Whom to Blame for Sovereign Debt Restructurings

Whom to Blame for Sovereign Debt Restructurings: Borrowers, Creditors, International Institutions, or Catastrophes Athanasios Orphanides MIT

Fifth Annual Sovereign Debt Restructuring Conference February 25, 2022

1

The role of the IMF

“The IMF should eschew the temptation to use currency crises as an opportunity to force fundamental structural and institutional reforms on countries, however useful they may be in the long term, unless they are absolutely necessary to revive access to international funds. It should strongly resist the pressure from the United States, Japan, and other major countries to make their trade and investment agenda part of the IMF funding conditions.”

(Martin Feldstein, 1998, Foreign Affairs)

2

Greece: IMF program vs outcome: Deficit to GDP ratio 0

0

-2

-2

2010

Percent of GDP

-4

-4

-6

-6

2015 -8

-8

-10

-10

-12

-12

-14

-14

-16

-16 1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

3

Greece: IMF program vs outcome: Debt to GDP ratio 180

180

2015

Percent of GDP

160

160

140

140

2010

120

120

100

100

80

80 1998

2000

2002

2004

2006

2008

2015 series includes effect of 2012 restructuring.

2010

2012

2014

2016

4

Greece: IMF program vs outcome: Unemployment 30

30

2015 25

20

20

15

15

Percent

25

2010 10

10

5

5 1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

5

Greece: IMF program vs outcome: Real GDP 260

260

240

240

Billion 2010 euro

2010

220

220

200

200

2015 180

180

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

6

Greece: IMF program vs outcome: Nominal GDP 260

260

Billion euro

2010 240

240

220

220

200

200

180

2015

180

160

160

140

140

120

120 1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

7

Why such a flawed program and default?

“Contagion from Greece was a major concern for euro area members given the considerable exposure of their banks to the sovereign debt of the euro area periphery.” “[The Greek program was a] holding operation [that] gave the euro area time to build a firewall to protect other vulnerable members and averted potentially severe effects on the global economy.”

(Ex Post Evaluation. IMF Country Report No. 13/156, June 2013)

8

What was the IMF program about?

“It was about protecting German banks, but especially the French banks, from debt write offs” (Karl Otto Pohl, Former Bundesbank President, May 18, 2010.)

9

Did the IMF know?

“The risks of the program are immense . . . As it stands, the programs risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.”

(Brazil’s executive director, IMF Board meeting, May 9, 2010)

10

11

References Blustein, P.(2015). Laid Low: The IMF, the Euro Zone and the First Rescue of Greece. CIGI Paper No. 61, April. https://www.cigionline.org/publications/laid-low-imf-euro-zone-and-first-rescue-greece/

Feldstein, M. (1998). Refocusing the IMF. Foreign Affairs March/April. https://www.foreignaffairs.com/articles/asia/1998-03-01/refocusing-imf

IMF (2010). Greece: Staff Report on Request for Stand-By Arrangement. IMF Country Report 10/110; May 5, 2010. https://www.imf.org/external/pubs/ft/scr/2010/cr10110.pdf IMF (2013). Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement. IMF Country Report No. 13/156, May. https://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf

Orphanides, A. (2015). The Euro Area Crisis Five Years After the Original Sin. Credit and Capital Markets, 48. http://doi.org/10.3790/ccm.48.4.535 12