Subcommittee Evaluates Lessons from the IMF’s Bailout of Greece
Washington, May 18

The Monetary Policy and Trade Subcommittee held a hearing on Thursday to evaluate lessons from the International Monetary Fund’s (IMF) bailout of Greece in 2010 and 2012.

“With Greece’s economy again officially in recession and discussions underway for a third IMF bailout, it is clear from today’s hearing that the IMF’s past efforts to save Greece from insolvency have been unsuccessful and that it needs to learn from those failures,” said Subcommittee Chairman Andy Barr (R-KY). “The IMF must focus on its core mission, not provide political cover for Eurozone politicians who refuse to take responsibility for Greece’s debt crisis.”

Key Takeaways from the Hearing:

  • The IMF’s bailout of Greece has politicized the Fund and left the Greek economy in tatters, tarnishing the IMF’s reputation and putting taxpayer dollars at risk.
  • Eurozone officials are using the IMF as a fig leaf to avoid electoral consequences, even though Europe’s own bailout fund possesses ample resources to resolve the Greek crisis on its own.

Witness Quotes:

  • “In retrospect, the IMF should not have submitted as readily as it did to European political exigencies; reputation-wise, the Greek crisis has been perhaps the worst debacle in the Fund’s history.” – Paul Blustein, Senior Fellow, Center for International Governance Innovation
  • “Given that the largest share of the debt is owed to Greece’s European partners, this is the opportune time for the IMF to disengage from financing Greece’s adjustment program. At this time, Greece’s outstanding debt to the IMF has dropped to less than $14 billion, while its debt to European partners remains over $200 billion.” – Meg Lundsager, Public Policy Fellow, Woodrow Wilson Center
  • “Co-financing limited the IMF’s financial commitment to Greece, but the IEO found that the so-called ‘troika’ arrangement of the IMF, European Commission, and ECB constrained IMF policy decisions and potentially subjected IMF staff’s technical judgements to political pressure.” – Dr. Rebecca Nelson, Specialist in International Trade and Finance, Congressional Research Service


MAY 18, 2017



Chairman Barr, Ranking Member Moore, Members of the Subcommittee on Monetary Affairs and Trade:

I have attended many hearings on Capitol Hill as a newspaper reporter, but this is my first time as a witness—an honor for which I sincerely thank the Subcommittee. I mention this because the expertise I bring to the subject of this hearing is that of a journalist, my main research technique being extensive interviewing as well as examination of countless documents, both publicly available ones and those which remain confidential but which interviewees kindly furnish to me, including memoranda, notes of meetings and the like. This sort of material provided the basis for my book, Laid Low: Inside the Crisis That Overwhelmed Europe and the IMF.

The Subcommittee’s hearing on the IMF’s bailout of Greece is welcome evidence of Congressional interest in a complex topic of profound importance to the future of the global economy. The Fund’s involvement in Greece is rich in lessons about the workings—and failings—of the international finance system. It’s a saga of many twists and turns, which I spell out at length in my book and am presenting in summarized form in this testimony.

The phenomenon of countries laid so low by financial crises as to require international bailouts was once thought confined to the emerging world—Mexico, Thailand, and Indonesia for example. The euro-zone crisis showed that advanced economies may be equally susceptible to the vagaries of globalized finance, and may need rescues too.

The importance of a muscular IMF, wielding power and authority commensurate with the strength of world markets, is thus greater than ever. The Fund, after all, is the chief guardian of global financial stability. By seeking to prevent financial crises from occurring and managing crises when they erupt, the Fund provides a global public good—that is, a good from which all nations broadly benefit and which no single nation can deliver alone.

But the IMF’s involvement in the euro zone was a bruising and enfeebling experience for the institution. During the euro-zone crisis, the Fund joined in several rescues despite grave misgivings among members of its Executive Board and top economic and legal officials—and it did so under pressure from top European policymakers, who maintain heavy influence over the Fund’s levers of control. Some of these emergency loan packages worked out well, but all too often debt was piled atop debt, and excessively harsh conditions were imposed on crisis-stricken countries. This approach, taken in conjunction with the Europeans, suited nations such as Germany and France, whose banks were anxious to stave off losses and whose voters were incensed at paying to bail out countries they perceived as irresponsible. It also suited the European Central Bank (ECB), because it helped preserve the international status of the euro and the ECB’s independence— principles on which the central bank’s leaders attach supreme importance.

The approach that was taken was not entirely misplaced; it was based on fears that the crisis would spread, via financial “contagion,” to the rest of Europe and elsewhere around the world. But the legitimate interests of the crisis-stricken countries were sacrificed in the process—and I believe the crisis was more prolonged, painful, and near-catastrophic than it ought to have been. Although IMF economists—to their credit—perceived serious flaws in these bailouts, they often yielded to the clout of policymakers in Berlin, Frankfurt, Brussels and Paris. Especially in the early years of the crisis, the Fund was relegated to the role of junior partner in the tripartite arrangement known as the Troika, which consisted of the Fund, the European Commission and the ECB.

The result sapped the institution of its most precious asset—its credibility as an independent, neutral arbiter of how to address economic and financial problems in countries around the world. Heavy damage was thus inflicted on the IMF’s ability to serve as a crisis-fighter and fixer of economic problems—and that raises concerns about the management of future crises.

Given its weighty duties, the IMF has consistently strived to maintain an image as a technocratic institution, free of gross political interference. Although it has often fallen short, there are sound reasons for hewing as close as possible to the ideal. The Fund stands the best chance of success when, in both appearance and reality, it represents the interests of the world community writ large rather than any single power or region. In the case of financial emergencies, one of the Fund’s primary goals is to help a country that has lost the confidence of investors regain access to financial markets. The money the Fund lends is only a part, and perhaps a relatively unimportant part, of its value. Equally crucial, if not more so, is its seal of approval—its signification that the country is adopting policies conducive to economic fitness. If the Fund’s seal of approval is severely tarnished, especially by the perception of manipulation by forces from on high, its effectiveness at restoring market confidence will be eroded. Cynicism among market players about the Fund’s susceptibility to political meddling makes its job much harder—an unwelcome development at a time when financial crises have become so pervasive.

The Greek crisis was where the damage was greatest, both to the country and to the IMF. In retrospect, Greece was saddled with an excessively high debt and should have gotten relief from its indebtedness much earlier than it eventually did. Although we will never know whether earlier debt relief might have made a difference, it seems quite reasonable to surmise that the Greek economy would have undergone a significantly less wrenching collapse than the 25% contraction in GDP that occurred between 2008 and 2015. And in retrospect, the IMF should not have submitted as readily as it did to European political exigencies; reputation-wise, the Greek crisis has been perhaps the worst debacle in the Fund’s history.

In my book, I use the term “Faustian bargain” to describe how the IMF became involved in Greece in the spring of 2010. This bargain is crucial to understanding much of what happened as the crisis unfolded.


In January 2010, a secret meeting took place in a hotel kitchen in Davos, Switzerland, during the annual meeting of the World Economic Forum. There were three participants—Dominique Strauss-Kahn, then the IMF’s managing director; George Papanadreou, then the newly-elected prime minister of Greece; and George Papaconstantinou, who was Papandreou’s finance minister. They met in a kitchen, with waiters bustling back and forth carrying trays, to make sure they wouldn’t be seen by the many reporters who cover the Davos gathering.

Here’s the background to this meeting: Greece had borrowed its way into deep trouble—its government debt totaled more than €300 billion, which was a bit more than the country’s annual GDP. Worse yet, the Greek government had done so without properly disclosing the degree of its profligacy. The budget deficit for 2009 was turning out to be several times higher than previously reported, and the ratio of debt to GDP—then estimated at 115%— was clearly on the rise. Financial markets were worried that Greece would fall prey to what economists call “exploding debt dynamics,” which refers to an ever-increasing debt-to-GDP ratio as higher interest rates, a sluggish economy and chronic deficits drive the ratio inexorably upward with the passage of time. (This phenomenon is analogous to an individual who, having borrowed an excessive amount from credit card companies, gets hit with much higher interest rates at the same time as his or her income falls, and keeps trying to borrow more until eventually being overwhelmed by mushrooming demands for interest and principal.) The nightmare scenario was that Athens would default on its debt obligations, leading ultimately to the country’s abandoning or effectively being expelled from the euro zone, with hellish chaos certain to ensue.

