IMF bailouts: Lessons from Greece and Argentina

By Dharshana Kasthurirathna

It is evident that the Sri Lankan economy is dysfunctional. Even the members of the general public such as us, with very little economic literacy can ‘feel’ it. When we switch to mainstream media sources, almost all the economic experts that express their views of the way the economy is handled, or where it is headed, are extremely critical of the political leadership, and rightly so. Then the same experts are quick to point out that an IMF bailout may be the only option. That may very well be the case as well, as beggars don’t have many options to choose from. We are in desperate times and any country or an organisation that comes forth to let us survive at least one more month if not one more week, is seen as a saviour. 

On a very rare instance where one points out that Sri Lanka has sought IMF assistance 17 times since 1965, the experts would typically point out that our politicians always failed to follow the prescriptions of the IMF to the letter; if that wasn’t the case we wouldn’t be in the current predicament. It’s always easier to put the blame on politicians, and they do deserve a lot of blame. Yet, is it an oversimplification of the root of the economic woes that we are facing? Perhaps it’s not just the patient’s fault that a certain medication didn’t work 17 times, perhaps the doctor too may have been a little complacent on the matter? Thus, we have to take a broader look at IMF interventions in other nations to gauge a more comprehensive, and more importantly, a more balanced view of what IMF bailouts and interventions may result in.

Greece was facing a classical sovereign bond crisis in 2010. The government spending and borrowing had gone out of hand, and the IMF had to intervene. The bailout was worth around $ 150 billion and both the IMF and EU chipped in. Along with the bailout, the IMF put forth certain recommendations for the Greek economic policies, which involved usual austerity measures and selling off of ‘national assets’ (which is often, quite derogatively termed as ‘firesale’), in order to pay off the international creditors. In the following years, the state of the Greek economy turned out to be much worse and there were allegations that the very conditions and recommendations that IMF put forth were stifling the recovery of the Greek economy. 

The backlash was so severe that IMF itself did an internal investigation on the matter and published a report on its findings in June 2013, which is available at IMF’s website under the title “Greece: Ex post evaluation of exceptional access under the 2010 stand-by arrangement”. In that report, the IMF admitted that the economic forecasts that it had envisioned going into the bailout program were too ‘optimistic’ (which may be a politically correct way of saying inaccurate). For instance, the IMF had predicted that the contraction of the Greek economy as a result of the bailouts would be around 5%, yet by 2012 the GDP contracted by 17%. The estimate for the rise in unemployment was 15%, yet it went up to 25%. 

One of the key revelations of the report is that it admitted that the program was designed to avoid any spill-overs of the Greek economic crisis to the Eurozone and the Global economy. In other words, its priority was not helping the Greek economy to recover as swiftly as possible! The priority was to protect the Eurozone and the Global financial system.

The Greek banking system lost 30% of its deposits during this recession from 2010-2012; it was much deeper and painful than what was expected. Further, the report points out that if a debt restructuring program was initiated much earlier the damage would have been minimised, yet it was ‘not acceptable to the euro-partners’, again highlighting the possibility of ‘misplaced’ priorities of the IMF.

This failed bailout program was followed by another yet the relationship between IMF and Greece became so egregious to the point that in 2015, Greece defaulted on the IMF bailout loan itself. In a IMF teleconference transcript leaked in 2016 on Wikileaks, Poul Thomsen, the IMF’s then head of Europe department, purportedly claimed that they need an ‘event’ to force the Greek government to enter into an agreement with the IMF and the European partners and the international creditors, which generated fresh controversy on IMF’s agenda, intentions and modus operandi. 

Enter Argentina in 2018. Nobel Laureate in economics and Professor at Columbia University Joseph E. Stiglitz and a co-director of the Washington-based Centre for Economic and Policy Research Mark Weisbrot wrote an opinion piece, last February to the Foreign Policy magazine on the infamous 2018 IMF bailout program to Argentina. The bailout was worth $ 57 billion and at the time it was a record amount for any bailout loan given by the IMF to any country.

According to the article, titled “Argentina and the IMF Turn Away From Austerity”, a report published by IMF in 2020 admitted that the bailout program and the associated recommendations were unsuccessful in achieving the goals mentioned. The report is titled “Argentina: Ex-Post Evaluation of Exceptional Access Under the 2018 Stand-By Arrangement-Press Release and Staff Report”, and is available at the IMF’s website. Based on the findings of the report, the article points out two main issues with the bailout program. 

The first is the same issue that was observed in the Greek 2010 bailout program, where the effect of the austerity measures was much more painful and caused economic recession far worse than that was originally predicted. The report clearly indicates that the predictions on the effect of the GDP growth set forth by the IMF were inaccurate. 

For instance, the IMF had predicted a 0.4% and 1.5% positive growth for Argentina in 2018 and 2019 consecutively, under the bailout program, yet the actual figures were contractions of 2.6% and 2% consecutively. In the meantime, poverty had risen by 50% and unemployment grew to a much worse rate. Further, the bailout program failed to prevent capital flight, which apparently resulted in further devaluation of the Argentinian peso. 

