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IMF: Greek rescue isn't working


(Moneywatch) The international bailout of Greece is doing the nation more harm than good and needs to be radically restructured if it is to be saved. This is the recent conclusion of The Institute of International Finance, a global association of financial institutions, and the International Monetary Fund.

Or as skeptics of the effort to rescue Greece would say, the organizations have figured out something that economists, and anyone who can do basic math, have been saying for more than a year. Here is what the Financial Times reported exactly a year ago:

The degree of financial pain confronting the Greek population is twice as severe as that in Ireland and Portugal, fuelling concerns that the drastic austerity program imposed by lenders could smother growth in the eurozone's weakest economy.

In case you've forgotten, Greece is bankrupt. Its government is only barely staying in business thanks to international funding. Athens is trying to reach agreement with the European Central Bank, European Union and IMF on $18 billion in government spending cuts, which would put the nation in line for another $40 billion in bailout funds.

These negotiations are an attempt by international lenders to get Greece to adhere to a spending plan that the nation agreed to earlier this year when the EU approved a second bailout. Yet there is reason to think that the EU knew at the time this plan was not going to work.

Under the best-case scenario for this plan, Greece's debt would rise to 120 percent of GDP by 2020. That is an unsustainable figure, and that's if everything went right. The scenario was based on projections that had the Greek economy recovering. It was not based on a Greek economy that was contracting at a rate of 7 percent a year, the rate at which it was shrinking last February when Greece and the "troika" agreed to the plan.

The IMF said Monday that Greece's failing economy had forced it to revise its estimate of the country's public debt for 2013 from 160.9 percent of GDP, as the fund stated in April, to 181.8 percent.

The bailout plan was never going to help Athens become financially solvent. A 2011 study by UBS said, "To achieve an actual 50 percent reduction in the debt, Greece would need to implement a 100 percent haircut, i.e. repudiate its debt totally." The 75 percent haircut the bondholders actually accepted probably cut the Greek debt only by 30 to 40 percent.

So what has the bailout plan managed to do? Here's The Guardian's description of comments last Friday by Greek Prime Minister Antonis Samaras:

Resorting to highly unusual language for a man who weighs his words carefully, the 61-year-old politician evoked the rise of the neo-Nazi Golden Dawn party to highlight the threat that Greece faces, explaining that society "is threatened by growing unemployment, as happened to Germany at the end of the Weimar Republic."

There are two primary reasons the Greek economy has shrunk by about a fifth since 2008. First is the punishing austerity measures demanded in exchange for the bailouts. The company's public and private sectors are both drastically cutting spending at the same time. This on its own guarantees a recession.

The other reason is that Athens can't spend most of the bailout money it gets on helping its people. Most of the money it gets is required to go right back to international lenders, like the IMF, that have loaned the nation money. If you see a problem in this approach, then you clearly have what it takes to be head of an international finance organization. Christine Lagarde has been the IMF's managing director for 15 months and apparently just noticed it.

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