Papandreou’s government was doing what any over-indebted entity is supposed to do—cut spending and raise income. But the markets were highly skeptical that Athens could or would go far enough, and interest rates on Greece’s borrowing were soaring, which of course increased the threat of exploding debt dynamics.

So Papandreou and Papconstantinou had a question for Strauss- Kahn: Suppose Greece couldn’t borrow money at anything like an affordable rate. Would the IMF provide the money the government needed to continue paying its obligations? At that point, in early 2010, Greece’s European partners—especially Germany—were balking at the idea of lending to Athens, on the grounds that the rules of the European Monetary Union contain a “no bailout” clause. The European position would later change, but at that point it appeared that Greece’s only recourse might be the IMF.

Strauss-Kahn’s answer to the Greeks was not as comforting as they had hoped. He said that of course the IMF would try to help any member country requesting aid, but there were two problems: First, Greece would need a lot more money than the Fund alone could provide; and second, the Fund would not be able to provide a loan without the support of Europe, because European countries held a large (and disproportionate) share of the votes on the IMF board.

At that point, the overwhelming majority of top European policymakers were vehemently opposed to an IMF rescue for Greece. This aversion resembled the denial syndrome that afflicts leaders of pretty much any government facing the need for an international bailout. They believed that Europe could—and should—handle its own internal problems, and that seeking help from the Fund would be tantamount to admitting that their monetary union was weak and ineffectual. According to Papaconstantinou, who has written a memoir, French president Nicolas Sarkozy told him: “Forget the IMF. The IMF is not for Europe. It’s for Africa—it’s for Burkina Faso!”1

But the IMF was eager to play a part—Strauss-Kahn most of all. One big reason was that the world had gone for many years after 2002 with no major financial crisis for the Fund to manage, and the Fund’s very relevance and raison d’être had been called into question. The Fund had undergone a sort of existential crisis during this period, when it was forced to downsize its staff on the grounds that the need for such an institution had diminished.

On the surface, Strauss-Kahn and other IMF officials avoided any comments indicating that they were pressing for a big role in Greece or yearning for an invitation to provide major assistance. Behind the scenes, however, Strauss-Kahn was doing whatever he could to assuage Europeans’ worries and objections to IMF involvement, because of his anxiety to to avoid exclusion lest doubts arise anew about the Fund’s raison d’etre. He made it clear that the Fund would accept a junior partner role—an almost unprecedented step, because in past cases when the Fund joined forces with other institutions and donors (such as the World Bank), it has played the dominant role in designing terms and conditions, in recognition of its expertise and status as agent of the international community. Only in one case, the 2008 crisis in Latvia, had the IMF accepted a junior partner position, putting up a minority of the funding and acceding to the view of European officials in a disagreement over Latvia’s exchange rate policy.

This is where the Faustian bargain comes in. In my interviews with

1 George Papaconstantinou, 2016, Game Over: The Inside Story of the Greek Crisis,6 CreateSpace Independent Publishing Platform, Chapter 8.

Strauss-Kahn, he told me that he felt it would have been “lethal to the IMF if the Europeans would handle the crisis by themselves.” Accordingly, he recalled telling top European Commission officials at a meeting in Brussels: “We [the IMF] have to be in, but you will be the leader.” His reasoning was that the IMF would bring expertise and credibility to the crisis that no European institution could match, and to ensure that its views were taken seriously, the Fund would have to make some financial contribution—something less than 50% of a rescue loan, but well above zero. At the same time, the Fund could not expect to exercise the sort of total control over economic policy that it does in most countries because, in this case, it could not realistically demand policy action by the central bank—the ECB being the central bank for all 300 million people living in the euro zone, only 11 million of whom are Greek.

As is well known, the decision about the IMF ultimately came down to one person—German Chancellor Angela Merkel, who effectively overruled Sarkozy and other European leaders at a summit in late March 2010. She concluded that the German Bundestag, and the German public, would never accept funding an emergency loan for Greece unless it came with severe conditions, enforced by arbiters with recognized neutrality and competence—and the IMF was the only institution that came close to this description. So the IMF was in, albeit on junior partner terms, which eventually were negotiated to mean that the Fund’s contribution to the rescue loan would be roughly one-third of the total requirement.

I should add in this regard that the term “junior partner” has been rejected by some at the IMF, including the Fund’s own Independent Evaluation Office, as an apt description of the role the Fund played.2 But I can assure you that Strauss-Kahn himself accepted that term in conversations with me and in emails he sent me. He contended, with some reason, that the IMF had little choice if it was to be involved at all.


With the Troika having thus been constituted, missions from the three institutions were dispatched to Athens in mid-April 2010, the aim being to negotiate what came to be known as “Plan A”—that

2 IMF Independent Evaluation Office, 2016, “The IMF and the Crises in Greece, 7 Ireland and Portugal: An Evaluation by the Independent Evaluation Office,” July.

is, a loan of many billions of euros to restore stability by ensuring that Greece could avert a catastrophic default on its obligations coming due over the next two or three years. A huge deadline was looming only a few weeks away, when €8.5 billion was due on May 19 to Greece’s bondholders. So intense negotiations took place over a relatively short period of time, in late April and early May, over the terms of this loan. The result was an international bailout of unprecedented size.

Of course, emergency loans of this type invariably come with conditions, and the toughest demands for Greece to accept austere policies were coming from two power centers, the German government and the ECB. It was perfectly reasonable to expect Greece to undergo substantial belt-tightening, since the country had essentially been living well beyond its means for some years. The question was how much austerity would be sensible, because by taking too much money out of Greek pockets, the country’s economy—already in recession—would undergo additional contraction, which would be counterproductive; it would cause a vicious circle in which the debt-to-GDP ratio would rise, exacerbating fears about exploding debt dynamics.

The IMF was commendably “dovish” in arguing within the Troika for a somewhat less harsh approach that would give Greece a couple of extra years to shrink its budget deficit. Even so, the rescue program was going to oblige Athens to undertake one of the biggest changes in budget and tax policy in history. Government outlays would be cut by 7% of GDP—and to put that into more understandable dimensions, it is a greater amount, as a percentage of U.S. GDP, than the our government spends on Social Security, Medicaid, military retirement and unemployment insurance combined. Tax revenues would increase by 4% of GDP—which is equivalent to an increase of $8,600 in the taxes paid by an average American family of four.

Plainly, Greece would require measures to counter the recessionary impact of a tight fiscal policy, or it would fall into an endless downward spiral of recession and a worsening debt-to- GDP ratio. Because of its membership in the euro zone, the country was precluded from the policies that most governments adopt under such circumstances—that is, pumping up the money supply and devaluing the currency. That left one option, namely structural reforms aimed at enhancing the productivity, efficiency and flexibility of the economy. The Fund and European Commission had long been exhorting Athens to embrace such reforms, and now they had the leverage to impose them. These reforms included streamlining Greece’s notoriously overstaffed state owned enterprises, changing labor laws that favored unions, and opening up professions that had long enjoyed protection from competition. According to Troika projections, if Greece faithfully adopted all of these measures, its economy would begin to recover in 2012, after contracting by 2.6% in 2011.3

For an idea of the skepticism about this plan that pervaded the IMF staff, see the confidential memo dated May 4, 2010 by Olivier Blanchard, then the Fund’s chief economist, which I disclose in my book. (A copy of the most relevant portions, with key phrases underlined, is reproduced as Exhibit 1.) The degree of budgetary belt-tightening required of Greece “has never been achieved” by any other country, the memo warned. Furthermore, “even with fully policy compliance…there is nothing that can support growth against the negative contribution of the public sector….the recovery would likely be L-shaped, with a recession deeper and longer than projected.” The program is thus likely to go “off track even with perfect policy implementation.” Put in plainer English, this meant that even if Greece did everything being asked of it, the economy would sink further, because the structural reforms—no matter how sensible—simply wouldn’t generate enough of a stimulatory effect. Structural reforms, after all, almost always take a fair number of years to generate positive effects on GDP.

