[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
LESSONS FROM THE IMF'S BAILOUT OF GREECE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
MAY 18, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-20
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Monetary Policy and Trade
ANDY BARR, Kentucky, Chairman
ROGER WILLIAMS, Texas, Vice GWEN MOORE, Wisconsin, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina BRAD SHERMAN, California
MIA LOVE, Utah AL GREEN, Texas
FRENCH HILL, Arkansas DENNY HECK, Washington
TOM EMMER, Minnesota DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
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Page
Hearing held on:
May 18, 2017................................................. 1
Appendix:
May 18, 2017................................................. 33
WITNESSES
Thursday, May 18, 2017
Blustein, Paul, Senior Fellow, Centre for International
Governance Innovation.......................................... 4
Gelpern, Anna, Professor of Law, Georgetown University Law
Center, and Non-Resident Senior fellow, Peter G. Peterson
Institute for International Economics.......................... 8
Lundsager, Meg, Public Policy Fellow, Woodrow wilson
International Center for Scholars.............................. 6
Nelson, Rebecca M., Specialist in International Trade and
Finance, Congressional Research Service........................ 9
APPENDIX
Prepared statements:
Blustein, Paul............................................... 34
Gelpern, Anna................................................ 58
Lundsager, Meg............................................... 88
Nelson, Rebecca M............................................ 96
Additional Material Submitted for the Record
Barr, Hon. Andy:
``German Conservative Euro-MP Breaks Ranks Over IMF Role in
Greek Bailout,'' dated February 16, 2017................... 106
``German SPD Says Europe Can Back Athens Without the IMF,''
dated January 19, 2017..................................... 108
``Germany Denies Devising Greek Rescue Plan Without IMF,''
dated January 18, 2017..................................... 110
``Commentary: The IMF Must Walk Away From Greece,'' by Meg
Lundsager, dated May 17, 2016.............................. 112
``The IMF Should Get Out of Greece,'' dated February 3, 2017. 115
``Alexis Tsipras Pushes for IMF to Stay Out of Next Greek
Bailout,'' dated December 20, 2015......................... 117
Davidson, Hon. Warren:
Chart entitled, ``Heavily-Indebted EU Nations''.............. 119
Chart entitled, ``Greece Labor Force Participation Rate''.... 120
Hill, Hon. French:
``Bailout Plan is All About `Rescuing Banks and Rich
Greeks,''' dated May 18, 2010.............................. 121
LESSONS FROM THE IMF'S
BAILOUT OF GREECE
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Thursday, May 18, 2017
U.S. House of Representatives,
Subcommittee on Monetary
Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Members present: Representatives Barr, Williams, Huizenga,
Hill, Davidson, Tenney, Hollingsworth; Moore, Foster, Kildee,
Vargas, and Crist.
Ex officio present: Representative Hensarling.
Also present: Representative Maloney.
Chairman Barr. The Subcommittee on Monetary Policy and
Trade will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``Lessons from the IMF's
Bailout of Greece.''
I now recognize myself for 5 minutes to give an opening
statement.
This morning's hearing, ``Lessons from the IMF's Bailout of
Greece,'' will examine the International Monetary Fund's
financial assistance to the country of Greece, one of the
largest and most controversial rescues in the Fund's history.
Under normal access rules, the IMF had traditionally lent
up to 200 percent of a country's quota per year. When the
eurozone crisis hit, the Fund in 2010 approved an exceptional
access program for Greece worth 30 billion euros or 3,200
percent of quota to supplement the eurozone's own contribution
of 80 billion euros.
In 2012, the Fund approved a second program worth over
2,000 percent of Greece's quota with more than 18 billion euros
in new money.
Many observers, including on this committee, were critical
of the Fund's use of a so-called systemic exemption which was
created in order for Greece to tap exceptional access lending.
This exemption claimed that potential spillover effects from a
Greek meltdown compelled the Fund to waive its requirement that
a member's debt be sustainable with a high probability before
the Fund lent money.
Thanks to pressure from Congress, the systemic exemption
has since been repealed, but this shouldn't obscure the fact
that the Greek bailout has made a mockery of other IMF lending
rules, too, as findings from the IMF's own Evaluation Office
have made clear.
Despite receiving exceptional access, Greece remains mired
in recession with youth unemployment approaching 50 percent.
The IMF likes to speak of the catalytic role its financing can
play in borrowing countries, but in Greece at least, the Fund's
resources have catalyzed nothing. Seven years after the IMF's
first program, Greece's debt has worsened and is judged by the
Fund as downright unsustainable.
Today, the eurozone has set up its own bailout fund, the
European Stability Mechanism, or ESM. It possesses more
resources for just 19 eurozone countries to borrow than the IMF
can deploy for the entire world.
At the same time, Greek capacity remains as doubtful as
ever with falling rates of tax collection, government arrears
to domestic firms, and even the prosecution of the former head
of Greece's statistical office, something widely viewed as a
politically motivated witch hunt.
In light of these facts, it is shocking that the IMF is now
considering a third bailout for the country as a junior partner
to the ESM. No one, not even the Europeans, pretends that the
Fund's financial assistance is needed. Rather, it is meant to
protect eurozone politicians as they head to elections this
year.
It is common knowledge that the IMF's contribution would be
symbolic. But if that is the case, the Fund may be on its way
to becoming a symbolic institution. So make no mistake, if the
IMF goes forward with a third Greek bailout, it will suggest
that the Fund has learned little from past experience, that its
role as a lender of last resort is in jeopardy and that its
decision-making has been hopelessly politicized.
The Fund will have no one to blame but itself if
Congressional scrutiny of its activities tightens accordingly,
including through future consideration of IMF governance
reviews.
As for those who claim that any IMF member including Greece
retains at least some right to borrow, we should refer to the
IMF's Articles of Agreement which contain explicit provisions
to limit loans or render a member ineligible to receive them.
The articles stipulate that assistance shall be temporary and
designed to meet balance-of-payments problems provided that
there are adequate safeguards.
I would submit that 7 years and counting does not qualify
as temporary, and that having the IMF and ESM hand money back
and forth to each other is not the kind of balance-of-payments
crisis that IMF members pay their quota for.
As for adequate safeguards, Greece is the first and only
advanced nation to ever default on the IMF. And last year's
alleged wiretapping of IMF officials in Athens suggests that
good-faith agreements are unlikely. With the eurozone
attempting as we speak to force the IMF to water down its
demands for debt relief, another safeguard is at risk of being
made meaningless.
In short, nothing less than the Fund's integrity and
adherence to its foundational principles is at stake here. I
look forward to our witnesses' testimony and I thank them for
their participation at this hearing.
I yield back the remainder of my time.
And the Chair now recognizes the ranking member of the
subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5
minutes for an opening statement.
Ms. Moore. Good morning, Mr. Chairman, and my colleagues.
Today is yet another exceptional day where we are going to
be taken to school with our distinguished panel of experts,
including our own Dr. Nelson from the Congressional Research
Service.
I want to thank you for appearing.
And I think we are going to learn, Mr. Chairman, about the
important role of the International Monetary Fund. This work is
neither straight, nor is it easy. We are seeking here on this
committee to evaluate the IMF's roughly $32 billion
contribution to the first Greek rescue package in 2010 through
the exceptional access framework, the largest fund in history
aimed at avoiding a Greek default and stemming contagion in the
eurozone and more broadly.
The eurozone crisis has revealed flaws in the architecture
of Europe and whether Greece is in or out makes a compelling
case for further economic integration, flaws that include flaws
created for the benefit of European banks.
Moreover, how the crisis is handled may speak volumes for
the future of Europe and the eurozone with important economic,
political, and security implications, both in the United States
and globally.
I realize that these are complicated issues, and I have my
thoughts and opinions, but I will reserve those because I am
truly interested in hearing from our expert witnesses.
There are two things I would like to say: the role of the
IMF in these situations is vital; and ongoing analysis and
research that they provide is irreplaceable. And so I hope that
we can evaluate the facts surrounding these events that were
made looking forward through the fog of economic uncertainty
when there are no perfect answers and not with the full benefit
of hindsight.
And with that, Mr. Chairman, I yield back the balance of my
time.
Chairman Barr. Thank you.
Today, we welcome the testimony of Paul Blustein, senior
fellow at the Centre for International Governance Innovation.
He is an award-winning journalist and author. His most recent
book is, ``Laid Low: Inside the Crisis That Overwhelmed Europe
and the IMF.'' Mr. Blustein earned his undergraduate degree
from the University of Wisconsin, and his master's degree from
Oxford University.
Meg Lundsager is--
Ms. Moore. Can I--do you yield?
Chairman Barr. Sure, Wisconsin.
Ms. Moore. Come on now, this is a well-educated panelist. I
just want to point that out.
[laughter]
Chairman Barr. You have a fellow Badger in the house.
Meg Lundsager is a public policy fellow at the Woodrow
Wilson International Center for Scholars, and a former U.S.
executive director and alternative executive director at the
International Monetary Fund. Additionally, she is a former
Deputy Assistant Secretary for Trade and Investment at the U.S.
Treasury Department. She has a master's degree from the
University of Maryland, and a bachelor's degree from American
University.
