The Wall Street Journal's Matina Stevis has a breaking story about a "strictly confidential" internal IMF (International Monetary Fund) document that reveals how thoroughly the IMF deceived the public (and investors) when it said Greece's debt levels were "sustainable." The document will be released on Thursday.
I wasn't at Davos, but in all of the accounts and subsequent verbal reports to me by participants, the IMF's false narrative was touted there. The IMF now admits that its response to the Greek crisis (pushing more debt on Greece) bought time so that the rest of the 17-nation Eurozone could do damage control.
In other words, the IMF threw Greece under the bus. In particular, it ludicrously downplayed the damage its recommended austerity measures would do to the Greek economy, which is in the grips of a prolonged and deep recession.
Gang of Three
The IMF wasn't alone. It is part of the Eurozone's so-called troika comprised of the IMF, the European Commission, and the European Central Bank.
The troika's biggest fear may have been that Greece would repudiate its debt, as Iceland did. Iceland is now recovering, while Greece is sinking even further. By joining forces, the troika engaged in a sophisticated form of bullying.
As the troika arranged multiple bailouts that sank Greece further in debt, the IMF first forecast a 5.5 percent decline in Greek economic output for 2009 to 2012. But Greece lost 17 percent in real gross domestic output. The forecast also called for only 15 percent unemployment in 2012; the reality was 25 percent. These weren't forecasts; they were numbers fabricated to build consensus to strong-arm Greece into complying with the bailouts.
The troika is also managing the bailouts of Ireland, Portugal, and Cyprus, and it will likely have a hand in others when needed. Yet, citizens of these countries would be foolish to believe the troika has their interests in mind.
Eurozone Banks Are Bloated with Bad Debt
The IMF's own document reveals that the wider Eurozone benefited from the Greek bailouts, not Greece. In other words, banks and investors didn't have to recognize losses on Greek debt that cannot be repaid. Instead, the troika has a policy of foisting more debt on failing countries -- to support the Eurozone's failing banks -- to pretend that the banking system in the Eurozone isn't bloated with bad debt.
The reason for this is simple. The Eurozone banks cannot mark down the "assets," i.e., the debt they own, to realistic levels. If they did, the losses would be so great, even the troika couldn't save them. Many banks should be allowed to fail, even if that means wiping out shareholders and having debt holders take a hit. There would be a lot of short-term pain, but it would be over faster.
The troika will never recommend this, because some of the biggest losers are among their fellow attendees at Davos. Many people in prestigious positions would lose their status. Little do they know that they have already lost that status in the eyes of thinking financiers and business leaders.
Lies in Davos, Truth in Tel Aviv
In December, I spoke at the Israel Business Conference in Tel Aviv. My topic was the Eurozone, and I aired my views on Greece, views that are very different than the troika's. Speakers and attendees included Shimon Peres, European business leaders, leaders from the defense industry, and corporate leaders from around Europe. The Tel Aviv conference was one of the most illuminating events I've attended in a decade
European business leaders were baffled by the misinformation pushed by the troika about the situation in Greece and in weaker Eurozone countries. They recognized the troika's story for the deception it was. European business leaders and (honest) banking officials called Greece's deep recession a depression, since that's exactly how it appears to them.
How much has the IMF damaged its credibility? Here's a snippet from Matina Stevis's WSJ report:
The IMF said that it bent its own rules to make Greece's burgeoning debt seem sustainable and that, in retrospect, the country failed on three of the four IMF criteria to qualify for assistance.
Over the last three years, a number of senior IMF figures, including the current managing director Christine Lagarde, have repeatedly said that the country's debt level was "sustainable" -- likely to be repaid in full and on time.
Meanwhile, the IMF knew there were serious doubts about the sustainability of Greek debt. All the while banks and investors were taking this debt onto their balance sheets. In many cases the banks knew this was troubled debt even as they sold it to investors and stuffed it on their own balance sheets. Convenient lies from the IMF gave their risk committees air cover.
At Davos Lagarde was lionized and gave a speech entitled "Resilient Dynamism." If dishonest spin is what you want to hear, Davos is the place for you. If you prefer hard-to-hear useful truth, go to Tel Aviv.
Endnote: In September, 2009, I gave a presentation to members of the International Monetary Fund (IMF) explaining the corrosive atmosphere that allowed the largest Ponzi scheme in the history of the capital markets to flourish: "Wall Street's Fraud and Solutions for Systemic Peril." You can read more about it by clicking here..
The IMF was still in denial (this preceded SEC fraud suits). It also has a history of sending the wrong message. Failure to recognize fraud led to statements like the one that opened Chapter 2 of the IMF's April 2006 Global Financial Stability Report:
There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped to make the banking and overall financial system more resilient.
That was all the more extraordinary given that in April 2005, I had given a presentation to the IMF about problems with credit derivatives and misrated collateralized debt obligations. The IMF acted as a public relations division for the global banking system. IMF insiders said they are often censored and not allowed to oppose the party line.