A graphical depiction (See Exhibit 2) helps make clear the grim implications of Blanchard’s concerns. In this graph, originally included in a public IMF document in May 2010, the dark solid line shows the projected path for Greece’s debt-to-GDP ratio—first peaking, at about 150% of GDP, then sloping back down to relatively sustainable levels—if all the assumptions in the program proved valid (that is, if Greece did everything demanded of it, and the economy responded as forecast.) The dotted line shows what would happen if just one of the major assumptions proved too optimistic—that is, if economic growth turned out to be one percentage point a year worse than projected. Under that less rosy scenario, the debt-to-GDP ratio wouldn’t decline; it would stay very

3 IMF, 2010, “Greece: Staff Report on Request for Stand-By Arrangement,” 9 Country Report No. 10/111, May.

high, almost certainly above sustainable levels. An even more explosive debt path would result if several of the assumptions went unmet.

One credulity-strainer in the first Greek rescue merits particularly close attention. The table in Exhibit 3 shows the Troika’s projections in 2010 for Greece’s primary budget surplus (that is, the budget surplus excluding interest payments on government debt). The Troika was assuming that the Greek government would run a surplus of about 6% of GDP each year from 2014 to 2020. Obviously if Greece could achieve such a high degree of fiscal rectitude that would help reduce its debt-to-GDP ratio to sustainable levels. But such a large budget surplus entails taking massive amounts of money in taxes from ordinary citizens while putting much less back into the economy in the form of government spending. The assumption that a country like Greece could achieve such a goal year after year was absurd—and other assumptions were too.


Small wonder, given the shaky prospects for Greece to stabilize its debt-to-GDP ratio, that a debate was raging behind the scenes at the IMF about whether to try a Plan B—namely, a “haircut” for the country’s creditors in which they would accept reduced and/or delayed payments of interest and principal. Fund economists were divided on this issue; some, especially in the European Department, contended that the rescue stood a decent chance of working if Athens fulfilled all of its promises. But others were more in the Blanchard camp, and in any event the Fund had a high standard for approving a large loan in such cases. The Subcommittee is well familiar with this standard, I believe—its formal name is the Exceptional Access Policy, but in my book I call it the “No More Argentinas rule,” because it was implemented not long after the disastrous failure in 2001-2 of the Fund’s rescue for Argentina, when the country defaulted and fell into total economic chaos a few months after receiving a Fund loan. Under the No More Argentinas rule, the IMF could make a large loan to a country in crisis only if rigorous analysis showed that the country’s debt was “sustainable with high probability”; otherwise the country should undergo a debt restructuring. Very few people if anyone at the IMF believed Greece met this criterion.

At Strauss-Kahn’s direction, high-level staffers from two departments that favored a Plan B-type approach (the Strategy, Policy and Review Department and the Legal Department) held secret discussions in late April 2010 with officials from the German and French finance ministries, in the hope of starting to lay the ground for a debt restructuring. As I report in my book, these discussions were so sensitive that they were held at a Washington hotel rather than in the IMF headquarters building. One reason for the secrecy was the concern that if word leaked, markets would go even more haywire than they already were.

Equally important, any talk of a debt restructuring was drawing enormously powerful and vehement opposition, the most formidable critic being Jean-Claude Trichet, the president of the European Central Bank. For Trichet, who was one of the founding fathers of European Monetary Union, it was unthinkable that a euro zone country would fail to honor its debt obligations in full and on time. In addition to the moral issue, he feared the contagion that might result; once bondholders saw the debt of one euro zone country restructured, they would dump the bonds of other countries in the zone, potentially leading to a catastrophe redolent of the Lehman Brothers bankruptcy in 2008. Advocates of Plan B tended to agree that such fears were reasonably well-founded, but their rejoinder was that countermeasures could be put into place to limit contagion and keep markets stable. And as we now know, the ECB finally took action in the summer of 2012—the so called “whatever it takes” strategy, technically dubbed “Outright Monetary Transactions”—to quell market turbulence once and for all, an action that pretty much ended the viral stage of the crisis. But in 2010, the ECB was unwilling to use its money-creation powers to nearly such an extent.

So it was back to Plan A—€110 billion in loans for Greece, including €30 billion from the IMF and the rest from European governments and institutions. Even if the secret meetings had fully persuaded the German and French ministry officials (which they didn’t), opposition to Plan B from other quarters was too strong. Time was of the essence, given the bond payments coming due on May 19; in a sign of the urgency involved in getting Plan A finalized, the IMF board scheduled a meeting on Mother’s Day, May 9, to approve the Fund’s part of the bailout.

This board meeting was one of the most consequential in the IMF’s recent memory—the loan the Fund was making to Greece, after all, was the largest in history, both in absolute terms and relative to the size of Greece’s quota (contribution to the IMF’s pool of resources). It has been known for some time, thanks to the leak of a memo to the Wall Street Journal, that although the board approved the loan to Greece based on its tradition of consensus, members were sharply divided and quite a few expressed deep reservations about the wisdom of imposing austerity on Athens without requiring the country’s creditors to accept any losses. It is also well known that the board enacted a change in the No More Argentinas rule that was inserted into the staff report for the program the board was approving.

A more recent revelation about this meeting, which is reported in my book and came to light with the release of the official minutes in 2015,4 is that the directors didn’t know about the rule change until the meeting was almost over, when one of them raised questions about some jargon-laced wording on the 19th and 20th pages of the staff report. So not only was the Fund breaking its rule, it was doing so in a manner that can charitably be described as fast and loose.


A few days after this board meeting, Strauss-Kahn summoned Panagiotis Roumeliotis, who served as Alternate Executive Director for Greece on the board, to his office, and urged him in confidence to convey to Athens the need for an early debt restructuring. This episode reflects well on Strauss-Kahn’s perspicacity. But it also raises one of the most troubling questions about the Greek crisis: why wasn’t a strenuous effort forthcoming to reduce the country’s debt burden soon after May 2010, in the latter months of that year?

The IMF had good reasons to avoid risking a debt restructuring during the spring of 2010. Substantial time would have been required for all the legal procedures that are involved, and failure by Athens to make the payments due to its creditors on May 19 might well have led to a “Lehman moment,” given the lack of an

4 IMF, 2010, “Minutes of Executive Board Meeting 10/45-1,” May 9 (published in the IMF Archives in July 2015). 

adequate “firewall” to prevent contagion and other groundwork that would have been necessary for bondholders to accept losses. But suppose Strauss-Kahn had quietly told the IMF’s Troika partners that very soon thereafter, the Fund would insist on a restructuring. He might have said that the Fund would simply not lend its good name and credibility to a plan with insufficiently high likelihood of leading to debt sustainability.


Such an approach would have required confronting Europe’s high and mighty. It presumably would have also required overcoming resistance from the U.S. government, which was still suffering from post-Lehman trauma. Although American officials were playing a much less dominant role in this crisis than they had in previous ones, the United States is the IMF’s most powerful single shareholder, and its officials were opposed to any debt restructuring in the absence of a strong firewall.

Most daunting of all would have been the face-down with Trichet. The ECB president was prone to umbrage when the subject of restructuring a euro-zone country was broached, and he had declared himself loath to take the kinds of monetary policy steps that would have been needed to limit contagion.

In my book, I call this hypothetical scenario a “poker play that would have been the greatest in the history of the global economy.” If the IMF had forged ahead with a debt restructuring, how might Trichet have reacted? Would he have stood his ground, even at the cost of risking a breakup of the currency union? Or would he have grudgingly used every conceivable monetary policy instrument to pacify market alarm? Could the IMF have called his bluff?

The IMF did not attempt this audacious step because—to carry the poker metaphor further—its managing director believed the Fund would only have gotten itself expelled from the card table. As Strauss Kahn told me when I asked him about this imaginary showdown: “We were just recovering, trying to re-establish our role in the global system. I could play this game a little. But I couldn’t go too far.”