Anna Gelpern is a professor of law at Georgetown University
Law Center, and a non-resident senior fellow at the Peter G.
Peterson Institute for International Economics. She earned her
bachelor's degree from Princeton University, her J.D. from
Harvard University, and her master's degree from the London
School of Economics and Political Science.
Dr. Rebecca Nelson is a specialist in international trade
and finance at the Congressional Research Service where she
focuses on the International Monetary Fund, the multilateral
development banks, and other policy areas related to
international economic affairs. Dr. Nelson earned her
bachelor's degree from Johns Hopkins University, and her Ph.D.
from Harvard.
Each of you will be recognized now for 5 minutes to give an
oral presentation of your testimony. And without objection,
each of your written statements will be made a part of the
record.
Mr. Blustein, you are now recognized for 5 minutes.
STATEMENT OF PAUL BLUSTEIN, SENIOR FELLOW, CENTRE FOR
INTERNATIONAL GOVERNANCE INNOVATION
Mr. Blustein. Thank you very much, Mr. Chairman, Ranking
Member Moore, and members of the subcommittee. Thank you very
much for the opportunity to provide my perspective at this
hearing about a complex, but very important topic.
The IMF's role in the bailout of Greece is rich in lessons
about the workings or non-workings of the international
financial system and has immense implications for the future of
the global economy.
I have made something of a career of writing books, behind-
the-scenes books, journalistic narratives about the IMF and
financial crises. And when I wrote a book about the Argentine
crisis of 2001-2002, I thought I had chronicled the IMF's
greatest debacle ever. But financial crises are kind of a gift
that keeps on giving to people like me and along came the Greek
crisis, which has, I would argue, been even worse, both for the
country and for the Fund's reputation.
So I got to write another book, the title of which you
kindly mentioned, Mr. Chairman. I will mention it again, if you
don't mind. It is, ``Laid Low: Inside the Crisis That
Overwhelmed Europe and the IMF.''
Let me begin with a tidbit from that book. I think we are
going to get this thrown up on the slide here. Yes, okay. And I
know we have time constraints, so this will be my only tidbit,
I promise. But this is a memo, a confidential memo that was
written by Olivier Blanchard who was then the IMF's chief
economist. And he wrote this in May 2010 as the first bailout
of Greece was nearing finalization. So this memo may be a
little hard to see on the screen, I don't know, but the essence
of it is he is saying this isn't going to work.
The bailout, just some details, was the largest in history
at that time, 110 billion euros in emergency loans, 30 billion
of which was to come from the IMF, the purpose being so that
Greece could pay off all its obligations coming due over the
next couple of years, reassure markets on that point, and avoid
a catastrophic default on its debt.
And in return, Greece was expected to drastically cut its
government spending and budget deficit. And to get itself out
of recession and growing again, the Greeks were supposed to
implement a very large number of structural reforms, for
example streamlining the notoriously inefficient state-owned
enterprises, the state railways for example.
So I have underlined sort of the money bits of Blanchard's
memo. He says the degree of budgetary belt-tightening required
of Greece has never been achieved by any other country.
Furthermore, ``even with full policy compliance, there is
nothing that can support growth against the negative
contribution of the public sector. The recovery would likely be
L-shaped with a recession deeper and longer than projected.''
It then goes on to say the program is likely to go, ``off
track, even with perfect policy implementation.'' So to put
that in a bit plainer English, what he was saying was that even
if Greece did everything that was being asked of it, fulfilled
all the conditions, the Greek economy would sink further and
the rescue program wouldn't work.
Now, Blanchard doesn't say so explicitly in this memo, but
the clear implication is that Greece would need a large amount
of debt relief much sooner rather than later. But powerful
European policymakers were vehemently opposed at that time to
giving Greece any debt relief and the rescue went ahead as per
the original plan, a gigantic loan with conditions. And when
Greece finally did get debt relief in 2012, it was too little,
too late.
And this was typical of a syndrome that plagued the IMF
during the eurozone crisis. The Fund joined in several rescues
despite grave misgivings among top economic and legal officials
there and also some of the members of its executive board. And
it did so under pressure from European policymakers who
maintained heavy influence over the Fund's levers of control.
And some of these emergency loan packages you would have to
say worked out pretty well. But all too often, debt was piled
atop debt in excessively harsh conditions imposed on the
crisis-stricken countries. And Greece was, I think, the
canonical case in this regard.
And this is a real problem in view of the IMF's mission.
This is a mission I really believe in. The Fund provides a
global public good, a benefit that no single nation can provide
by itself, but which all nations gain from, the global public
good of global financial stability.
And the crisis in Europe showed us that this is more
important than ever because previously we thought that
international bailouts were for countries in the emerging
world, countries like Thailand and Indonesia, for example, and
the eurozone crisis showed us that advanced countries need
bailouts, too. So the world has really been put on notice about
the importance of a muscular and effective IMF.
But the eurozone crisis, I think the Greek crisis above
all, was a bruising and enfeebling experience for the IMF. Fund
economists, to their credit, as this memo shows, perceived
serious flaws in these bailouts, but they often yielded to the
crowd of people in capitals such as Berlin and Frankfurt and
Brussels and Paris.
Now, the IMF was more independent in the latter stages of
its crisis. But in my view, it didn't use the greater leverage
that it had to the extent that it should have. And this sapped
the IMF of its most precious asset, its credibility as an
independent, neutral arbiter. And this has disheartening
implications for the management of future crises.
So I am out of my time, Mr. Chairman. I will be happy to
elaborate on these points in the Q&A. And I appreciate your
incorporating my written statement in the record.
Thanks very much.
[The prepared statement of Mr. Blustein can be found on
page 34 of the appendix.]
Chairman Barr. Thank you, Mr. Blustein.
Ms. Lundsager, you are recognized for 5 minutes.
STATEMENT OF MEG LUNDSAGER, PUBLIC POLICY FELLOW, WOODROW
WILSON INTERNATIONAL CENTER FOR SCHOLARS
Ms. Lundsager. Thank you very much, Chairman Barr, Ranking
Member Moore, and members of the subcommittee.
I spent much time discussing these issues while I was at
the IMF and continue to focus on it at the Wilson Center. And
my testimony today reflects my personal views.
Over many decades, IMF policies and lending have
underpinned the global economic and financial stability that we
all seek. The IMF's early response to the eurozone crisis was
key in containing the spread of the crisis, which benefited all
members. But IMF lending to eurozone countries also strained
IMF principles and weakened the IMF's lead role in designing
economic adjustment programs and financing packages for
countries facing a balance-of-payments crisis.
IMF lending programs that normally encompass all aspects of
macroeconomic and financial sector policy have been shaped more
by European needs than by IMF standards. This eroded the IMF's
commitment to treat its members uniformly in terms of the types
of policy adjustments demanded in lending programs.
Furthermore, eurozone governments have created their own
500 billion euro financial rescue fund, the European Stability
Mechanism, and therefore do not need IMF funding.
With little likelihood that Europe will adjust its internal
rules and regulations to accommodate the IMF, the preferred
future approach is that eurozone countries do not seek IMF
lending. Eurozone members nonetheless retain their right under
the IMF Articles of Agreement to request IMF financing. The IMF
should therefore have in place a defined policy establishing
its primacy in program design and its seniority among all
creditors in lending to currency union members.
The IMF requires that borrowing countries implement
economic reforms designed to restore financial stability and
balance-of-payments viability. Programs include conditions on
monetary, fiscal, financial sector and exchange rate policies.
If a country is a member of a currency union and cannot adjust
its exchange rate, domestic macro economic policies will be
tightened further to restore competitiveness.
The IMF will also work closely with bilateral and
multilateral partners as aid and credit programs provide
technical assistance and critical funding. Debt relief from
official and private creditors may also be included in the
financing package if the IMF assesses that the country will be
unable to meet its debt servicing commitments or borrow new
funds from private markets.
Greece is the only eurozone member now seeking IMF
assistance. European partners reaffirmed they are committed to
providing additional future debt relief to Greece if needed and
if Greece adheres to its reform program through 2018. The IMF
has stated that European assumptions are too restrictive and
the IMF continues to demand more clarity now from European
partners regarding the extent of additional future debt relief
European entities will provide. European finance ministers will
meet on Monday to discuss their response to the IMF.
Greece's outstanding debt to the IMF has dropped to less
than $14 billion while its debt to European partners remains
over $200 billion. With little financial need for a parallel-
aligned program, the eurozone should assert its lead role in
addressing its internal economic challenges and move forward
without an IMF program for Greece. The IMF cannot fix the
eurozone's internal inconsistencies, only Europe can.
However, as I mentioned, under the Articles of Agreement
each country is entitled to request IMF financial assistance.
Therefore, the IMF should establish a policy governing how it
will lend to members in a currency union, particularly those in
a reserve currency union, such as the euro. Recognizing this
need, the IMF is planning to discuss conditionality in currency
unions this summer, according to the IMF's work program.
The approach should include a process for the IMF to
participate in designing the country's economic reform program
and monitoring its performance without necessarily providing
financial assistance. If the country requests IMF financing,
the monetary union should respect the IMF's lead role in all
elements of program design and debt sustainability assessments.
