Greek lessons for the IMF - and Europe
"IMF searches soul, blames Europe" - a headline from the Wall Street Journal captures the story rather well.
The International Monetary Fund has looked at its involvement in the eurozone crisis and come to the stunning conclusion that it hasn't gone very well. But, it says "don't blame us - blame those pesky eurozone governments, and their seriously imperfect monetary union."
Let's face it, there is plenty of blame to go around. The report on the Greek bailouts says the Fund's forecasts for the economy and the level of government debt were hugely optimistic from the start. It also says the Fund put too much confidence in Greek government officials when it came to implementing difficult reforms.
These are not exactly unusual problems for the IMF. Countries with predictable economies and rigorously efficient governments don't usually end up needing the Fund's emergency support in the first place.
But there are other parts of the eurozone story which are more distinctive - and peculiarly painful for the IMF. The most important has been the way that the Fund allowed itself to be boxed in by European government perceptions of what was politically acceptable to their voters.
As the report shows, this had nasty implications for the countries that were being "rescued'" - and also for the credibility of the Fund itself.
It's worth remembering that European governments (notably France and Germany) resisted the idea of a Greek bailout, almost until the day it was agreed.
When they finally did come around to the idea, at US and IMF urging on the weekend of 8-9 May in 2010, the kind of financial commitment the Europeans had in mind was not a match for the job - even when they were persuaded, over the course of the weekend, to add a zero to it.
Eurozone leaders also insisted there would be no upfront write-downs of Greek government debt.
Those two constraints put the Fund in an impossible position from day one. Without debt restructuring, Greece needed even more money to stay afloat, and Europe was only willing to fill part of the gap.
The IMF changed their previous rules to lend Greece $43bn (£27bn) - more money, relative to the Greek economy, than any IMF member country had ever been offered. But the lack of debt restructuring meant the Greeks still had to sign up to an improbable amount of fiscal austerity to make the numbers add up in the initial May 2010 programme.
Literally no-one I spoke to at the time thought the official forecasts in the plan were plausible. The report notes that the plan forecast the Greek economy would shrink by 5.5 per cent between 2009 and 2012. In fact, national output fell by 21%. Unemployment is now more than 25% - more than twice the original forecast.
Eventually, as we know, Greek debt was written down, in a deal finalised in 2012. But by then a large part of Greek debt was owed, not to the private sector but to European governments, the IMF and the ECB. The delay in "bailing in" the private sector had effectively ensured that it was European taxpayers who did most of the bailing out - without doing very much to lower the total level of Greek debt.
This is highlighted in another bit of IMF soul-searching published last month (first spotted by Matina Stevis, the eagle-eyed Wall Street Journal reporter who got hold of the Greek report this week).
That Fund paper looks at recent examples of sovereign debt rescheduling and concludes that the Fund usually does too little of it, too late. In the Greek case:
"Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output. The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook."
In future, the report says, the Fund should insist on debt write-downs from the start. That is potentially significant. Though whether it's practical remains to be seen.
Why did the Europeans take Greek debt restructuring off the table in May 2010? One reason was fear of contagion, which they could not promise to combat with a big European bailout fund because, back then, they didn't want to have one. (Remember, the "no bailout clause" meant there weren't meant to be any eurozone bailouts at all.)
Another reason that Germany and others hated the idea was that the "private sector" institutions who would take losses included plenty of French and German banks.
But "moral hazard" was also a big issue, especially for Germany. Policy-makers hated the idea of letting the Greek government off the hook, and felt that cutting the country's debt would give it room to avoid difficult reforms.
In a sense, all this soul-searching merely tells us something we already knew: that the eurozone crisis has been handled pretty badly, and that this mismanagement was partly due to flaws in the design of European monetary union, and partly due to the political constraints on this generation of European leaders.
But there is another lesson here - about Germany and the costs of a "muddle through" approach to the crisis.
In responding to the crisis Chancellor Merkel has said repeatedly that she can only move as fast as the German people - and the German people hate government bailouts. That may be true. But in Germany and across Europe, most polls also suggest that voters would have liked the private sector to share more of the burden of the crisis.
Ironically, the lesson of the Fund's analysis is that taxpayers might have paid a smaller price for the crisis, if European leaders had faced up to the scale of the crisis sooner, and if Germany had not been so focused on teaching governments a lesson, that she missed the opportunity to teach private investors a lesson as well.
Correction 7 June 2013: This blog has been amended to say that the IMF "changed" its previous rules, rather than "suspended" them, to lend Greece $43bn.