By the third quarter of 2011, with Christine Lagarde now serving as IMF managing director, it was clear that Plan A was going terribly awry. GDP was declining much more rapidly than the Troika projected; the Greek economy ended the year contracting by 7.1% (vs. the minus 2.6% forecast), and the debt-to-GDP ratio rose to 170% (vs. the 133% forecast). Greece was falling into exactly the sort of vicious cycle that had been feared in the spring of 2010. Was Greece fully abiding by the conditions to which it had agreed? No, but the main reason for the woes afflicting the Greek program was the counter-productive effect that fiscal austerity was having on an economy that had no real means of stimulating growth in the short term.

A new rescue program was in the works, and within the Troika, the IMF was in the forefront of insisting that this time significant “PSI”—private sector involvement, in which Greece’s bondholders would undergo a haircut—must be included. The final deal, approved in March, provided for Greece to receive the biggest debt relief in history. Approximately €200 billion worth of Greek government bonds were subject to a haircut that amounted to well over 50%—estimates have ranged as high as 75%, depending on the calculation method5—in which each €1000 of bonds would be exchanged for a package with €465 in face value (consisting of a modest amount of cash, plus new government bonds.) To effectuate such a deep haircut, an ingenious scheme was used involving collection action clauses (CACs). These clauses oblige all holders of a bond issue to accept the terms of a debt restructuring if a sufficient number agree, and the Greek government was able to approve legislation retroactively inserting the clauses into the vast majority of its bonds, which happened to have been issued under Greek law.

Was this debt restructuring desirable? Absolutely, but the problem was that it was too little, too late. Despite all the relief Greece was receiving on its private debt (that is, its bonds), Athens would still be laboring under a huge, €300 billion-plus debt burden because of all the money it borrowed from the official sector (that is, European governments and institutions, and the IMF itself). This point illustrates why bailouts of unsustainably indebted countries can be so injurious. One major drawback is the moral hazard that

5 Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati, 2013, “The Greek Debt Restructuring: An Autopsy,” Peterson Institute for International Economics,Working Paper 13-8, August.

occurs when private lenders conclude they will be able to get their money back, courtesy of the public sector, no matter how foolish their loans may have been in the first place. Another problem, of more profound concern to citizens of the country being “rescued,” is that debt to official bodies may be very hard to restructure, harder even than debt to private creditors. That is especially true for money owed to the IMF; the Fund enjoys “preferred creditor status,” which means that when a country has received international bailout loans, the Fund must be repaid ahead of all other creditors. The Fund, after all, is the closest thing the world has to an international lender of last resort, lending to countries in situations where all other sources of credit have dried up— metaphorically, entering burning buildings while others are fleeing. This means IMF claims get top priority and countries that fail to repay their IMF loans can expect to be treated like international financial pariahs.


Concern at the IMF about whether the second bailout would work is fairly evident in documents I reviewed for my book. Perhaps the most colorful illustration is a comment that Lagarde made when the broad outlines of the deal were struck at 5 a.m. on February 21, 2012, after a grueling, all-night meeting in Brussels. As European officials were clapping one another on the back in relief over the agreement, Lagarde said: “Don’t celebrate guys. In a couple of years, you’re going to have to dig in your pockets again for Greece.” Again, to understand such skepticism, consider the size of the primary budget surpluses the Greek government was expected to generate under this program—between 4% and 4.5% of GDP each year all the way until 2030, as shown in the table in Exhibit 4. That was less than the 6% of GDP assumed in the first bailout, but it was still ambitious to a ridiculous extreme.

Internal Executive Board documents cited in my book reflect intense criticism at the meeting the board held on March 15, 2012, to approve this program. The Canadian representative at the meeting hit the nail on the head when he contended that Greece’s debt should be “brought down to well below the level targeted in the program, through a combination of more ambitious PSI/OSI.” By “OSI,” he meant “official sector involvement”—in other words, acceptance by Greece’s official creditors of reduction in their claims. But European officials were unwilling to go far in that direction; although they accepted lower interest payments and postponements in maturities on the debt Greece owed them, they refused to accede to outright forgiveness of the loans they had extended to Athens—a position they have continued to staunchly maintain.


It is important to note that, although the IMF deserves criticism for bowing to European pressure, it deserves credit for standing up to Europe on a number of occasions, especially during the period starting in the latter half of 2011 after Lagarde became managing director. In August of that year, Lagarde gave a speech questioning whether European banks were adequately capitalized, which infuriated leading officials in the region. In October 2012, analysis issued by the Fund’s Research Department, which Blanchard directed, sharply challenged the prevailing European orthodoxy favoring austerity for dealing with crises. In the spring of 2013, when Cyprus underwent a crisis, the IMF succeeded in overcoming European resistance to an approach that Fund officials favored. Although this victory wasn’t quite as impressive as has been portrayed in the news media—an approach the IMF would have preferred even more for dealing with Cyprus was rejected by Europe, as my book reveals—it is fair to say that the Cypriot crisis was one of several examples of the Fund taking a considerably tougher and more independent stance than it had before.

Perhaps the most salient illustration of the IMF’s increasing assertiveness was the drama that unfolded in 2015 when a radical leftist government came to power in Athens. During this period, the IMF was often credited, justifiably, with playing the role of “honest broker” between Greece and its European creditors—that is, demanding far-reaching reforms from the Greeks while simultaneously insisting that Europe accept debt relief that would put Athens on a sustainable path. For example, when European finance minsters met in Riga, Latvia in late April 2015—an episode that was widely depicted as a massive ganging-up on Greek finance minister Yanis Varoufakis—Poul Thomsen, the director of the Fund’s European Department, said, according to notes of the meeting: “I want to caution you, ministers…very significant debt relief will be necessary…do not be surprised when this will come.” Fund documents issued during the tense standoff between Athens and Europe in the summer of 2015 provided laudably candid assessments about the dimensions of the debt problem. And when Greece’s left-wing government capitulated to European pressure in July 2015 by accepting yet another harsh rescue package, the IMF finally refused to go along, stating that it would join only after a plan was agreed that would assure reductions in the debt burden in more realistic accord with the country’s ability to pay.

It would be misleading, however, to attribute these developments to the change in IMF leadership in mid-2011. Tempting as it is to conclude that the dauntless Lagarde showed more gumption than the crafty Strauss-Kahn, the crucial factor was the different position the IMF found itself during the months after Lagarde’s arrival. In contrast to the situation in 2010, when Strauss-Kahn was struggling to ensure that the Fund would play a role in the crisis, Europe was far more anxious during the period starting in late 2011 to keep the Fund involved. This was the time when Europe’s need for Fund involvement—both its money and its credibility— was at its peak, and so was the Fund’s leverage.

Commendable as the IMF’s frankness was in 2015 regarding Greek debt sustainability, I believe the Fund should have been tougher regarding the country’s official debt—and acted sooner. It should have exploited the greater leverage that it had to better advantage.

Consider in this regard the strong public statements that Fund officials have made in the past couple of years concerning Greece’s primary budget surplus. In mid-2015, an IMF document derided European expectations that Athens could maintain a 3.5% of GDP surplus over the medium term, noting that “few countries have managed to do so.”6 In April 2016, Lagarde declared at a press conference: “What we find highly unrealistic…is the assumption that this primary surplus of 3.5% can be maintained over decades. That just will not happen.”7

Lagarde was absolutely right, and she should be applauded for speaking out. Yet recall that the IMF went along with much bigger long-term primary surplus targets, both in the first and second bailouts. Why did it take so long for the Fund to deem these

6 IMF, 2015, “Greece: An Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis,” Country Report 15/186, July 14.
7 IMF, 2016, “Press Briefing of the Managing Director,” April 14. 

targets to be economically and socially unattainable? A charitable answer would go as follows: Only later in the crisis did the Fund gain sufficient insight into the Greek political system to see how misplaced its confidence was in the attainability of those targets, and only then could the Fund act resolutely in the face of European resistance. A less charitable answer—which I believe is more apt—is that the IMF took too long, both for Greece’s stake and its own, to muster sufficient pluck.