The currency union's institutions should share the information
on their policy requirements and defer to IMF program
requirements.
The IMF contribution should be relatively small and shorter
term than some of the recent programs have been with eurozone
countries. The currency union's members and leading
institutions should explicitly recognize the preferred creditor
status of the IMF, including with regard to their earlier
disbursements. An IMF policy along these lines would clarify
respective institutional roles and help point eurozone
countries towards addressing their own internal imbalances.
I look forward to your questions. Thank you.
[The prepared statement of Ms. Lundsager can be found on
page 88 of the appendix.]
Chairman Barr. Thank you.
Professor Gelpern, you are recognized for 5 minutes.
STATEMENT OF ANNA GELPERN, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER, AND NON-RESIDENT SENIOR FELLOW, PETER G.
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
Ms. Gelpern. Chairman Barr, Ranking Member Moore, thank you
very much for including me. And thank you to the members of the
subcommittee.
I am especially honored to share this panel with people I
respect tremendously. So it is a special pleasure for me to be
here today.
I write about financial regulation and sovereign debt
restructuring, so I am really looking at this very much from
the perspective of a global sovereign debt restructuring regime
rather than the EU or Greek equities in particular.
My main message is that the IMF remains indispensable in
the sovereign debt restructuring. It is absolutely true, I
agree with my colleagues, that Greece has tested it like no
other. However, like no other actor, the IMF has shown capacity
to learn from its mistakes, has undertaken substantial reforms
and paradoxically now probably has more policy sway with less
money on the line than it did earlier on. I think we should
encourage this trajectory, reinforce the Fund's independence.
In other words, I think the lesson of Greece is that we need a
stronger IMF, not a smaller, weaker IMF.
As you know, sovereign governments that run out of money
cannot file for bankruptcy. This is not just a problem for the
borrowing country and its citizens, but also for its creditors
who are doomed to scramble for bits and scraps in a crisis
because most of the sovereign's property is immune.
Against this background, the IMF plays a vital coordinating
role. It is literally the only actor capable of bringing
together diverse domestic and external constituents around a
reform program. It has developed unparalleled expertise in
crisis management, to be sure nourished by its many mistakes in
the past, including some of the ones that Paul has written
about so beautifully.
My written testimony outlines in painful, excess detail the
sovereign debt restructuring context, focusing on the role of
the Fund, and summarizes recent restructuring experience and
how this role has come to be.
Now, sovereign debt restructuring reform is not all about
the IMF, far from it, but it cannot happen without the IMF. I
believe that in the wake of Greece in particular, reform should
have three objectives: outcomes should be sustainable; the
process should be comprehensive and collective; and the regime
as a whole must be intelligible and accountable to its
constituents, both debtors and creditors.
Greece does illustrate, again, painfully, the risk of
entangling analysis, money, and politics. I think that when
those three come together, analysis always loses, and that is a
big problem.
With respect to the first objective, sustainable outcomes,
the IMF should be applauded for reforming its approach to
assessing countries' debt sustainability, opening up its
methodology to outside scrutiny. In Europe, the IMF has been,
despite all of the stumbles and mistakes, a force for good. The
question is, where would we be without the IMF? What would
European Union assumptions be and where would Greece be if the
IMF were out of the picture completely?
I believe the Fund has pushed EU authorities to be more
realistic in their projections. And Paul's ``smoking gun'' memo
is actually one example of internal debates yielding results
over time, even in the face of political constraints.
As I elaborate in my written statement, I continue to
believe that debt sustainability analysis should be further
open to debate and competing views. And also, in order to
reduce the pressure on analysis, I believe that we need a
credible story for how the international financial system deals
with contagion because contagion, you know, the ``C word,'' has
this magical effect of killing all analytic effort.
Without bankruptcy, we have piecemeal official, private
sector, domestic, and external restructuring and default. And I
think, again, the IMF alone has shown capacity to bring
together these various parties. I am particularly delighted
that the Fund has begun to address the role of official
creditors, including central banks. The ECB was paradoxically
the biggest holdout in the Greek debt restructuring in 2012.
There are other, even more difficult examples of official
sector holdouts around the world.
Finally, while there is no bankruptcy for sovereigns, there
has developed a pretty regular and discernible sovereign debt
restructuring regime. With this regime, the sequencing of debt
restructuring, what the different actors do, is completely
unintelligible and inaccessible to ordinary people. The IMF is
ideally positioned to promote more transparency and
intelligibility. It can easily require uniform, comprehensive
disclosure of debt and debt restructuring terms. And I think it
should use its power to advance this goal.
To close, the IMF is in a peculiar position. It is doomed
to be small relative to global capital flows. But the fact that
it has more clout in Greece now with less money on the line I
think is instructive. Credibility is immensely important. We
should help the Fund hold the line, continue to rebuild its
credibility, and be a force for good in sovereign debt
management, including in Europe.
Thank you.
[The prepared statement of Ms. Gelpern can be found on page
58 of the appendix.]
Chairman Barr. Thank you for your testimony.
And, Dr. Nelson, you are now recognized for 5 minutes.
STATEMENT OF REBECCA M. NELSON, SPECIALIST IN INTERNATIONAL
TRADE AND FINANCE, CONGRESSIONAL RESEARCH SERVICE
Ms. Nelson. Chairman Barr, Ranking Member Moore, and
members of the subcommittee, thank you for the opportunity to
testify on lessons from the IMF's bailout of Greece.
My testimony focuses on the policy implications of the
Greek crisis for the IMF as an institution. I will summarize my
statement with these brief remarks.
The IMF has decades of experience responding to economic
crises around the globe. The Greek crisis, however, took the
IMF into uncharted territory. Greece was the first advanced
economy to borrow from the IMF in decades and the IMF committed
significant financing in two back-to-back programs.
The IMF entered an unusual co-financing arrangement for
Greece with European creditors. It was also the first time that
the IMF had designed a program for a country in a major
currency union.
The IMF's record in Greece is mixed. IMF programs helped
limit spillover from Greece to the global economy, which was
struggling to recover from the global financial crisis. But 7
years after the first program, Greece's economy remains in
crisis.
The IMF's experience in Greece raises a number of broad
policy questions about the IMF that continue to be relevant in
Greece and are likely to arise in future crises. I will talk
about four such questions.
The first question relates to the size and length of IMF
financing. Although Greece is an extreme example, there is a
broader trend towards larger IMF programs and for some
countries to require repeated IMF programs. This raises
questions about whether there are or should be limits.
On one hand, long-term financing veers from the IMF's
mandate to provide temporary financial support. Additionally,
there is the potential for moral hazard. Governments may be
less likely to adopt prudent economic policies if they believe
that the IMF will step in regardless of the cost. On the other
hand, limiting the resources that the IMF can deploy during
crises may pose risks to the broader global economy.
The second question relates to co-financing. In Greece, IMF
co-financing with European creditors limited IMF exposure to
the crisis. It also limited the IMF's independence in designing
programs for Greece. The IMF does not have a clear policy on
co-financing arrangements. There are questions about whether
co-financing is desirable and, if so, how co-financing
arrangements can be designed to maximize their effectiveness.
The issue of co-financing is likely to remain salient. Regional
financing arrangements have proliferated in the global economy.
The third question relates to IMF policy flexibility and
accountability. The IMF revised its lending safeguards in 2010
to allow the Greek program to go forward despite misgivings
about Greece's debt. The IMF believed that the risks from
Greece to the global economy justified the policy change. The
policy change was controversial and eventually repealed.
Going forward, this raises questions about the appropriate
balance between IMF flexibility and adherence to safeguards.
Providing the IMF discretion to make policy changes allows the
IMF to respond to unforeseen and time-sensitive crises. The
risk is that the IMF may adopt policy changes that donor
governments do not support and may also make the IMF less
predictable as an institution.
The fourth and last question relates to currency unions. A
currency union is where two or more sovereign states adopt a
common currency. Greece belongs to a currency union, the
eurozone. The crisis in Greece was fundamentally tied to
structural problems in the eurozone. The IMF, however, does not
design programs for currency unions. The IMF designs programs
for specific countries.
For Greece, this meant that IMF programs were focused on a
relatively narrow set of policy issues and tools. Arguably, the
IMF programs required a broader scope that addressed the
eurozone crisis as a whole. How the IMF should respond to
crises and currency unions remains a challenge for the
institution.
In conclusion, the IMF is an institution that has evolved
over time. After a number of major crises, the IMF has adapted
policies based on lessons learned. Greece is another pivotal
crisis that raises questions about IMF policies and the IMF's
role in the global economy. Congress plays a critical role in
shaping U.S. policy at the IMF and Congress may want to
consider these policy issues.
Mr. Chairman, this concludes my brief remarks. Thank you
for the opportunity.
[The prepared statement of Dr. Nelson can be found on page
96 of the appendix.]
Chairman Barr. Thank you all for your testimony.
And the Chair now recognizes himself for 5 minutes.
