fall-back plans on how to deal with a multinational currency crisis, because they had “ruled out any possibility that it could happen”.

In Greece, the IMF signed off a “bail-out” in 2010 – even though it made the sovereign debt impossible to sustain, and many commentators (this one included) insisted from the start that it was mathematically doomed. To go along with the imposition of austerity on top of this was, quite simply, economic illiteracy.

The killer punch – delivered by Evans-Pritchard, a globally respected writer on fiscal economics – is staggering in the clarity of its accusation:

The ramifications of these findings should have colossal ramifications on literally dozens of dimensions. What the IEO Report means

• For Greece, a clear and documented case for repudiation of the debt in an International Court
• For Brexiteers, a vindication of the moral case for leaving an EU that behaved with selfish and almost unthinkable cruelty from Day One
• For Christine Lagarde, a humiliating admission that she simply did not do her fiduciary duty at the IMF. Her position as head of the IMF must now be in doubt
• For British MPs and the Whiteminster establishment, a sense of shame that – in the light of this obvious international crime – they sat on their hands and whistled a happy tune
• For the Obama Administration’s Tim Geithner, a confirmation of the charge levelled against him at the time: that he used Lagarde’s Amerophilia and French nationality to advantage in pushing through her appointment to a job for which she had no qualifications
• For emerging nations, rage at the highhanded and devious manner in which stimulus that should’ve gone to their economies was blown in a fruitless excercise in debt management designed to keep over-leveraged Western banks upright
• For the Berlin austerity school, a slap across the face and a recognition of its bigoted approach to the problem.
• For the European Commission, charges of collaboration in a hare-brained attempt to save an idiotic currency union
• For the key members of the Eurogroupe and the infamous Troika, possible prosecution for the way they bullied Greece to set an example to others
• For Mario Draghi at the European Central Bank, possible prosecution for the illegal use of EU funds to destabilise the Greek banking system…the same charge applying to his toady in Athens, Yannis Stournaras

How to stop this happening again

In the short term, we probably can’t: there are bigger clouds boiling on the horizon that will rain on the globalist SuperState parade, come what may.

But beyond the Crash2 that creeps ever nearer, the world of States, fiscal policy, multinational banks and global trade alliances needs to given a serious reality check:

• The neoliberal ‘light touch’ regulation of lending at all levels should be abandoned in favour of highly-paid forensic watchdogs with the talent and power to stop limits being exceeded
• The role of Goldman Sachs in this venture should be revisited vigorously by the forces of law and order on every continent: “setting aside fines” will no longer cut it…miscreants must go to jail and serve real sentences, not token knucke-raps
• The euro needs to be radically restructured or abandoned if disasters to make this one look like a minor event are to be avoided
• Above all, widescale debt relief should now be brought in and enforced throughout Club Med
• The European Commission and its power structures need to be investigated by the top brains available in forensic auditing and the Law
• The Eurogroupe and the ECB in particular must be made accountable to a directly elected European Parliament, and forced to act within the spirit and letter of the Treaty of Lisbon
• The manic, blind drive towards federalism should be abandoned: it has been a classic case of trying to sprint while still a toddler. The EU should go back to being the EC.

The situation in Greece today is that of an unelected group of userers telling the democratically elected Governnment of Greece what to do. In the light of the IEO revelations, no ethical group of civilised nations can stand by and offer no restitution for what the largely innocent Greek people have suffered.

International relief without strings but with very heavy regulatory control should be forthcoming for all of ClubMed, and Greek poverty made a priority. Everyone is very keen these days on War Crimes tribunals. I think we need to instigate some Peace Crime investigations.

John Ward