Christine Lagarde has restored the IMF’s luster and enhanced its public profile since taking over after the sordid episode of May 2011 that led to Strauss-Kahn’s resignation. Indeed, she enjoys enormous admiration and popularity; her pronouncements on all manner of issues routinely receive respectful attention worldwide. She mobilized a major boost in the IMF’s financial resources from member countries, and was a shoo-in for a second term in 2016 after serving her first five-year term, with unanimous and enthusiastic support of the Fund’s board. When she appeared on The Daily Show in 2015, the studio audience welcomed her with wild applause as she bantered with host Jon Stewart—a public relations tour de force that would have boggled the minds of Fund press officers back in the day of her staid predecessors.

At a time when the managing director is held in such high esteem, concern about the IMF’s place in the world might seem incongruous. But all the bon mots in the world cannot erase the more substantive developments involving the Fund’s role in Europe both before and after Strauss-Kahn’s departure, nor the harm that resulted.

One word aptly describes the IMF’s role as junior partner in the Troika: travesty. The arrangement struck in the spring of 2010 was an original sin that led to many others. Even though the Fund was putting up a minority share of the loan package for Greece, it should have participated as senior partner, with the power to determine the terms and conditions of the rescue, based on an understanding that it would consult European policy makers without being obliged to defer to them or reach compromises with them.

This is not to say that compromise between the IMF and major shareholders is necessarily bad; the Fund is a political institution at the end of the day, with a management and staff accountable to the board that represents the member countries. The Fund has been obliged to reach some sort of accommodation with major industrial countries in virtually every crisis it has confronted—one famous example being the role played by U.S. Treasury and Federal Reserve officials during the Asian crisis of the late 1990s.

But in the euro-zone crisis, the line separating legitimate influence from harmful interference was not only crossed, it was trampled on. From the standpoint of the IMF’s integrity, the control that Europeans exerted in the euro-zone crisis posed a different and much more harmful threat than that of U.S. officials during previous crises. Unlike the United States, European nations were borrowing from the Fund. Even the rich European countries that never needed IMF aid were in many respects supplicants, using the Fund—both its seal of approval and its money—to save their terribly flawed system of money union. Not only were policy makers from these rich European countries desperate to protect the euro, they were aiming at the same time to ensure their political survival; they were concerned about placating angry, fed- up electorates. For Europeans to be pushing the Fund around under such circumstances was an affront to robust multilateralism.

When it came to the euro zone, therefore, the Europeans should not have been “the leaders,” as Strauss-Kahn put it in his meeting with them in the spring of 2010; the working assumption all along should have been the opposite. Ideally, the Fund should have gotten even more clout, in the form of what I call “super senior” partnership—that is, the authority to set terms and conditions for the entire euro zone. Under the Troika arrangement, the Fund was sitting on the same side of the negotiating table as the ECB, but it should have sat on the opposite side, and it should have had the power to require action from all of the member countries, not just the ones urgently in need of international assistance. As just noted, the Fund was coming to the rescue of the euro; if the countries using that currency were not willing to take the steps that the Fund believed necessary, they of course had the right to refuse. But the Fund had the right, and arguably the duty, to tell the Europeans they would then to be left to their own devices.

This is not to imply that the IMF is endowed with such brilliant insight that it can be assured of diagnosing every international economic and financial problem accurately and prescribing optimal policies. Quite the contrary, my book provides extensive evidence showing how the Fund often makes faulty assessments—for example, the Fund completely failed to foresee vulnerabilities in Europe prior to the crisis. But the case for the Fund exercising supreme authority in financial crisis situations should be based not on its infallibility (which it clearly does not have), but on its independence, objectivity, and global perspective. In other words, although the Fund cannot credibly claim to have superior wisdom regarding each and every crisis that comes along, it should be in a position to assert that its analysis must take priority by dint of its status as a multilateral institution entrusted by the international community to exercise neutral, objective judgment about the best possible resolution.

The question is what the IMF ought to do now to undo, or at least mitigate, the damage done to its credibility and effectiveness in future crises.

Nobody can foresee with any degree of certainty where the next crisis will arise—perhaps it will be Asia, or Latin America. But when it happens, powerful countries may insist that the IMF play a junior partner role again, based on the precedent set in Europe. They may wish to use the IMF to endorse their view of how matters should be handled, possibly for narrow reasons of national interest (protecting their big banks from taking severe losses, for example). Although the euro zone is sui generis to some extent, as the only major region of the world with a currency union, that does not mean the problem that arose there with regard to the IMF’s role could not happen elsewhere.

Regional financial institutions and ad hoc arrangements among countries are on the rise, one motive being to create alternatives to the IMF or at least influential adjuncts to it. The most recent of these is the BRICS countries’ $100 billion Contingency Reserve Arrangement (CRA), a pool of currencies intended “to forestall short-term balance of payments pressure, provide mutual support and further strengthen financial stability.” Although entities such as the CRA will never supplant the IMF, it is not hard to imagine that, in a crisis, they could be used to help tilt the terms of rescue packages in directions that suited major countries’ governments, against the Fund’s best judgment. Such an approach would erode the IMF’s value as a global public goods provider, which would be to the long-term detriment of all.

In the final chapter of my book, I list a host of policy recommendations aimed at addressing the problems I have cited. These proposals include changes in IMF governance and the establishment of a new Fund facility for handling countries in need of debt restructuring. This portion of the book is the least valuable; many people with greater expertise than I have on these issues are more qualified to figure out how to fix the system. As a journalist whose competitive advantage lies in reporting and writing a narrative, I like to fancy that I have provided an accurate chronicle of events that will be useful to informing the public debate.

Whatever remedies are adopted, they should fully take on board the extent of the IMF’s misadventures in Greece. Only then will the Fund stand a decent chance of providing global public goods of the sort the world needs.



Source: IMF, 2010, “Greece: Staff Report on Request for Stand-By Arrangement,” Country Report No. 10/111, May.


Source: IMF, 2010, “Greece: Staff Report on Request for Stand-By Arrangement,” Country Report No. 10/111, May.


Source: IMF, 2012, “Greece: Request for Extended Arrangement Under the Extended Fund Facility—Staff Report,” Country Report No. 12/57, March; and IMF, 2013, “Greece: First and Second Reviews Under the Extended Arrangement Under the Extended Fund Facility,” Country Report No. 13/20, January.



Click to access hhrg-115-ba19-wstate-pblustein-20170518.pdf

Click to access cigi_paper_no.61web.pdf

Related posts 


  1. Hearing

    Hearing entitled “Lessons from the IMF’s Bailout of Greece”
    Thursday, May 18, 2017 10:00 AM in 2128 Rayburn HOB
    Monetary Policy and Trade

    Click here for the Committee Memorandum.

    Witness List

    Mr. Paul Blustein, Senior Fellow, Center for International Governance Innovation (TTF)
    Ms. Meg Lundsager, Public Policy Fellow, Woodrow Wilson Center (TTF)
    Professor Anna Gelpern, Professor of Law, Georgetown Law and Non-Resident Senior Fellow, Peter G. Peterson Institute for International Economics (TTF)
    Dr. Rebecca Nelson, Specialist in International Trade and Finance, Congressional Research Service

  2. Memorandum–steamroller for the Greek people
    2 June by Leonidas Vatikiotis

    The prerequisites passed by a tiny majority 153 MPs (in an overall number of 300) of the Greek government on May 18th, equivalents to a new super-memorandum, as the new measures which further deepen the poverty extend up to 2021, three years after the end of the current 3rd programme, on August of 2018.

    The new Memorandum (3rd in a row voted by the MPs of SYRIZA and ANEL, after the agreement of August 2015 and the May 2016 pre-requisites) is sacrificing on the altar of the budget surpluses any potential of GDP growth that may existed. The GDP shrinking by 0.5% in the first quarter of 2017 already cancels the optimistic projections for the reduction of unemployment, which had been incorporated in the budget this year. It is not at all coincidence that the projected GDP growth of 2017 included in the Medium Term is limited to 1.8%, much lower than the 2.7% provided by the state budget

    The measures included in the 4th Memorandum, which have been quantified in the Medium-Term Budgetary Objective of the 2018-2021 Program, tantamount to whirlwind and can be divided into four general categories.