As many of you all alluded to, the Greeks still suffer from
the eurozone's highest unemployment rate. It has been around 25
percent for the past several years. And instead of helping to
reduce Greece's public debt-to-GDP ratio to 110 percent as
planned, the Fund has witnessed the debt-to-GDP ratio climb to
nearly 180 percent despite a major restructuring of debt in
2012. So the logical conclusion is that the IMF's involvement
has done little to improve the lives of the Greeks, in part
because Greece's leaders have slow-walked reforms for years.
In December 2015, Greek Prime Minister Alexis Tsipras was
unapologetic, criticizing the Fund's ``unconstructive attitude
on fiscal and financial issues.'' He indicated the IMF should
stay out of any future bailouts and was quoted by The Financial
Times as saying, ``After 6 years of managing an extraordinary
crisis, Europe now has the institutional capacity to deal
successfully with intra-European issues.''
I would ask unanimous consent that this Financial Times
article with the headline, ``Alex Tsipras Pushes for IMF to
Stay Out of Next Greek Bailout'' be entered into the record.
I would also ask unanimous consent to enter into the record
a Reuters article from January of this year noting that the
Greek government would welcome the IMF's being excluded from
the Europeans' bailout.
Without objection, it is so ordered.
So for Dr. Nelson, according to the IMF's Articles of
Agreement, assistance can only take place at a member's own
initiative. If the leaders of a member like Greece believe that
the country's crisis can and should be resolved by Europe
alone, shouldn't the IMF take Greece at its word?
Ms. Nelson. As you say, the IMF provides financing to
countries that request it. And if Greece isn't requesting
financial assistance, the IMF shouldn't be providing financial
assistance.
Chairman Barr. Mr. Blustein, would you agree with that?
Mr. Blustein. I think the Greeks will probably, under such
circumstances, have their arms twisted and told that they
should request IMF help if there is a deal. Of course, there is
a big meeting expected on Monday, the euro group. So, Tsipras
does score political points by attacking the IMF because the
IMF has been, in many ways, tougher than the European creditors
in insisting on various structural reforms and insisting that
targets be met and so he lashes out at them and then I think it
is to his political advantage to do so.
But I would bet that if there is such a deal, he will--
Chairman Barr. Is your microphone on, sir?
Mr. Blustein. I am pressing ``talk.'' Can you not hear me,
sir?
Ms. Moore. Pull the microphone up to your mouth.
Mr. Blustein. Oh, okay. Sorry.
Chairman Barr. Pull your microphone towards you, sir. Thank
you very much.
Mr. Blustein. Okay, thank you.
Chairman Barr. That is better.
Mr. Blustein. Okay. I can hear myself. But anyway, sorry.
So my basic point was that I think, although Tsipras loves
to beat up on the IMF for political reasons, if there is a deal
that the IMF can live with, my guess is that the European
creditors will twist his arm and tell him that he has to ask
for aid from the IMF. So that formal request would be
forthcoming. But we don't know what is going to be happening
next week.
Chairman Barr. One of you referred to moral hazard. And it
does sound like the IMF is creating moral hazard. If the IMF
were to move forward with a third bailout, the IMF would be
giving Greece a third credit card to max out and incentivizing
the very behavior that got Greece into trouble in the first
place with little or no meaningful prospect for a long-term,
sustainable solution.
It seems to me that Greece needs to enact some tangible
reforms that would lead to growth and increase revenue.
So, Ms. Lundsager, do you agree that a third bailout would
create that moral hazard?
Ms. Lundsager. Mr. Chairman, I have a hard time dealing
with moral hazard because when I see what countries have to go
through I never felt that the IMF created the incentive for
countries to mismanage their economy and then come to the IMF
for help. Because we have seen, especially in the case of
Greece, how painful that is and how Mr. Tsipras has had to walk
back from earlier claims of, ``Well, we are not going to invite
the IMF in.'' He must already have approached the IMF and said,
``I want another program,'' because the IMF has been part of
the teams that have been in Athens negotiating the policy
package.
So on the moral hazard side, perhaps there is some moral
hazard on the part of the private sector that thinks they will
be able to get out before a debt restructuring happens. But at
this point, there isn't too much private sector debt left. It
has all been turned into official debt Greece owes to European
partners.
Chairman Barr. Thank you.
My time has expired, but I would invite, as the questions
continue, the other panelists to comment on that issue of moral
hazard.
And with that, I will now recognize the ranking member of
the subcommittee for 5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman.
Of course, I have more questions than answers as we see the
evolution of this. And I was really interested in what seemed
to be a consistent theme with all of you that there are
structural reforms that were needed.
But, Mr. Blustein, you talked about the belt-tightening not
having been achieved. And I guess I want you to share with me
briefly why you thought that hadn't occurred. Was the
conditionality too great? In particular, I want to know if
there was some conditionality with regard to requiring Greece
to collect taxes aggressively from the oligarchs there.
Mr. Blustein. There was conditionality of that sort. I
think on the fiscal conditionality, it is fair to say that
Greece delivered on a lot of that. That was kind of part of the
problem. The belt-tightening part of the program worked, and it
had a very dampening effect on the economy.
The theory of the first program was, Greece had an
exploding debt-to-GDP ratio. That was what everyone was worried
about. So if you tighten fiscal policy and the country can run
big surpluses as they were projecting, then the country would
be able to pay down its debt. The trouble is, that takes money
out of people's pockets.
Ms. Moore. Austerity.
Mr. Blustein. So then GDP falls. So the theory was, well,
how are we going to get this economy to grow to get out of this
trap that it is in? Now, Greece is a member of the eurozone.
They are not allowed to cut interest rates, they are not
allowed to pump up the money supply, they are not allowed to
devalue their currency as many countries do when they are in
situations like that.
So the theory was, we will have structural reforms and that
will increase the efficiency of the economy and that will help
pump up growth. And I think a lot of the structural reforms
made very good sense. You can't argue--I think most economists
wouldn't argue--with the value of making state-owned
enterprises more efficient, liberalizing a lot of the
professions that had been kept closed to help special
interests.
Ms. Moore. But in the long run, austerity was just not the
answer to it; that didn't work.
Mr. Blustein. I would put it slightly differently. The idea
of, and I guess this is the main point of Blanchard's memo in a
way, is that the structural reforms will take so long to work--
they will have beneficial impacts eventually, but the effects
of the austerity dampening the economy will be so great. And
the structural reforms actually in the short run often have a
negative impact on the economy.
Ms. Moore. You are interesting. We are going to have to
have lunch.
But I want to hear from Dr. Nelson and the ladies here
because you have all talked about the importance of the IMF
having been there in the beginning to prevent the contagion
from spreading.
And so, Dr. Nelson, Professor Gelpern, let us just have a
dialogue for the next minute and 43 seconds. Go for it.
Ms. Nelson. I do think the IMF's programs were successful
in stemming contagion of the crisis. I think it is important to
remember that when the first program for Greece was approved in
2010, it was on the heels of the global financial crisis. And
there was broad consensus among the international community.
Ms. Moore. Right. And Secretary Paulson came and asked for
$700 billion, not $32 billion.
Ms. Nelson. Right.
Ms. Moore. Just saying.
Ms. Nelson. And I think the IMF programs did contribute to
preventing another Lehman-style shock to the system. However, I
don't think anyone believes that the economic situation in
Greece has been successful or that there is even a long-term
plan for restoring economic viability in Greece.
Ms. Moore. Dr. Gelpern, the intellectual benefits of the
IMF's intervention are what?
Ms. Gelpern. They are the only ones that literally have the
methodology that has been tested, that can tell a credible
story. And they also have an internal organization that enables
some kind of debate. And they have a board, including the
United States, that can exercise checks and balances.
I did want to return and connect this to the topic of moral
hazard.
Ms. Moore. Yes.
Ms. Gelpern. I think the one type of moral hazard we are
not talking about is political moral hazard. And there are two
types of political moral hazard that we see in Greece. One is
exemplified by--I guess ``trash talking'' is not a very polite
way to describe Mr. Tsipras's occasional comments on the role
of the international community, but they are free to say that
when they know it will have little impact on what is going to
happen behind closed doors.
He was saying that the IMF should stay out after the IMF
had stopped disbursing for almost a year and less than a month
before the program was formally done.
So while I think that it is absolutely true that the IMF
should not be financing countries that are not truly committed
to the program, I am not sure that this commitment necessarily
follows from the leader's public words.
But the other one, and I will just mention it briefly and I
am happy to elaborate later is, the moral hazard of European
leaders telling their own citizens that they are going to be
repaid in full. The fact is that over 200 billion euro in
government-to-government debt is now on Greece's back for
decades to come.
Chairman Barr. The gentlelady's time has expired.
Ms. Gelpern. I'm sorry.
Ms. Moore. I thank you for your indulgence, Mr. Chairman.
This is fascinating. We have other Members here, so maybe we
will get a chance to get to Ms. Lundsager and hear more.
Thank you so much. You guys are so brilliant, you gals and
guy.
Chairman Barr. Thank you.
The Chair now recognizes the vice chairman of the
subcommittee, Mr. Williams.
Mr. Williams. Thank you, Mr. Chairman.
And for all the witnesses, thank you for your testimony
today.
