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The IMF and the Euro: Love's Labours Lost?

by ARGeezer Fri Jul 29th, 2016 at 02:32:17 AM EST

IMF admits disastrous love affair with the euro, apologises for the immolation of Greece    Ambrose Evans-Pritchard

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 break-down 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 EU insiders used the Fund to rescue their own rich currency union and banking system.


The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000 percent 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.

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 emphasize 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".

Taken together the failure to follow internal rules, the failure to keep required records of how decisions were justified and who made them and acting in the interests of their own nations' supra-national project to the detriment of the remainder of the total world membership would create a situation ripe for prosecution were it under the jurisdiction of most West European Nations. But there really is no appropriate jurisdiction to hold IMF officials to account. Sadly, neither is there a means to provide the member nations of the IMF with insurance against errors and omissions by the staff - let alone misconduct.

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 bail-out 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.

"And so castles made of sand fall in the sea, eventually" - Jimni Hendrix

Yanis Varoufakis Tweet:

"Time to demand the immediate firing of Poul Thomsen. No ifs. No buts. Exit stage left."

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 29th, 2016 at 04:35:50 AM EST
Varoufakis discusses the matter in more detail on his blog today.
by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Fri Jul 29th, 2016 at 09:13:22 PM EST
[ Parent ]
The IMF confesses it immolated Greece on behalf of the Eurogroup    Yanis Varoufakis

This week began with a debate in Greek Parliament called by the Official Opposition (the troika's main, but not only, domestic cheerleaders) for the purposes of, eventually, indicting me for daring to counter the troika while minister of finance in the first six months of 2015. The troika who had staged a bank run before I moved into the ministry, who had threatened me with bank closures three days after I assumed the ministry, and who proceeded to close down our banks, now moved to charge me with... bank closures and capital controls. Like a common bully, the troika proved immensely keen to blame its victims, and to violate and vilify anyone who dares resist its thuggery.

My reaction to the troika's charges, and threat of being pulled up in front of a judicial inquiry , was simple: "Bring it on!" "I shall face you", I challenged them "in any forum you want: in an amphitheatre, a TV station, even a court room!" In the end, they chickened out and the parliamentary motion was defeated as some of them (a small party usually fully in troika's clasps) strategically voted against.

And then, to complete this week's drubbing of the troika, the report by the IMF's Independent Evaluation Office (IEO) saw the light of day. It is a brutal assessment, leaving no room for doubt about the vulgar economics and the gunboat diplomacy employed by the troika. It puts the IMF, the ECB and the Commission in a tight spot: Either restore a modicum of legitimacy by owning up and firing the officials most responsible or do nothing, thus turbocharging the discontent that European citizens feel toward the EU, accelerating the EU's deconstruction.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 29th, 2016 at 09:42:10 PM EST
[ Parent ]
And how much power does Christine Lagard have at the IMF? There are 24 groups casting votes for individual countries or groups of countries. Can she fire those who serve various departments at the IMF? Varoufakis calls for the firing of Poul Thomsen - the original IMF Greek Mission Chief, Thomas Wieser, the chair of the EuroWorkingGroup and Klaus Masuch. Who can do what?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 29th, 2016 at 10:03:05 PM EST
[ Parent ]
I think it's just like the banks who caused the crash in 2008; those most responsible waltz off scot free with tens of millions in bonuses while the corporations, companies and countries that they destroyed are left in smokin ruins, victims of the faultless and unquestioned "logic" of the market.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Mon Aug 1st, 2016 at 01:57:14 PM EST
TINA and 'the faultless and unquestioned "logic" of the market' will certainly be thrust forward as the preferred explaination - no matter how spurious. Else what have all of those billions spent on propagands been for? But Mr. Market could soon, in many smoking craters, find himself answering to fascist strong-men.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 1st, 2016 at 02:09:35 PM EST
[ Parent ]
I'm not sure that my personal preference among the alternatives

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Mon Aug 1st, 2016 at 03:41:16 PM EST
[ Parent ]
Nor will it likely matter, unless massive numbers feel the same way, and even then....

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 2nd, 2016 at 03:13:23 PM EST
[ Parent ]
But my preference would certainly be that TPTB sort things out so as to avoid at least dire outcomes. Either dissolve the Euro-zone or radically change the rules under which it operates. And DO something significant for the peripheral countries current policy has so badly damaged.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 2nd, 2016 at 03:16:27 PM EST
[ Parent ]
How do you redesign a currency union that has 19 members, another 9 members who are sort-of half interested, and was incredibly badly designed in the first place?

You can't just change the terms and the goals overnight. Especially not when the only people with access to policy are brainwashed marketista idiots.

Is there anyone at all - apart from Varoufakis, who is probably disqualified - who might have a workable plan?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Aug 2nd, 2016 at 05:09:09 PM EST
[ Parent ]
Note that the existing system is sort of working but does not work for all members and seems likely to work for fewer and fewer over time and does not look sustainable. Begin negotiations with nations or groups willing to negotiate on terms to which all parties can agree. Start with general principles:

First, any agreement has to work for all. The Eurozone obviously fails that test.

Second: nations or groups are not joining a victim of the year club. If a nation or group finds the direction the overall system is taking to be disadvantageous, it can withdraw.

Third: The mutual goal is to grow everyone's society so that general well-being is improving. If one group or nation wants to pursue a policy or direction that advantages itself at the expense of others, it must leave the group.

The problem with the Eurozone is that it has allowed a few powerful members to set direction and policy that disadvantages too many other members and the inherent dynamic of the agreement - if current policies and direction continues - will be desolation of member nations, weakest first.

This does not require the dissolution of the EU or, immediately, of the EMU. But the existing system must be changed in order to get it out of what is becoming a death spiral. As I have long advocated, this should start with negotiations between the victims of the existing system. Were Cyprus, Greece Italy, Malta, Spain and Portugal to form their own association run by rules following the above principles they could, when the process reached an appropriate stage, all leave the Euro together and form a new union. They would be stronger together than individually.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 3rd, 2016 at 03:32:19 AM EST
[ Parent ]
And there are plenty of economists and potential leaders in Europe to put together a feasible plan. That they are not currently empowered is because their skill sets are actively suppressed by the existing mindset. This is what Varoufakis is proposing to do on one of his web sites. People would do well to put energy into something that has a potential future than into the current doomed project. Europe is not doomed, but the current incarnation of the EMU certainly is.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 3rd, 2016 at 03:04:59 PM EST
[ Parent ]
If a man as articulate, knowledgeable, charismatic and vocal as Varoufakis can get this little traction even when the shit fans are in turbo crash mode, then things are dire indeed!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Aug 3rd, 2016 at 07:06:30 AM EST
[ Parent ]
Well, the  facade is crumbling. The IMF inspector's report just vindicated everything he has been saying. Maybe when DB blows up or Italy starts considering exiting the Euro....

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 5th, 2016 at 02:11:56 AM EST
[ Parent ]
Welcome to the desert of the real world.
by rifek on Thu Aug 11th, 2016 at 01:03:13 AM EST
[ Parent ]
I looked at the Evans-Pritchard link/headline and thought, "So AE-P is writing for The Onion now?"
by rifek on Tue Aug 2nd, 2016 at 03:54:44 PM EST
Bankers gonna bank. Crisis at 11.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Aug 2nd, 2016 at 05:03:05 PM EST

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