Greece remains a slow-motion car-crash – it should be allowed to go bankrupt

EU and Greek flags

Leaked documents on the web. Threats to provoke a financial collapse. Spies within the government. It might sound like an early draft of the sequel to the The Night Manager.

But in fact, it is just the latest episode in a drama that has been running a lot longer than that, and has had even more unlikely twists and turns – the Greek crisis.

Over the weekend, the International Monetary Fund found itself in hot water over thetranscript of a conversation between its senior officials posted on WikiLeaks. They openly discussed provoking a “credit event” for the beleaguered country, taking the Greek back to the edge of bankruptcy, as a way of forcing the Germans to concede debt relief.

Not surprisingly, the IMF was quick to deny any such plan was under consideration. After all, that is not the way the IMF is meant to behave. It isn’t meant to plot behind the backs of elected governments, nor to act as financial agent provocateur to create, rather than resolve, a crisis.

And yet, at the risk of taking inspiration from Trotsky, sometimes the ends justify the means. In truth, a “credit event” is precisely what the Greek crisis needs. The country remains a slow-motion car-crash, with GDP still contracting, debt still rising, and little sign of a return to normality.

It is time the IMF broke free of what will go down in the economic textbooks as one greatest policy catastrophes of all time, and abandoned the failed terms imposed on the country by Berlin. If it takes a crisis to do that, so be it.

The transcripts posted on WikiLeaks, assuming they are accurate, give a fascinating glimpse into the behind-the-scenes negotiations over Greece’s future. In the conversation, held last month, senior Fund officials discuss putting pressure on the German government to include more debt relief for Greece in the latest round of its never-ending bail-out.

In extreme circumstances, the IMF could withdraw from the programme, creating the conditions for a potential bankruptcy for the country just ahead of Britain’s EU referendum.

The implication is clear. The German Chancellor Angela Merkel will be desperate to avoid that, and will throw a few more billion euros at the problem to make it go away.  Ever since, allegations and counter-allegations have been flying in every direction.

The IMF’s managing director Christine Lagarde has denied that they are trying to pressurise anyone. There have been dark hints the Greek government may have leaked the transcript to prevent the crisis getting worse. Or the Fund itself may have ‘accidentally’ put the conversation into the public domain to get the idea out there.

IMF managing director Christine Lagarde

It is all extremely cloak-and-dagger, and hardly very edifying.  True, it is certainly not the way you would hope the IMF would behave.

The Fund it meant to ensure financial stability, not going around stirring up trouble. Nor is it the job of financial bureaucrats in Washington to put pressure onto democratically elected politicians, whether they are in Athens or Berlin.

It is not hard to understand why the Fund has been so quick to cover up its tracks. Even so, those are details, which should not be allowed to obscure a larger truth. As it happens, the Fund officials are right. A ‘credit event’ is precisely what Greece needs.

Six years after the crisis began, the Greece remains a disaster zone. When the original bail-out was agreed, it was meant to be well on the road to recovery by now. But instead it just goes from bad to worse, to even worse still.


The economy is still contracting, shrinking by another 0.8pc in the latest quarter. Overall, output is now down by 27pc since the crisis began – to put that in perspective, in the Great Depression of the 1930s, American GDP dropped by 32pc, but it was climbing again by the middle of the decade.

Unemployment’s has climbed to punishing levels – 24pc of the workforce on the latest Eurostat data, the highest level in the EU. Itsoverall debt-to-GDP ratio has now hit 171pc, close on double the 91pc level that is the average across the EU, and it is still rising relentlessly every year.

Shamefully, what was a middle-income country now has one of the worst poverty rates in Europe.  In reality, the German policy of endless austerity, whilst maintaining the pretence its debts will be paid one day, is clearly not working.

Greek riot police
The IMF has been accused of overstepping its role CREDIT: REUTERS/JOHN KOLESIDIS

How much more evidence can possibly need to be accumulated to prove that point? For example, the Greek government has actually done quite well at getting people to pay more tax. It now takes 39pc of GDP in tax, compared with 33pc back in 2005 before the crisis began.

But so what? It is taking a bigger and bigger slice of a pie that keeps getting smaller. The country remains trapped in a cycle of cuts, shrinking output, and spiralling debt ratios from which there appears no escape.

If there was to be some miraculous improvement in competitiveness that would allow it to break out of that trap, there should be some sign of it by now. Instead, it simply gets worse – indeed it may well have now reached the point where the tax burden is an extra drag on an already painfully weak economy.

The IMF has been guilty of providing intellectual cover for a failed strategy. The choices have been very simple since the crisis first started and have hardly changed since then. Either the country should get out of the euro, and re-establish the drachma, and start to claw its way back to recovery.

Or else it needs major debt relief, and a package of financial assistance to re-flate its economy and kick-start growth. Anything else is simply wishful thinking. It is surely time to break out of that.

The job of the IMF, although it has been hard to tell since Lagarde took over, is not to prop up the single currency, or to help Angela Merkel pretend that Greece is not going to cost German taxpayers money. It is to ensure global financial stability.

Greek prime minister Alexis Tsipras (L) and German chancellor Angela Merkel
Greek prime minister Alexis Tsipras (L) and German chancellor Angela Merkel CREDIT:AFP/GETTY IMAGES/JOHN THYS

Greece remains, as it has been for six years, a major threat to that: a simmering volcano that threatens to erupt at any time.  There will be no better time for the Fund to make that break than this summer.

With the British referendum just over two months away, Germany will be desperate to prevent another crisis developing, and may well concede the debt relief Greece needs.

The leak might have been unfortunate. The tactics might be under-hand. But even the most duplicitous strategy can sometimes be the right one – and the IMF officials were quite right to think about strong-arming Europe into a change of course.

[Source:- Telegraph]