I think it is safe to say, Mr. Chairman, that in business,
the private sector, you want to make sure you get the best deal
for your company and your shareholders. In this case, the
shareholder, the American taxpayer, should be confident that
their money is being spent wisely. And just like any business
deal, when a deal goes bad, sometimes you have to walk away and
cut your losses.
According to some of our testimony today, Greece's
outstanding debt to the IMF has dropped to less than $14
billion. Greece is currently paying 3.8 percent lending rate to
the IMF. The interest rate to the European creditors is only
.72 percent on roughly $200 billion. The European Stability
Mechanism's (ESM's) 2015 annual report proudly underlines that
its financing is a fraction of the cost of the Fund's.
My first question is for Mr. Blustein. If the ESM provides
cheaper financing than the IMF, why should the Greeks be forced
to take on the Fund's pricier loans? If an individual is facing
financial disaster and only had two credit lines, wouldn't we
advise them to go with the lowest interest rate possible?
Mr. Blustein. The problem is that countries like Germany,
the Netherlands, Finland, members of the eurozone that would be
endorsing the provision of ESM money for Greece, those
countries are insisting that the IMF be there, putting some of
its own money on the line and providing its seal of approval.
So it is a bit of a Catch-22.
But in theory, you are right. If the Europeans want to do
it themselves, and particularly if the IMF feels that Greece is
not being put in a sustainable debt position, whatever Greece
wants, whatever Germany wants, the IMF should say no.
Mr. Williams. Ms. Lundsager, could you talk about that
please?
Ms. Lundsager. Thank you, Congressman. We will get a bit of
an answer to your question on Monday when the European
ministers meet to discuss this. But I would be delighted if
they decided to use the ESM funding to basically clear off
Greece's obligations to the IMF. I think it would be a benefit
to Greece.
It is, as Mr. Blustein said, the other European capitals
which want the IMF involved for credibility of the adjustment
program. But my concern is that Europe itself needs to do more
to develop its own internal unity to become more of a union.
And bringing in the IMF may not necessarily help them do that
when they have to grapple with the changes they need internally
to make themselves function more as a union.
And, of course, we saw the meeting between the new French
president and Angela Merkel earlier this week get off to a very
good start, but there are still wide divergences between those
two key economies. If they can agree on some of the reforms
needed, perhaps then there will be a way forward. But I still
do not believe the IMF is the one that ultimately can fix this
monetary union.
Mr. Williams. Okay, thank you.
Dr. Nelson, why would we take the IMF's concerns about debt
seriously if the Fed doesn't insist on the Greeks receiving the
least expensive financing available? And if the Fund is serious
about Greece's debt burden, shouldn't it step aside and let the
ESM provide cheaper financing?
Ms. Nelson. I think that is certainly an option that the
IMF could pursue. If debt sustainability is the issue, go with
the cheapest source of funding.
I think one issue that people are talking about is, is
there a role for the IMF to play in responding to the Greek
crisis through sort of technical assistance and helping
Europeans design the program without putting forward money
itself? And so that might be one option that people are
exploring.
Mr. Williams. Okay.
Dr. Lundsager, the IMF has concluded that Greece needs
significant debt relief. Would you agree that debt relief is
required for Greece's debt to become sustainable and to prevent
further bailouts past 2018?
Ms. Lundsager. Absolutely, Congressman. And my preference
would be for an outright haircut on the principal, the
outstanding principal, so that the Greek population, the
private sector, wouldn't face this 180 percent of GDP debt out
there. But that is not what the Europeans are prepared to do.
What they are prepared to do is greatly--well, we will find out
how far they will extend grace periods and maturities to
basically have the equivalent of having a reduction in the
outstanding principal.
But restoring incentives to invest, to hire in Greece, I
think, is a real challenge. And we are not quite getting there
yet. Thank you.
Mr. Williams. Really quickly, Dr. Blustein, could you say
something about that?
Mr. Blustein. I completely agree. It certainly would be
preferable if Europe would agree to outright forgiveness. And
the moral hazard that Professor Gelpern referred to before,
that you need to say to Europe, look, you lent money foolishly
to Greece in 2010 and thereafter, and if we keep sort of
enabling you to do that, we understand that you have political
problems explaining this to your citizens that you are not
going to be repaid in full and you can go on doing what Meg
Lundsager referred to as the extending the maturities.
But that is, I think, a poor way to go about really helping
the Greek people get some hope of some getting out of the trap
that they have been in now for the past 7, 8 years.
Chairman Barr. The gentleman's time has expired.
Mr. Williams. Thank you for the time.
Chairman Barr. And the Chair now recognizes the gentleman
from Michigan, Mr. Kildee, for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman, and Ranking Member
Moore, for holding this hearing.
And to the panelists, thank you very much for your
participation.
I do have to say, I noted with a little chuckle that the
comment about Mr. Tsipras engaging in trash talk in the effort
to pander to a domestic political base that might also degrade
the standing that he and the nation he serves might have is a
lesson that could be applied to a number of countries,
including the one that we are all sitting in right now.
So you don't have to comment on that unless you want to.
I would be interested in pursuing a little bit more where
Ms. Moore left off on the question of austerity and other
conditions.
And starting with Mr. Blustein, you mentioned, I think you
said anyway, that your analysis, that the belt-tightening
essentially worked. I wonder if you could just explain that in
a little more detail and also expand that to touch on the other
sort of systemic reforms that have a longer curve to them and
what your assessment, and perhaps each of you could manage a
point on this, what you think the balance of those might be.
And secondly, whether or not additional measures in either
category would apply in order to follow up on Ms. Lundsager's
notion that you might all comment on also on whether or not
principal reduction would come with pretty significant other
conditions in order to achieve that.
If you could each comment, I would appreciate it.
Mr. Blustein. Just to clarify, when I said that the
austerity worked, I guess what I mean is, to a large extent, it
was delivered on. Greece did undergo a tremendous amount of
fiscal consolidation on both the spending and tax sides. So it
worked too well; it killed the Greek economy.
Mr. Kildee. That is where I was going.
Mr. Blustein. Yes, okay.
Mr. Kildee. Because when you said it worked, you meant it
worked in that they complied.
Mr. Blustein. They delivered on that. And a lot of the
structural reforms they actually didn't deliver. And one of the
arguments that is made in defense of the original program is,
well--and this is the IMF, I am sorry to say, they often do
this. When programs don't work, they say, well, the country
didn't deliver, they didn't do what we asked, they didn't
fulfill the conditions. And it is, you know, you can't say, you
have to admit that Greece didn't deliver on quite a number of
the structural reforms.
I would argue that even if Greece had delivered on those
structural reforms, as I would argue that Blanchard in
retrospect was absolutely right, even if they do all that
stuff, those structural reforms are not going to help, they are
not going to offset the effects of the austerity because those
things take a long time to work.
In the short run, they actually have a dampening effect on
the economy. If you are streamlining an inefficient state-owned
enterprise, you are laying people off, and those people have
less money in their pockets. So, now, it may be a good thing to
do in the long run because those jobs are inefficient and you
need to, you need to make the economy work better.
So when I said the austerity ``worked,'' I don't mean to
suggest that it ``worked.''
Mr. Kildee. Okay, that makes more sense because I was
curious as to how much of what Mr. Barr referred to in terms of
the now increased debt-to-GDP ratio could be attributable to
the lag in the economy that was precipitated by some of those
austerity measures.
I wonder if the other panelists might also comment on this
general subject.
Ms. Lundsager. No. I do think that Mr. Blustein is
absolutely correct. The austerity in terms of contracting the
economy made it even more difficult to then address the debt.
But the other side of the coin is Greece has lagged on the
structural reforms that it needs and they are very difficult.
They are the kind of labor market reforms in order to get
employers to hire more workers. They need to be able to
actually occasionally fire workers and there are very stringent
worker protections in Greece.
Additionally, pensions and other benefits were increased
substantially after Greece joined the eurozone because they had
access to very low interest rates as part of the eurozone and
basically made a lot of promises that the real side of their
economy couldn't deliver, didn't have the productivity, the
competitiveness to deliver the real output that could then
satisfy those pensions and the other commitments they made.
Greece is now struggling to try and do some of that. But in
the meantime, the Europeans are demanding very tough austerity
for a number of years to get Greece back to debt
sustainability. The IMF is pressing back and saying no, that is
not going to happen, you Europeans need more up-front debt
relief. Therefore, I do think it is going to be very difficult
to generate the kind of confidence in the Greek private sector
that will create jobs, will increase production, will
revitalize that economy. Thank you.
Mr. Kildee. Thank you very much.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the gentleman from Indiana, Mr.
Hollingsworth.
Mr. Hollingsworth. Good morning. Thank you, everybody, for
being here. I really appreciate all of the insights that have
been shared so far.
I wanted to turn our attention to something that I think
Dr. Nelson and Ms. Lundsager brought up, which is the IMF's
effectiveness operating inside a currency union.
Today, I think a quarter of IMF membership is made up by
countries that are involved in some sort of currency union. So
I think this is a problem that we are going to see in the
future. So for a moment, setting aside primacy of repayment,
but focusing just on the economic issues themselves and the
challenges that the IMF may face in responding to a crisis for
a country that is in a currency union, could you start, Dr.