    Recovery measures

    Direct impact on disposable income of citizens, namely deepening poverty, will be brought by seven measures:

    Reduction in pensions

    The so-called personal difference between primary and supplementary pensions came into the government’s target, with the reduction reaching even 18% of the paid pension. In absolute numbers the reduction will reach an average of 185 euros per month and in some cases up to 300 euros, while it is expected to affect about 1.35 million pensioners.

    In the first line of fire will be thrown the pensioners from the former TEVE (Self-employed Insurance Agency), retired doctors, lawyers, engineers and pharmacists, double-pensioners, etc. The measure will be applied from January 1, 2019. Losses will also suffer the young pensioners who will retire by 31/12/2018.

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    EU Commission welcomes voting of measures in the Greek parliament

    Reduction of the tax-free income

    This measure, which according to Minister of Economy, Eykl. Tsakalotos, would be the reason of his resignation, if passed, will be applied on 1 January 2020 and is expected to burden each family with an average of 600 euros per year. The new tax-free income threshold, which will exclusively hit the poor, develops as follows:
    – 1,250 euros (from 1.900 euros) for taxpayers with no children
    – 1,300 euros (from 1.950 euros) for taxpayers with 1 protected child
    – 1,350 euros (from 2.000 euro) for taxpayers with 2 protected children
    – 1,450 euros (from 2,100) for taxpayers with 3 or more protected children

    The savings to the State budget or else the cost that the pensioners will pay from the pension cuts in 2019 amount to 2.26 billion EUR and the cost that the taxpayers will pay from the drastic reduction in the tax-free income starting in 2020, is EUR 1.92 billion..

    Increase in insurance contributions

    In article 58 provides that as from 1/1/2018 insurance contributions of freelancers and the self-employed will be calculated on the monthly income, including contributions.

    Article 58 stipulates that as of January 1st 2018 the freelances and the self-employed insurance contributions will be calculated on the monthly income, including insurance contributions. This is an unprecedented robbery – a confession of the failure of EFKA (Single Social Security Institution), as contributions will be calculated on non-existent income! According to calculations made by professional parties, the consequent increase, in relation to the current year, may reach up to 37%!

    Reductions in special wage regimes

    Officers of the army, the police, the Fire Brigade and the Coast Guard fiercely reacted, forcing the Government in the last minute to propose allowances in order to close the rift triggered by the reductions caused by the shrinkage of wage levels. On the grounds of rationalisation, the government attempted to remove allowances that led to more sustainable wage levels.

    Moreover, according to a statement by POSDEP (Panhellenic Federation Of Faculty Associations & Research Staff), wage cuts were also made in Universities, dismissing the proclamations of the Minister of Education, Mr. Gavroglou ,at the Rectors’ Meeting on May 13th, for increases in the salaries of professors of all levels ranging from 2.5% to 7.5%. These increases, even if they had been applied, they would have been absorbed by the tax increases…

    Reductionof grants to municipalities and Regions

    Based on Article 8OA, from January 1st 2018 the total amount to be transferred annually from the regular budget to Municipalities and Regions must not exceed € 3.4 billion. The decision is justified as follows: since the municipalities managed to draw up and implement balanced budgets, they do not need the Central Independent Resources! Therefore, it is obvious where this famous ” financial independence ” of the municipalities leads: to the gradual withdrawal of the State from funding and the transferring the cost on the citizens’ backs.

    Taxation of short-term tenancy of real-estate in the context of sharing economy

    This particular request, which is contained in Articles 83 and 84, increases significantly the cost of Airbnb and was a requirement of the hoteliers in order to reduce the gap in prices between hotels and short-term leases from electronic platforms that made hotels unprofitable.

    Further use of generic medicines.

    Article 88 encourages pharmacies to prescribe more and more often cheap generic medicines with the incentive of a compulsory deduction from the pharmaceutical companies if the generics exceed 25% of the medicines included in the prescriptions. This percentage may be adjusted annually, by decision of the Minister of Health. Moreover, goals incorporated into the e-prescription system may be set for every doctor, as well as penalties! As a result, pharmaceutical expenditure, will be reduced, on the benefit of the State Budget, with unknown however effect on the health of the insured.

    The Scientific Committee of the Parliament has already expressed reservations about the constitutionality of the cuts in pension rights and special wages. In a lengthy report, the Committee questioned whether or not a fair balance between the requirements of the general interest, as invoked by the government, and the protection of the fundamental rights of the individual is guaranteed. Of course, SYRIZA, like all the other governments that signed a Memorandum, didn’t give a hoot …

    Measures of Real Existing Liberalism

    Chapter E, which is entitled “Provisions of competence of the Ministry of Justice”, describes all the details of the amendment of the Code of Civil Procedure in order to permit the beginning of electronic auctions. Government and bankers under the fear of popular reactions that culminated in the previous period, set up the institutional framework that will allow the bloodless persecution of thousands of borrowers from their houses, without publicity. The amended Article 959.1 of the Code of Civil Procedure suggestively states that “electronic auction is carried out by the certified electronic auctioneer notary, through the electronic auction systems. Electronic auctions are held on Wednesdays or Thursdays or Fridays from 10.00 to 14.00 or from 14.00 to 18.00.”

    According to the provisions of the Financial Agreement there will be a tightening of the budgeting procedures. An amendment to Law 4270/2014 provides that the submission of the preliminary draft of the annual State Budget is subject to the Financial Council’s observation that it is complied with the provisions of the Financial Agreement (Article 66).

    Release of the sale of Non-Prescription Drugs! Confident enough, that the sale of medicines in supermarkets will result in the increase of their prices, the Government is rushing to impose maximum prices for their purchase by the health system, so as not to burden the budget. As for the burden of the citizens, it is left to the mood of the pharmaceutical industry …

    As ordered by the Domestic Troika, that is to say, of specific business interests that speak directly with the government, Article 49, provides the operation of stores on Sundays from May to October, with the exception of the second Sunday of August. In fact, paragraph 2 removes all prior restrictions on the landsize, the legal relationship with chain of stores, and so on. This measure is order of the department stores to the executives of SYRIZA and will soon lead to a redistribution of sales shares at the expense of traditional markets such as Ermou street, and to the benefit of commercial hubs such as the one nearby airport. Indeed, in the explanatory memorandum, in an impeccable neo-liberal dialect that has evolved into the native language of SYRIZA, it is directly stated that the challenge is to enhance competition… And may the stronger survive!

    Another “gift” to certain private interests is also the extension of the purpose of the Claims Management Companies, which is contained in Article 48. The 4th Memorandum gives them the extra opportunity to manage real estate that has been burdened with notices of change or mortgages. This amendment passes houses and commercial roofs that were guarantee in “red loans” to the claws of the predators.

    In addition, as facility to the private school owners they offer the opportunity to students participate in classes of foreign languages in private schools.

    The imposition of the most primitive liberalism from SYRIZA is further accompanied by the introduction of ‘open access’ of tax authorities in taxpayers data in order to achieve the classification of risk avoidance characteristics (risk profiling) from one hand (ie “big brother state”), and on the other hand the absolute immunity of those who will achieve restructuring or write-offs in order to avoid the risk of persecution (ie “reshuffling of the cards” by people who are above the Law)! Immunity is also given to the members of the Board of Directors of EOPYY (National Agency of Health Services) and other committees, creating in fact a body of state officials – mandarins that operate beyond and above the law.

    Article 39 of the new memorandum enables intervention and control by the state on the finances of the political parties. In particular, it states that “the issue of vouchers, the purchase of which is a means of financing, is permitted only if … there is a mandatory mention of the name and VAT or ID number of the buyer, if the amount of funding is more than fifty euros”.

