IMF: Austerity was more damaging to Greece than we thought it would be

IMF won't sign up to a new bailout deal if it doesn't include debt relief

THE International Monetary Fund (IMF) has admitted that the structural reform programme that it put forward as part of an agreement for a bailout of Greece in 2010 was flawed.

The Greek economy has collapsed since the bailout deal, with a decline of over 25 per cent in economic output and its fifth year of recession, a greater fall than at any time during the 1930s Great Depression.

The IMF contributed EUR30bn towards a EUR110bn bailout package in 2010 with the European Central Bank (ECB) and European Commission, but now admits in a new report that the price - of sharp reductions in public spending and privatisation of large parts of the Greek economy - was too high.

"Market confidence was not restored, the banking system lost 30 per cent of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment," the IMF report states.

It continues: "Given the danger of contagion, the report judges the programme to have been a necessity, even though the Fund had misgivings about debt sustainability.

"There was, however, a tension between the need to support Greece and the concern that debt was not sustainable with high probability (a condition for exceptional access).

"In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases. The baseline still showed debt to be sustainable, as is required for all Fund programmes."

The report added that its economic projections were "too optimistic" and the decision-making from its Troika partners in the Eurozone was "fragmented".

The IMF has made it clear that it will not be part of another bailout deal for Greece unless it involves significant debt restructuring, something that other Eurozone leaders, most importantly German Chancellor Angela Merkel, does not want to concede.

Greece defaulted on a EUR1.5bn debt repayment to the IMF last week as the Greek Government and its creditors could not come to a deal. Since then, 61 per cent of Greeks voted No in a referendum to a Troika offer for bailout conditions with austerity conditions tied to it, including cutting the state pension.

Dominique Strauss-Khan, disgraced former head of the IMF at the time of the first bailout in 2010, has admitted that the IMF underestimated the "profound institutional shortcomings of Greece", and proposed that no new money be offered from international institutions but should get "significant nominal debt reduction". (Click here to read more).

A meeting of Eurogroup finance ministers is set for Tuesday [7 July] to try to agree to a deal between Greece and the Troika. The Greek financial system is on the verge of collapse, with some reports suggesting just EUR500m of deposits is left in bank coffers.

Picture courtesy of World Bank Photo Collection