Nelson, and talk about the economic challenges associated with
that?
Ms. Nelson. Sure. So the IMF designs programs for
countries. It doesn't design programs for currency unions. And
I think how that played out in Greece was the crisis was tied
to fundamental imbalances across the eurozone, but the IMF
program, by focusing only on policies, regulations, things
under the authority of the Greek government, it was only
looking at one piece of a bigger puzzle.
Mr. Hollingsworth. Correct.
Ms. Nelson. And so I think some of the problems that we are
seeing play out in Greece now are tied to this sort of narrow
look at the crisis as it played out.
Mr. Hollingsworth. Right.
Ms. Lundsager, would you like to add to that?
Ms. Lundsager. Yes, thank you. In dealing with the currency
union the IMF had to take monetary policy as a given, interest
rate policy, exchange rate policy as a given, so that greatly
narrowed the tools available.
Mr. Hollingsworth. Right.
Ms. Lundsager. And, of course, those polices were set for
the entire eurozone or for the entire currency union, not for
the country itself. So monetary conditions were too tight for
Greece, they could be looser. And you see that tension still
within the monetary union right now, within the eurozone, as
some countries, for example, Germany, complain that monetary
policy is too loose.
The policy measures that would normally be in an IMF
program and help a country recover would include monetary
policy and exchange rate policy, meaning the country would need
less of the fiscal contraction. Thank you.
Mr. Hollingsworth. Right.
Mr. Blustein?
Mr. Blustein. This is a really great question and it is
something that I wrote about with some I guess you could say
passion or maybe even sort of starry-eyed, crazy idealism in my
book.
The IMF was coming to the rescue not only of Greece, it was
coming to the rescue of the euro or the European Monetary
Union. And the IMF had been put, at the outset of the crisis,
in a position of junior partner in the troika with the European
Commission and the European central bank.
I would argue that the IMF should have played a senior
partner role. In fact, I argue that it should have played a
super-senior role. Meaning I think the IMF should have been in
the position where it was able to say to all of Europe the
following things are going to happen, not only in Greece, but
in Europe. The ECB is going to do this and Germany is going to
do that and you all are going to be doing this on banking,
union and what not.
I think the crisis would have been solved a lot sooner, I
think it would have been a lot easier to have a debt
restructuring in Greece or in--
Mr. Hollingsworth. So I think, like you said, kind of wrong
tools for the situation or an inability to be able to diagnose
and treat all of the symptoms at the same time, instead
focusing on a single symptom, in hopes that that would migrate
to other aspects.
So I guess I would start again with Dr. Nelson. Is this a
permanent defect or inability of the IMF to handle a currency
union crisis? Or given the players that you probably know, you
have seen more than me, do you think the IMF will be able to
effectively work with the currency union as a whole to be able
to get at some of the other symptoms?
Ms. Nelson. Sure. The IMF's Articles of Agreement doesn't
talk about programs for currency unions. It is not something
that is sort of by design. The IMF has started grappling with
this issue. For example, in its surveillance programs, it
started having Article IV consultations for the eurozone as a
whole.
I do think there is a mismatch still between with the
programs, is that, is it appropriate to design programs for
specific countries? Or do they need to address the broader
currency union as a whole? And it is not clear that sort of the
founding document, the governing document of the IMF addresses
that issue.
Mr. Hollingsworth. It is clear that the problem exists. It
is not clear whether the IMF can solve that. Right?
Ms. Nelson. Right. And I would also add that through design
by focusing on specific countries rather than the broader
eurozone as a whole, it imposes all the costs of adjustment on
the weaker members of the currency union. It exempts the
stronger sort of members from playing any part in the
adjustment process.
Mr. Hollingsworth. Correct. Which they certainly had a part
in creating the problem. Correct?
Ms. Nelson. Right, right.
Mr. Hollingsworth. My time is almost expired. But again, I
want to reiterate my deep concern that the IMF's inability to
get at all of the symptoms of the disease will lead to a poor
outcome, both for the Greek economy and, ultimately I worry
about, for the IMF as well, that they don't have the tools to
be able to tackle the problem when we expect them to do so and
asking them to do more than they can do and then holding them
accountable for the failure to do so is probably inappropriate
for both the institution and for the Greek economy itself.
Chairman Barr. The gentleman's time has expired. The Chair
now recognizes the gentlelady from New York, Mrs. Maloney.
Mrs. Maloney. Thank you, Chairman Barr and Ranking Member
Moore, now represented by Mr. Foster, for allowing me to
participate in this hearing.
I am a strong advocate for Greece. I believe that it is
critically important that Greece remains in the European Union.
And I believe they have been strong allies to the United States
and our relationship remains strong as Greece endures an
unprecedented economic crisis. It has been a strong pillar of
democracy and stability in the West and plays a vital role in
protecting U.S. security interests in Europe. One of our major
bases is placed there.
So I thank the chairman and the ranking member for holding
the hearing.
And I would like to ask Ms. Lundsager about debt relief for
Greece. You noted in your testimony that debt relief could
provide additional fiscal resources for Greece, which could be
used to invest in her economy and for additional social
services which are badly needed. In other words, the less money
that they have to pay to the European creditors, the more money
it will have to get its economy going again.
And I recall in our own financial crisis, one of the ways
that we dug our way out was not through austerity, but through
really stimulus packages and ways to stimulate the economy and
investing in our infrastructure and really investing with
resources into our own economy.
So my two questions for you are, first, do you believe that
debt relief is a necessary component of a new lending program,
whether or not the IMF is involved in the new lending program?
Ms. Lundsager. Yes, Congresswoman, I do believe that no
matter what, whether the IMF is involved or not, debt relief
needs to be part of the future relationship the Europeans have
with Greece.
Mrs. Maloney. What about the other panelists? How do you
feel? How would you respond? I will invite anyone who would
like to respond to respond.
Ms. Gelpern. If I may, Congresswoman, I agree entirely that
debt relief is essential. And I also want to second Ms.
Lundsager's point that principal reduction, I think, is not
just economically, but politically important.
And in this picture, the IMF stands for relief and reform,
which are two things that are critical for Greece. The European
Union is a bit of a question mark on both. So I have no
religion about whether the IMF puts in money. In fact, I am
delighted that they are able to exercise influence without it,
I think it is great for us. But I do think that it is
advocating the right thing, debt relief foremost among them,
and I think it should stand firm. Thank you.
Mrs. Maloney. Okay.
And second, Ms. Lundsager, do you think the best form of
debt relief would be a reduction in principal as some have
advocated? Or would simply extending the loans and lowering the
interest rate be sufficient?
Ms. Lundsager. Thank you. I continue to believe that
outright principal reduction would be best. And I come back to
my earlier comments that this would be a signal to the Greek
economy that there would not be a future, very heavy burden of
debt repayment, even if it is far in the future, because what
Greece needs is investment, it needs job creation, it needs
internal growth.
The Europeans have been very clear that they will not do
principal reduction. The IMF has therefore pushed them to have
such very long grace periods and maturities on the outstanding
debt that, for all practical purposes, for decades Greece would
be paying very little back to its European partners. So that is
certainly a second or third or fourth-best option.
But Greece is part of this eurozone, they have chosen to be
part of this eurozone, and so that means they have to work it
out within the eurozone, too. The IMF is not in a position to
dictate how the eurozone undertakes its internal deliberations
and agreements. Thank you.
Mrs. Maloney. Do you think it would be better for Greece to
just leave the European Union and the debt and just go on their
own? Are there any comments on that from, starting first with
you, Ms. Lundsager, and then Ms. Gelpern?
Ms. Lundsager. If Greece had dropped out of the eurozone,
perhaps not the EU, the European Union, but had dropped out of
the eurozone years ago, ultimately in the long run it probably
would have been better off because it would have had a very
large devaluation of its currency, let us say the drachma, and
that would have helped restore competitiveness and bring jobs
back.
With that said, that is not what the Greek population
wanted. The one thing that has been clear year after year after
year is that they want to stay in the eurozone, which at times
I have found a little bit remarkable. So in that case, it is
their own choice, too, to undertake the reforms that they need
to stay in.
Chairman Barr. The gentlelady's time has expired.
The gentleman from Arkansas, Mr. Hill, is recognized for 5
minutes.
Mr. Hill. I thank the chairman and the ranking member for
holding this hearing.
I agree with Mrs. Maloney's comments that Greece is
certainly an important, long-term partner in Europe and a
longtime friend of the United States. But the structural
differences that we have about the role of the IMF in the EU
are really illustrated in this hearing today.
Dr. Nelson, I noted in your testimony that you noted how
the IMF's first bailout socialized much of the private debt
that Greece had owed. And much of this debt was held by German
and French financial institutions. And back in 2010, the former
head of Germany's central bank said in an interview, ``The
bailout was about protecting German banks, but especially the
French banks from debt write-offs.''
On the same day that the rescue package was agreed upon,
shares of French banks rose by 24 percent. Looking at that, you
can see what this was really about, which was rescuing banks
and rich Greeks, he says.
