The IMF Goes Varoufakis? Please Don’t!

Egged on by celebrity economists from the United States and elsewhere who do not seem to understand Europe at all, Yanis Varoufakis, who served as Greece’s radical left finance minister for the first half of this year, preached to the world that Greece needs massive debt relief.

(See TG’s recent coverage of Greece here)

Meanwhile, he got busy reversing key supply-side reforms at home. The result of Syriza’s policy reversal is obvious: In late 2014, Greece was on track for Spanish-style growth of 3%.

After Varoufakis had had his run, the Greek economy fell back into deep recession. The banks are bust and Greece’s debt-to-GDP ratio looks set to reach 200% in 2016 — instead of 165% (as it would have without the Syriza follies).

Policies matter much more than debt

Read the previous sentence once more. If bad policies can raise the projected debt burden of a country by 35% and push Greek corporations’ confidence level from above average to almost record lows within seven months, the conclusion is obvious: It takes good policies rather than debt relief to contain and reverse the profound damage done to Greece’s economy.

Given all that, it is downright dangerous that the IMF now wants to put so much emphasis on upfront debt relief. The Washington-based institution gets its priorities wrong.

Worse, by causing an unnecessary new dispute, the IMF adds to the already pervasive uncertainty that is crippling Greece. This is the exact opposite of what the IMF should be doing.

IMF versus Europe?

The IMF wants to provide new credits to Greece only if Europe grants much more debt relief to Athens first.

However, the IMF must be aware that major parts of Europe will only ratify a third support program for Greece if the IMF is on board from the very beginning and if Athens meets the first reform targets in such a program.

On a good day, this dispute as to who needs to move first — the IMF with a contribution to a new bailout program or Europe with more debt relief — could be solved by wily diplomats in an hour.

On a bad day, however, it could potentially scupper a deal. The scariest aspect of the dispute is that the IMF is starting to sound almost like disgraced Greek finance minister Yanis Varoufakis: “It’s about debt relief.” Nothing could be more wrong than that.

Europe is right

As so often before, it’s all a matter of proper sequencing – aligning incentives with actual performance. Europe has learned the hard way that “upfront” concessions to Greece do not work.

Even more so than their predecessors, the radical left now ruling in Athens seems inclined to book just any of the concessions – and then fail to deliver on the promise they had made in exchange.

What that means in practical terms is that Greek debt should be re-profiled — if and when Greece returns to sensible policies.

Prime Minister Alexis Tsipras is finally showing signs of having understood that. The IMF? Apparently, not so much.

As if anybody needed a reminder, the IMF’s own team has seen an unwelcome return to foot dragging once again over the past two weeks. That is just another reminder that Athens needs a further incentive to stay on the agreed-upon course.

Debt relief in stages and in reward for actual reforms makes sense. A massive upfront haircut, as IMF staffers seem to recommend, does not.