The authors of the article argue that when there’s a recession and the degradation of market confidence, austerity measures can further erode market confidence, resulting in an increase in poverty, unemployment and further drying-up of private investments. In a fairly strongly worded and blunt manner, they argue, “The idea that cutting government spending would magically restore confidence, leading to an influx of money and compensating for the loss of fiscal support, is sheer fantasy” and “...in the upside-down world we live in, there’s a school of thought that argues that contradictory policies can be expansionary; it was this viewpoint that dominated when creating the 2018 loan. It didn’t work there: No surprise. It’s virtually never worked.”

The other main issue that the authors point out is the structural issues of IMF’s own management and governance. The United States is the sole nation with veto-power in the IMF. Further, the authors point out that 60% of the votes are controlled by the US and its allies, the kind of majority that was critical in approving the questionable 2018 loan to Argentina. What we can deduce from these observations is that the IMF, like many other ‘international’ organisations, is far from being apolitical. Actually, the very operation of the IMF may be one rift with conflict of interests when it’s largely influenced by the USA, whose Federal reserve is funded by privately owned banks, while the IMF may be bailing out the very same banks in other countries! 

The key issue here is again a matter of priority and intention. Whether the priority of the IMF bailouts is to stabilise the economy of the country in trouble, with minimum pain and suffering being inflicted on its citizens, or whether the priority is to maintain the status-quo of the global financial system and to serve the needs of the international creditors first. The case studies of Greece and Argentina point towards the latter.

The article further elaborates on the ‘double-standard’ that organisations like the IMF may practice for countries rife with debt such as Argentina. For instance, when COVID restrictions hit, almost all Western governments intervened heavily in their economies and subsidised many industries to minimise the damage to the economies and less privileged, the very same measures that the IMF prescribed austerity measures prevent in much poorer and debt-ridden countries.

The article is not all doom and gloom on the IMF and its operations. In 2020, the IMF granted another bailout loan to Argentina that apparently gained better results. One key reason for this that is highlighted in the article is that Argentina had the luxury of economic experts that had their own priorities set, who went into the negotiation table that resulted in an agreement that was much more favourable to the economic recovery of Argentina. The article points out that many other poor countries may not have the luxury of having such experts at the negotiation table.

India too had sought IMF assistance back in 1991. Yet it never had to seek such assistance again. The negotiations were headed by Dr. Manmohan Singh, who was the Finance Minister at the time, who went on to become the Prime Minister of India. Dr. Singh is perhaps the sole figure that is most responsible for the modern economic revival of India. India has done something Sri Lanka and Argentina (who had sought assistance from the IMF 21 times) couldn’t.

This brings us back to the Sri Lankan context. It is questionable whether we have the best team that we can send over to the negotiations with the IMF. The initial discussions were headed by the ex-finance minister, who was the personal attorney to the president before he entered politics. Our current Central Bank Governor has held key positions with the IMF before. Dr. Indrajit Coomaraswamy, who currently heads the debt restructuring committee appointed by the President and who was a former Central Bank Governor, has worked closely with organisations like IMF and World Bank throughout his career. Dr. P.B. Jayasundera, who was a key figure in setting the country’s fiscal policy under successive governments, too had worked as a consultant to the IMF and World Bank. 

Even though their experience and expertise cannot be challenged, for some reason, the issue of conflicts of interests is never brought-up in the peculiar world of central banking and economic policymaking, where the individuals who apparently had ties with the international organisations get involved with the negotiations with the very same organisations. In any other discipline, such practices would be deemed as potential conflicts of interests. 

On a less controversial note, one can’t help wonder whether the country’s economic policymakers are victims of ‘group-think’ (as many in the world of science are, across disciplines), where they may be wilfully blind and be reluctant to learn the lessons from IMF’s own misadventures in countries like Greece and Argentina. Failing to do so might result in unnecessary pain and suffering of the masses, where Sri Lanka may ultimately be reduced to a shallow, hollow and nominal nation, and the citizens may evolve into modern day slaves where subsequent generations would forever be paying back the loans to foreign banks.

There’s no question we have to go to the IMF seeking assistance. We are compelled to do so. Yet a healthy debate on the pros and cons of IMF conditions and their possible repercussions is highly warranted. Currently what we laymen hear is just the sound of one hand clapping. What we currently see among the experts is a naive belief that IMF would set things right and an extremely simplistic view that ‘it’s all the fault of corrupt politicians’ or ‘if the politicians had the guts to do what IMF tells them to do, things will be alright’. The full picture may be much more nuanced. 

Further, visibility and transparency on the side of the Central Bank and the Finance Ministry on its ongoing negotiations need to be improved. After all, the public that funds these institutions and who are deeply affected by their policy decisions have the right to all the information that they can get. The Central Bank should be first answerable to the general public, before being accountable to any international organisation. Otherwise, we cease to be a sovereign nation. 

Unfortunately, most members of the general public seem to be much more preoccupied with the latest action at ‘GotaGoGama’ and much less bothered by the ongoing negotiations with the IMF, which may shape the future of this nation for decades to come.