And I ask that this interview be entered into the record,
Mr. Chairman.
Chairman Barr. Without objection, it will be made a part of
the record.
Mr. Hill. Thank you.
So Germany and France are two of the richest countries in
the world. And if you believe that their banks needed to be
propped up, is it really the IMF's job to recapitalize rich-
country banks? Doesn't this just present a conflict of interest
on the part of the IMF's board of directors? What are your
thoughts on that?
Ms. Nelson. I think one thing people have talked about
after the experience of 2010 was, would it have been better to
let Greece default in 2010 and use the European money to
recapitalize French and German banks? Would that have made the
banks better off, would that have addressed the contagion
issues? And would Greece be better off today without this sort
of large, outstanding debt?
However, it is not clear that there was a mechanism in
place to do that. We didn't have a European Stability Mechanism
at the time, we didn't have a process for recapitalizing banks.
But in hindsight, this is something that I think people have
talked about.
I also think it gets at the issue of moral hazard. We have
talked a lot about political moral hazard or moral hazard by
governments that borrow from the IMF. But there is also moral
hazard from private investors who make investments, but may not
bear the full consequences of investments that they have made
when it goes bad.
Mr. Hill. This committee knows something about that from
watching Puerto Rico.
So what is the lesson?
Mr. Blustein, just a moment, I will come to you.
Just what is the lesson for the ECB and Europe on--the
European mechanism is one item. What other reforms should
Europe take into account to kind of solve their own internal
currency zone issues like this?
Ms. Nelson. I think two of the issues that have been
discussed are greater coordination of fiscal policies and the
creation of a European banking union, both of which are in
progress, but it is not clear to me, have those policies been
completely harmonized and coordinated across the eurozone or
the broader EU.
Mr. Hill. You think we would still have faced a similar
challenge that we have even if they had been harmonized? Or do
you think it would have been a different policy outcome?
Ms. Nelson. I don't know. I don't know how it would play
out if we had a similar situation today. There are certainly
institutions that have been created, like the European
Stability Mechanism, that could help address a crisis, that
didn't exist in 2010. But it is not clear if they would do
something to address the issues in the banking system rather
than address the issues of a debtor government who owes money
to French and German banks.
Mr. Hill. Right.
Mr. Blustein, let me let you comment.
Mr. Blustein. Yes. I just wanted to come back to your point
about what the motive was for the original bailout and whether
it was saving German and French banks.
I spent a lot of time interviewing people for my book and
that was one of the questions that I looked into a lot. And I
would have loved to have found a smoking gun indicating that
this was a major motive for the key players either in Europe or
at the IMF.
And there there is no question that French officials in
particular were keenly aware of the exposures of banks, like
Societe Generale and Paribas and so forth, that they had large
exposures to Greece. And I don't doubt for a minute that this
was a consideration for them.
But I take people at their word when they say that their
main concern, the main reason why they adopted the approach
that they did was fear of contagion. If Greece was either going
to default or be allowed to restructure its debt, this was
going to have knock-on effects, people would dump the bonds of
other vulnerable countries in the eurozone.
This was certainly the thinking of Jean Claude Trichet, the
president of the European central bank. I am very critical of
Jean Claude Trichet, a lot of the positions that he took during
the crisis. But I do think he was sincere in his concerns and a
lot of the policymakers were, and that was the key reason why
the approach that was taken was taken.
I am aware of the interview you are referring to--
Chairman Barr. The gentleman's time has expired.
Mr. Blustein. --but I don't think that was the prime
motive.
Chairman Barr. Thank you.
The gentleman from Illinois, Mr. Foster, is now recognized.
Mr. Foster. Thank you, Mr. Chairman.
And thank you to all the witnesses here.
There are a number of very interesting lessons that the
world, as well as our country, I think should learn from this.
In general, there seem to be three possible futures here. There
is one possibility where Greece just leaves the union,
repudiates the debt. So if we go down that route, what would
the immediate impact be on banks around the world, on
bondholders and so on? Has that actually been worked out in any
detail so that people have an idea of what that would look
like?
Ms. Lundsager. Congressman, Greece's debt for the most part
is owed to European official creditors, to governments, to
European institutions that they set up, both the European
Stability Mechanism, but more to the earlier mechanisms they
had set up. So it is not really owed to banks so much and so I
don't think the impact would reverberate around the world.
I think there is a bigger concern within Europe, especially
after the U.K. vote to leave the European Union, that if Greece
were to leave, it is showing that the continental system, the
political system that they have struggled so hard to build
could start to fracture. I think that is why it is so important
that the German-French let's say amity or the good start to the
new relationship be cemented and that they move forward on the
internal reforms that they need.
Mr. Foster. It would also presumably have a bad impact on
the creditworthiness of other southern European countries that
are in roughly comparable situations.
Ms. Lundsager. Yes. I think that could be a concern because
there is a quite a bit of concern about Italy and its banking
system and, of course, what those banks, what they owe to other
creditors is not necessarily to official creditors, it is to
other financial institutions within Europe. So there is, I
think, a deeper worry there.
Mr. Foster. Right. So the other class of solutions, just a
big haircut, both to the debtors, and also the pensioners, I
guess, are another potential entity in a position to take a big
haircut.
Ms. Lundsager. Yes, they are going to have to pare back
their pensions and take the kind of reforms that the IMF
actually recommends to many countries. As you know, older
retirement ages mean contributions for longer periods and a
smaller pension. And this comes back to what I said earlier
that Greece ended up, once it joined the eurozone and benefited
from very low interest rates, ended up spending more on
pensions, promising more to its citizens than it could deliver
based on the real productivity of its economy.
Mr. Foster. Right. This is the problem with having a
monetary union without a fiscal union.
Ms. Lundsager. Exactly, yes.
Mr. Foster. Which has been pointed out by many people, even
at the time it was made.
And that then, a future where you have potentially
repetitive bailouts like that or haircuts like that, ends up
looking like I guess they call it a transfer union where there
is just a systematic--it is sort of like what is going on in
the United States where there is a limited number of States,
generally the large-population States, that write a huge check
to the rural and Southern and Western States. I know in my
State of Illinois, we lose about $40 billion a year, which is
very comparable to the Greek subsidy, because we pay a lot more
in Federal taxes than we get back in Federal spending. And
these checks are largely written to rural, southern States.
But this is the way we have lived for at least 40 years in
the United States and it has real, long-term impacts. And so
that is a possible future, that the Germans will just
continually write checks to subsidize the pensioners in Greece.
And I guess that is one of the things that makes it so
difficult politically.
The third possibility is just a massive increase in taxes
and tax compliance in Greece. If Greece could solve the tax
compliance problem, what fraction of the problem would that
solve?
Ms. Lundsager. It would go part way towards helping Greece
with its own internal resources for its own internal needs, but
it wouldn't be enough to address their debt servicing
requirements over the many decades of the future. They couldn't
possibly--
Mr. Foster. And would, for example, a principal write-off
followed by a much higher rate of tax compliance actually solve
the problem?
Ms. Lundsager. That, I think, could give them a clean slate
and perhaps make it easier then to generate the domestic
support for these kind of reforms that would make the economy
more competitive and would broaden tax compliance and help them
enforce better their own internal laws.
I was in Greece a couple of years ago and I was stunned at
how difficult it is for them to even get compliance, to get
effective enforcement of their own laws and regulations.
Mr. Foster. There is that famous aerial photograph of, I
guess it is the suburbs of Athens, with all the swimming pools.
Ms. Lundsager. Yes.
Mr. Foster. And in an area that there were three registered
swimming pools and hundreds of visible swimming pools.
I guess my time is up at this point.
Chairman Barr. Thank you. The gentleman's time has expired.
The Chair now recognizes the gentleman from Ohio, Mr.
Davidson.
Mr. Davidson. Thank you, Mr. Chairman.
And thank you to our guests. I appreciate your expertise
and your presence here today.
When solving problems, it is vitally important to address
cause and effect and to understand what are indeed the root
causes if we are to see a lasting solution. So as we have sat
here and talked about haircuts to debt, I think we are glossing
over, how did we get here in the first place?
Ms. Lundsager, has Greece addressed the root causes that
led to their need for this new debt?
Ms. Lundsager. I think they have made quite a bit of
progress in doing that, but no, they still have a number of
structural reforms to undertake to make their economy more
competitive, to make their workers able to work, to make their
citizens willing to share in the responsibility of financing
their government and accepting that they will be getting
somewhat, everybody, reduced benefits over time. So they still
have a ways to go on that and I think it has been very
difficult, especially for countries like Germany where they
have managed to undertake labor reforms and managed to make
many of the improvements over time, to then continue with the
prospect of supporting Greece. But that is going to be the
likely outcome.
Mr. Davidson. Yes, thank you. You touched on a number of
things there that I think are important. One is, some countries
in the EU have stronger economies than others. Some have
reformed their economies and found themselves able to steer
clear of a debt crisis in the first place. But even countries
that did find themselves in heavy debt burdens have taken
action to change course.
I would like to show a chart which shows the idea of debt
in the EU. So this isn't something that, as a few folks have
alluded to, this is what that looks like and how Greece is, but
it is certainly not alone. And the concern is, we mentioned it
as a moral hazard, that once countries realize that they are
seen as too big to fail, do you create the hazard that people
don't change course?