    Anti-labour measures

    SYRIZA’s promise to restore collective bargaining had the same fate of the … torn Memoranda: “From 21.8.2018, the institutional framework of collective bargaining returns to the status laid down in 1876/1990 (A’27),” as mentioned in the explanatory report.

    The measures to mitigate the effects of collective redundancies as advertised by SYRIZA (“amounts for coverage of self-insurance, amounts available through corporate social responsibility for training and consultancy”) are indeed contained in Article 17, with the title “Control of collective redundancies”. But these are measures that “the employer may bring into the attention of the employees”. He may, he may not! As they could do in the past, without SYRIZA’s fourth memorandum.

    The opinions of the Supreme Labour Council, are not binding. The Explanatory report of the 4th Memorandum states that “the negative reasoned decision of the SLC due to the non-fulfillment of the relevant conditions is a presumption of nullity of the redundancies before the civil courts,” and nothing more. Meaning it does not have a binding character!

    The bad news for collective redundancies are apparent from the very first lines of the explanatory report, which states that the proposed provision takes into consideration “the recent judgment of the EU Court, (Heracles General Cement Company -AGET Heracles- against Ministry of Labor, Social Security And Social Solidarity) C-201/15 of December 21st 2016, which amends the legislative framework for the control of collective redundancies for the purpose of harmonizing national law with EU law”. The decision was interpreted as opening a “window” in order to facilitate the dismissal of 236 workers from the factory of Chalkis, as requested by the French multinational (Lafarge, owner of AGET Heracles), introducing a more flexible interpretation of the Greek law which was clearly much more pro-labour than the European. That is why Lafarge had appealed to the European Court, challenging Greek law.

    As far as the lock-out is concerned, what matters is the complaint filed by the Spokesman of the Union of Judges and Prosecutors in the Parliament on May 16th which argues that Article 20 which is contained in Part B (“Work Regulations”) of the Memorandum, brings through the back door the lock-out… which SYRIZA supposedly did not allow to be introduced! Nor the government, or the creditors and their mouthpieces did not breathe a word about this revelation. The retrograde is also confirmed by the amendment of paragraphs 1 and 2 in Article 5 of Law 1264/82, which explicitly and categorically stated that: it is prohibited to recruit strike-breakers and lock-outs are forbidden! These articles were amended. In other words, they ceased to be binding for the employers as it was until May 18th, at least at a typical level.

    As regards to the trade union leaves (article 19) they set up a single framework that that uniformly regulates the paid and unpaid leaves.

    Ιt is more than obvious that a government that imposes such anti-labour measures cannot be called a leftish government, but the leftovers of a failed capitalism.


    In the 4th Memorandum it is provided the disposal “from the date of registration of the statute of the the Public Holding Company to the General Commercial Registry Service, ipso jure and without any compensation, from the State Asset Development Fund (TAIPED), to the Public Holding Company the ownership rights, rights of management and exploitation, acquired financial interests, intangible rights as well as rights of operation, maintenance and exploitation of infrastructure that had been transferred to TAIPED”. Consequently, everything is passed to the Super-fund of sell-out!

    In addition, the following twelve legal entities pass immediate to the above mentioned Superfund: OASA (Athens Public Transport Organisation) and its affiliates (OSY SA and STASY SA), OSE SA (Railway Organization), OAKA (Olympic Athletic Center of Athens), ELTA (Hellenic Posts), International Airport, Greek Saltworks, ETVA INDUSTRY CORPORATE COURT, Corinth Canal SA, Central Market And Fisheries Organization, Thessaloniki Central Market, TIF – HELEXPO and Duty Free Shops.

    By December 31st, 2017, 66% of DEPA’s (Public Gas Corporation) shares of DESFA’s (Management of National System of Natural Gas) share capital must be sold, through international tender carried out by TAIPED.

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    ANA-MPA news. Greece protesters clash with police outside parliament; police fires tear gas
    SYRIZA’s temperament in the sell-out of public property is accurately reflected on the table included in the Medium-Term, derived from TAIPED, which shows that in 2017 and 2018 record-breaking collections will occur! Apparently, SYRIZA does not only know to how to “sell-out” the people of the Left, but they also know how to sell-out the public wealth …

    The 4th Memorandum also foresees the contraction of DEI (Greek Electricity Board) so that in 2017 its share in the retail market of the interconnected system to be limited at 75.24%, while in 2018 at 62.24% and in 2019 at 49.24%. Moreover, another crushing blow to DEI, will also be brought by the increase of the annual electricity auctioned rates in 2017 at 16%, in 2018 at 19% and in 2019 at 22%. The imposition of the contraction of DEI through administrative way, meaning using the state’s power, shows not only how hollow the liberal anti-state beliefs are, but also that the Government along with the Troika legislate in the name of private interests. Nobody doubts, that behind Article 101 there are certain individuals who are active in the energy market. It is for their sake, that the MPs of SYRIZA and ANEL betray once more the trust of the hard-pressed Greek people!

    Countermeasures: sugaring the pill of surpluses

    The Government attempted to sweeten the pill of the new memorandum and the bleeding of workers and pensioners by promising a package of measures -the famous countermeasures, which would be applied if and so long as they achieved a surplus of 3.5% of GDP. The countermeasures included reduction in ENFIA (Real Estate Flat Tax) for tax amounts of up to € 700, not exceeding € 70, reduction in the rate of income tax from 22% to 20%, reduction in the special solidarity levy and in corporate tax rate from 29% down to 26%.

    The countermeasures also include housing allowance for up to 600,000 households, free health care for a very small proportion of the population with income less than € 1,200, childcare program, school meals, child benefit, work-related measures targeting the registered unemployed of OAED (reek Manpower Employment Organisation), reduction of pharmaceutical expenditures for taxpayers with income up to € 1,200, etc.

    The problem is not on that the countermeasures will be implemented after two years. The problem is how a sine qua non for their implementation is the achievement of outrageous fiscal surpluses through the application of the above mentioned measures, as well as any others that may be necessary until the program is completed, in August 2018.

    So, the countermeasures, which are tantamount to breadcrumbs and will only be implemented if and insofar the IMF agrees, work like the carrot that legitimizes the whip of reduced pensions and the lower tax-free income level.

    Last but not least, one thing that is being repeated since 2010 with irritating accuracy is the inclusion in the Memorandum of a number of correct and necessary provisions. For instance, in the current Memorandum, among the many others (such as the abolition of the MPs tax-free regime with Article 71, the reduction of VAT on agricultural supplies from 24% to 13% with Article 70, the prohibition of the financing of political parties by legal entities, etc.) is the creation of an electronic register of production factors for public and private projects, studies, technical and other related scientific services. Also, the creation of an electronic healthcare procurement platform and the introduction of annual procurement programming, which if not eliminates, significantly curtails the potential of corruption posed by the decentralization of procurement on the basis of the “hospital and procurement” principle.

    In my opinion, the inclusions of such measures of urban modernization by all the Memorandum Governments PASOK, ND, and SYRIZA and their Health Ministers (Loverdos, Adonis, Polakis) is an attempt to embellish the Memorandums themselves and deconstruct those who blame them as a cause of social regression. In fact, all together (PASOK, ND, SYRIZA) prove their inability to manage the commons without having Troika over their head, dictating them even how the medicines supplies will take place.

    For this (extra) reason they are dangerous and the quicker they get off the power the better…

  3. Vulture Funds: Lessons from Greece
    23 February by Daniel Munevar

    The experience of the Greek debt restructuring of 2012 serves as a good example to show how vulture funds operate and the costs they can impose in a country and its population. The Greek case is quite interesting as not only involved the first major debt restructuring in Europe since 1953 but also it was the largest operation of its kind. The remarkable aspect of this episode is that the country decided to continue paying holdout creditors, and specifically vulture funds, in full. This was the case even though the process was organized with the support of the official creditors of the country. In this regard, it created yet another damaging precedent regarding the viability of the profits by litigation strategy followed by vulture funds.

