IMF bowed to political pressure in euro zone debt crisis – report

Internal review finds commission influenced staff; Lagarde rejects ‘premise’ of report

International Monetary Fund  managing director Christine Lagarde: fund’s involvement in euro zone programmes had been a “qualified success” in the face of unprecedented systemic challenge. Photograph: Fred Dufour/AFP/Getty Images

International Monetary Fund managing director Christine Lagarde: fund’s involvement in euro zone programmes had been a “qualified success” in the face of unprecedented systemic challenge. Photograph: Fred Dufour/AFP/Getty Images

 

The IMF repeatedly succumbed to political pressure from European governments during the euro zone debt crisis, according to a damning internal report on bailout strategy that will fuel debate over whether it should continue to fund Greece.

The Independent Evaluation Office highlighted a litany of flaws in the IMF’s “uneven” response, prompting calls for greater clarity over its rescue strategy.

The assessment also raises fresh questions over the failure to restructure Greek debt at the time of its first bailout in 2010. The report, released Thursday, said key decisions had already been reached in Europe by the time the fund became involved in the rescue effort.

Christine Lagarde, the IMF’s managing director since 2011, backed some of the recommendations for improving internal procedures but dismissed calls from the inspectors to fortify the fund’s defences against political interference.

“I support the principle that the IMF’s technical analysis should remain independent,” she said. “However, I do not accept the premise of the recommendation, which the IEO failed to establish in its report, and thus do not see the need to develop new procedures.”

The fund’s involvement in euro zone programmes had been a “qualified ­success” in the face of unprecedented systemic challenge, Ms Lagarde said.

Nonetheless, the report is likely to fuel suspicions of some emerging market IMF shareholders and some of its staff that it repeatedly bent its own rules to help out the euro zone.

“It highlights the concerns of many, both inside and outside the fund, that the fund’s treatment of developing and emerging market economies is quite different from its treatment of advanced economies,” said Eswar Prasad, economics professor at Cornell University. “Political factors seemed to play a bigger role than pure technical considerations [for] advanced economies.”

The inspectors said the troika arrangement – in which the IMF worked alongside the European Commission and European Central Bank – potentially subjected the technical judgment of IMF staff “to political pressure” from an early stage. “The European Commission, in the area of emergency crisis lending, acted as the agent of the eurogroup, which in turn represented member states and decided whether to provide assistance.

“Interviews and some internal documents suggest that political feasibility in creditor countries was an important consideration for [European Commission] staff and that IMF staff occasionally felt pressured to accept a less-than-ideal outcome.”

The inspectors said the IMF executive board was in the dark on sensitive policy questions for Greece and for Ireland, which also received a bailout in 2010. Some members had learnt more via the press throughout the crisis than from informal board meetings.

– (Copyright The Financial Times Limited 2016)