Misdiagnosis has made IMF cavalier with taxpayer money

Michael Spilotro/IMF Staff Photographer

International Monetary Fund Managing Director Christine Lagarde (left) opens a meeting with Greek Finance Minister Evangelos Venizelos (center right) at IMF Headquarters in Washington, D.C. on Jul. 25, 2011.

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  • The #IMF and #EU have not been able to spare the #Greek #economy from collapse: despite their large lending program

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  • Greece and Portugal's #debt problems were misdiagnosed as #liquidity instead of #solvency

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  • The IMF should reconsider a large scale #lending program to #Italy

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Sir, Lorenzo Bini Smaghi appears to be cavalier about using taxpayer money to address the eurozone debt crisis (“How to equip the IMF for the crises of our time”, January 27). Not only does he propose that the International Monetary Fund has even larger and longer financial support programmes for countries in the European periphery than it has had to date, he also proposes that the IMF stands ready to forgo its preferred creditor status.

"The IMF only compounded [Greece and Portugal's] economic and financial problems." -- Desmond Lachman

Dr. Smaghi makes his proposals in seeming disregard of the IMF’s highly unfortunate experience over the past two years with its Greek financial support programme, the largest IMF lending programme on record. Despite financial commitments by the IMF and the European Union to Greece in excess of 30 per cent of that country’s gross domestic product, the Greek economy has not been spared from literal economic collapse. Nor has the country been spared from the need to now write down its privately owned sovereign debt by as much as 70 cents on the dollar, and to look for debt relief from the European Central Bank.

The main problem with the recent IMF programmes to countries such as Greece and Portugal has not been one of size or duration but rather one of policy misdiagnosis. Instead of recognising Greece and Portugal’s problems as those of solvency, requiring upfront private sector debt reduction, the IMF went along with the European charade that these countries’ problems were those of liquidity that should be addressed by very large scale official lending. And by so doing the IMF only compounded those countries’ economic and financial problems.

Before the IMF goes down the road of a very large lending programme to Italy, it might want to consider whether Italy is capable of restoring public debt sustainability without debt reduction. In that respect, the IMF’s recent World Economic Outlook forecasts for Italy are not encouraging. Those forecasts suggest that fiscal austerity will result in a decline in the Italian economy in 2012 of more than 2 per cent, which will undermine the Italian tax base and will prevent Italy from stabilising its public debt to GDP ratio anytime soon.

Desmond Lachman is a resident fellow at AEI.

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