    The involvement of vulture funds with Greece can be traced back to the first rescue program of 2010. Even though it was clear at that time that Greek government debt was unsustainable, the IMF, the ECB and the EU Commission excluded the option of a debt restructuring. This created a problem of moral hazard, as the official funds provided by the IMF and European governments were allowing private creditors, such as French and German banks, to shift their losses onto official creditors. Furthermore, the moral hazard created by the first program meant that as long as official funding was available it could be profitable for financial institutions to lend money to an insolvent Greece. The reason for this was that official funding was effectively guaranteeing all the short-term debt repayments of the country between 2010 and 2013. Given that the event of a default and consequent restructuring was not a matter of if but of when, substantial profits could be made by vulture funds following two strategies. On the one hand, to buy Greek bonds at prices below the expected price of a debt restructuring. On the other, to target government bonds under foreign law so as to be able to litigate against the country and recover their full value after a debt restructuring.

    In the case of the first strategy, the first bailout program never managed to convince the markets regarding its capacity to stabilize Greek debt. In the weeks preceding the approval of the program, and the risk of a default loomed in the horizon, the price of 10-year Greek government bonds dropped as low as 60 cents on the Euro. |1| Once it was announced in May of 2010 that debt restructuring was not being considered as part of the program, prices recovered to 90 cents on the Euro. This behavior can be explained as large investors started to sell their exposure to Greece in the expectation of default. Thus, the only market for Greek government bonds was either Greek banks, which could use the bonds as collateral with the ECB, or vulture funds willing to take on the risk. From May of 2010 forward, the prices of bonds continued to drop steadily through time. By the fall of 2011, as discussions regarding a debt restructuring plan began, prices dropped under 20 cents.

    At this point, vulture funds were actively engaged. Their strategy was based on buying the bonds at depressed levels below the expected value of newly exchanged bonds issued in a restructuring. Several funds tried this strategy in early 2011, when they assumed that prices of Greek bonds would be exchanged at around 80 cents on the euro. They proceeded to buy the bonds at around 50 cents on the Euro expecting to profit from the difference. However, as it was announced in the fall of 2011 that the restructuring would be more significant and prices continued to drop, they eventually lost this trade. |2| This failure didn’t discourage other vulture funds from trying the same approach later on, and eventually succeed. One known example corresponds to Third Point. Based in NY and managed by Dan Loeb, Third Point accumulated in early 2012 a total of USD 1 billion in Greek government bonds bought at around 17 cents. Once the successive debt exchanges that were part of the April 2012 debt restructuring were completed, Third Point was able to exchange its bonds for new securities issued by the ESM at a price of 34 cents. This netted Third Point a hefty profit of USD 500 million. |3|

    The second strategy was based on targeting specific sets of government bonds under foreign law in which vulture funds could buy controlling stakes so as to block a restructuring and subject the Greek government to litigation. At the time when the negotiations between the creditors and Greece began, around 177 billion Euros of government debt (86 % of the total) was under domestic law. The remaining 28.8 billion euros scattered in bonds under English, Japanese, Swiss and Italian law among others. The largest among these were the bonds under English law which amounted to 20 billion Euros, or 10 % of the total. |4| Furthermore, whereas the government could retroactively change the conditions on the domestic law bonds to ensure that a debt restructuring was binding to all investors, this was not the case for foreign law bonds. In their case, the decision to restructure could only be achieved bond by bond and it usually required the approval of between 66.7 and 75 % of the investors. Thus, vulture funds actively targeted these series of bonds so as to achieve a controlling majority and force the government to pay in full or else force it into an Argentina type of litigation. For example, law firms Bingham McCutchen and Brown Rudnick were openly campaigning for this type of approach in early 2012, as they searched to gather enough investors in government bonds under Swiss law so as to pursue litigation instead of accepting the results of the debt restructuring. |5|

    The strategy advocated by these law firms, among others, turned out to be extremely successful. Once the debt restructuring was concluded, a haircut of around 65 % in net present value (53,5 % in the facial value) was imposed on 199.2 billion worth of government bonds. However, there was a total of 6.4 billion Euros in bonds held by vulture funds and other holdouts. These were scattered in 25 series of government bonds, of which 24 were under foreign law. Of these, in 7 cases the government did not even attempt to amend the conditions of the bonds whereas in other 16 the holdouts rejected the conditions offered. |6| Despite the warning of Greek government officials regarding the unwillingness of the country to pay holdouts in the weeks preceding the final agreement, Greece caved in and paid these debts in full while inflicting massive losses on small investors and the pension funds of the country. |7|

    Just a month after the debt restructuring was completed, the government made an initial payment of 436 million Euros to a group of holdout investors led by Dart Management. |8| This hedge fund, which had a long story of suing governments to get paid in full going back to the Brady plan in Latin America in the late 1980s, made a massive profit as it had bought the bonds on prices estimated between 60 to 70 cents on the Euro. By making that initial payment, the Greek government set a negative precedent as the rest of the holdouts were now able to use that decision to claim for equal treatment under a foreign court. The payments to holdouts continued uninterrupted afterwards parallel to the implementation of harsh austerity measures. For example, during 2013 the country paid a total of 1.7 billion Euros to holdout creditors. |9| To date, most of the holdout claims have been paid in full by Greece. It is estimated that private investors currently have a total of 36 billion euros in government bonds that were either issued under the debt exchange of 2012 or in the debt issuance that took place in 2014. |10|

    As the Greek population continues to struggle under the imposition of harsh austerity measures and the debt burden of the country remains “highly unsustainable”, as the IMF characterizes it, |11| it is evident that the decision to continue paying the holdouts was a mistake. It represented nothing short of rewarding dangerous speculators while transferring the costs of their actions on to the Greek people. Even more troublesome is the fact that the relationship between Greece and the vulture has not ended yet. In the aftermath of the debt restructuring of 2012, it is estimated that hedge funds have bought nearly 15 billion Euros in government bonds. |12| As a new debt restructuring, or even unilateral default, is simply a matter of time is worth nothing that the country can still set a precedent against the actions of vulture funds. The country could begin by enacting a law, similar to that adopted in Belgium in 2015, to limit the actions of vulture funds. Furthermore, given the dire social situation in the country, it should declare the non-application of the 3rd memorandum and non-payment of all illegal, odious, illegitimate and unsustainable debts. After all it is never too late to state that sovereignty and the respect of human rights will always precede debt.

    |1| Wall Street Journal. (2011). Bargain Hunting: Path to Default. Retrieved February 6, 2017, from

    |2| New York Times. (2012). Hedge Funds Take Another Look at Greek Debt – The New York Times. Retrieved February 6, 2017, from

    |3| Financial Times. (2012). Greek bond bet pays off for hedge fund. Retrieved February 6, 2017, from

    |4| Zettelmeyer, J., Trebesch, C., & Gulati, M. (2013). The Greek Debt Restructuring: An Autopsy. WP 13-8 Peterson Institute for International Economics. Retrieved from

    |5| The AMLAW Daily. (2012). Greece Discloses Fees Paid to Cleary During Sovereign Debt Crisis. Retrieved February 6, 2017, from

    |6| Zettelmeyer, J., Trebesch, C., & Gulati, M. (2013). The Greek Debt Restructuring: An Autopsy. WP 13-8 Peterson Institute for International Economics. Retrieved from

    |7| New York Times. (2012). Greek Official Warns Debt Holdouts – The New York Times. Retrieved February 6, 2017, from

    |8| New York Times. (2012). Bet on Greek Bonds Paid Off for “Vulture Fund” – The New York Times. Retrieved February 6, 2017, from

    |9| Kamenis, S. (2014). Vulture Funds and the Sovereign Debt Market: Lessons from Argentina and Greece Vulture Funds and the Sovereign Debt Market: Lessons from Argentina and Greece. Retrieved from

    |10| WSJ. (2017). Greece’s Debt Due: What Greece Owes When – Retrieved February 6, 2017, from

    |11| WSJ. (2017). IMF Assesses Greek Debt as “Highly Unsustainable” – WSJ. Retrieved February 6, 2017, from

    |12| Greek Reporter. (2012). 15 billion euro of the Greek debt is in the hands of hedge funds. Retrieved February 6, 2017, from

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