I have another data point that just shows workforce
participation. And this is a particularly acute problem in
Greece. They are not the only country with this problem. But
when you look at how few people are paying in and you look at
the debt, isn't the root cause just as simple as the ``goes-
out-tos'' are bigger than the ``goes-intos?'' And what do we
see as the systemic solutions to fixing that problem in Greece
and, frankly, if the EU is to survive as an intact entity,
broadly?
Ms. Lundsager. I think, Congressman, that you have
highlighted one of the real challenges facing the European
Union, the eurozone in particular, which is, how to understand
that, yes, they are all in it together. They have all benefited
from having this very attractive euro, this currency,
especially Germany because it has had a more depreciated
currency than the Deutsche mark would have been had Germany
stayed with a separate, individual currency.
Yet that entails being partners with weaker countries. And
how do you then enforce internally the kind of reforms that
will bring more workers back into the labor force or bring debt
levels down? And that is one thing Europe has not effectively
been able to do internally.
Mr. Davidson. Thank you.
And Dr. Nelson, if you could comment on that. This is a
question that you see internationally. The IMF is supposed to
be able to ratchet leverage with the loan, just like most
creditors of last resort. If you go out into the private equity
market, companies that find lenders of last resort find lots of
warrants, clawbacks, tools that will effectively result in loss
of control of the company.
In a country, a country is a sovereign entity and you have
this complexity here where you have a currency misaligned, and
we talked about this piece. How can the IMF participate in
Greece as part of this currency, multi-country currency
agreement in the EU, and yet if we are to participate in the
IMF apply enough teeth to get the reforms that the EU
themselves have not been able to show broadly?
Ms. Nelson. Right. I think the IMF conditionality that
attaches to its loans has been a challenge. I think something
that has come out from the panel is that there has been a real
difference between the fiscal adjustment that has happened in
Greece versus the structural problems that continue to plague
Greece.
Some of the discussions right now are on taxes, pensions,
unemployment, things that have been on the table for the past 7
years and have been subject to IMF conditionality, but there
are questions about, after 7 years, how much progress has been
made and/or how much progress was reasonable to expect.
Mr. Davidson. Thank you.
My time has expired. And I just would add briefly that this
is a challenge we are dealing with in the United States. And so
as a participant in the IMF, the idea that the Americans are
going to come to the rescue when we have our own crises to deal
with domestically is increasingly dubious with our vote in the
IMF.
Mr. Chairman, I yield back.
Chairman Barr. The gentleman's time has expired.
And without objection, the subcommittee will move to a
brief second round of questioning. The Chair recognizes himself
for 5 minutes.
Ms. Lundsager, you have written that not only can Europe
tackle Greece by itself, but further IMF involvement would only
postpone reforms in the eurozone.
And I would ask unanimous consent to submit for the record
Ms. Lundsager's Reuters piece entitled, ``The IMF Must Walk
Away From Greece.''
And Ms. Lundsager is not alone. I would ask unanimous
consent to enter into the record an op-ed from February by
Princeton Professor Ashoka Mody, a former deputy director of
the IMF's Research and European Departments. His piece is
entitled, ``The IMF should get out of Greece, the Fund's
involvement has been an unmitigated disaster.''
The views of Ms. Lundsager and Professor Mody have been
echoed in Europe as well. The head of ESM, Klaus Regling, said
in an interview last year, ``At this point in time, it is
really not a question of IMF funding, but of using the IMF's
technical expertise.''
Leaders in both Germany's conservative CSU Party and left-
leaning Social Democratic Party have also been quoted as saying
that Europe can stand on its own two feet and no longer needs
IMF's money in Greece.
I would also submit for the record a Reuters article from
February 16th, headline, ``German Conservative Euro-MP Breaks
Ranks Over IMF Role in Greek Bailout,'' as well as another
piece, ``German SPD Says Europe Can Back Athens Without the
IMF.''
Without objection, it is so ordered.
My question is as follows for Ms. Lundsager, since I quoted
your Reuters piece. Is there any reason to believe that the IMF
couldn't just limit itself to a purely advisory role as opposed
to a financing role? And if the Europeans, including Regling,
are saying that it is IMF's expertise that is needed in Greece
as opposed to money, is there anything that would prevent the
Fund from just providing monitoring and technical assistance?
Ms. Lundsager. No, and that is my preferred option.
Chairman Barr. Yes.
And, Dr. Nelson, it is often reported that Germany and
others in the eurozone want the IMF in Greece because they
don't have confidence in the European Commission. As Mr.
Blustein's work has shown, this lack of trust among Europeans
has been a running theme since 2010. The question would be,
doesn't taking advantage of the IMF in this way just let
Germans and other leaders off the hook?
Ms. Nelson. I think Europeans did want the IMF involved, to
have the IMF stamp of approval that the program design would be
sound, would be safe. However, there are questions about the
co-financing arrangement and whether or not the IMF had the
independence to do what it needed to do in the program.
Chairman Barr. And, Mr. Blustein, if the Europeans lack
confidence in European institutions, isn't it up to the
Europeans to reform them?
Mr. Blustein. That is an interesting way of looking at it.
I guess my preferred option would be something like the
following. The IMF should be involved if it sees, using its
best technocratic judgment, that the program has been fixed so
that Greece's debt is sustainable and, I agree with Meg, that
it would be preferable if that involved a debt write-off
But that shouldn't just stop there by making a technocratic
judgment about a specific deal that is struck in Brussels.
There ought to be a lot of conditions imposed because the IMF's
credibility has been damaged by basically being dragged and, as
Ashoka Mody wrote, its reputation affected in the process.
One way of doing that would be to say from now on for this
program and for any other, if we have to get involved in Italy,
whatever, Portugal is not completely out of the woods, then
from now on when we are lending money to a country in a
currency union like the euro, the countries that are on the IMF
board that represent those countries, they don't get to vote,
we are going to leave it up to the rest of the board to handle.
And by the way, we want the members of those countries that
are in this currency union to guarantee that the IMF will be
paid back in full for sure if this doesn't work out, in other
words if Greece ends up defaulting on what it owes to the IMF,
to protect the IMF's preferred creditor status.
So the way you look at it is, sure, it would be great if
Europe could handle this problem by itself. They have
understandably gone to the IMF and said we need your expertise.
And to comfort ourselves that you are really comfortable with
what we are doing, we want you to have some skin in the game.
And that is another way of doing it.
But if there is not complete comfort and if these other
conditions can't be met, then I would agree with Ms. Lundsager
that the IMF should walk away.
Chairman Barr. Thank you.
My time has expired. And the Chair recognizes the gentleman
from Illinois, Mr. Foster.
Mr. Foster. Thank you.
There is an amusing calculation that has, I think, been
done by many people, that if you just go region to region
around the world, you conclude that the world as a whole is a
net debtor, which cannot mathematically occur. And so the
reason, of course, is that various people are stashing money
that is off the books in offshore accounts.
And so I was wondering, what fraction of--and there are
estimates, I think, for the EU as to how much money is actually
stashed offshore. How does that compare to the total shortfall
that you are seeing in Greece? And would that be included with
estimates for the amounts stashed off the books? Is the EU and
Greece as big a debtor as actually you would conclude from the
raw numbers? Do you have any feeling for how those numbers
compare as possible sources of money to try to settle things
here? It is in the multiple trillions of missing offshore
accounts.
Ms. Lundsager. Congressman, I don't know the numbers, and I
don't have a good sense of how much it is. But clearly, as you
point out, this is the case. The problem is governments getting
access to that, establishing the kind of policies that will
bring that money back into the limelight, back into the
sunshine so that it can be taxed, it can be utilized. We saw
how long it took to negotiate an agreement with the Swiss
government in terms of data and information sharing.
Mr. Foster. Oh, yes, this will be politically very, very
difficult.
Ms. Lundsager. Yes.
Mr. Foster. In no small part because of assets that may or
may not be held by those in power in all of the European
countries.
Ms. Gelpern. If I may add very briefly, Congressman, this
is a multilateral problem that requires a multilateral
solution. This is not something that the IMF can fix with
Greece. And I think that is what Ms. Lundsager's comment
highlighted.
Mr. Foster. Right. But a solution to that problem could
actually at least be a partial solution to this.
Ms. Gelpern. It would do the world a whole lot of good.
Mr. Foster. That is right. And actually, the IMF may have a
role in encouraging that globally.
Another possible endpoint that various wags have pointed to
is that the way this will all end is that German investors will
each have their own private Greek island at the end of this, or
perhaps a 99-year lease on a Greek island. And there is a lot
of real estate with a very high potential market value under
the control of the Greek government and a very big political
problem even in, say, getting a 99-year lease that could be
sold.
But is the market value of that kind of real estate the
same order of magnitude as the debt problem here? And is that
at least a partial solution to this? Have there been serious
efforts to make estimates of that?
Ms. Lundsager. Again, I don't have the numbers at my
fingertips. It could perhaps help. But if they were to try and
sell it all at once, a fire sale, I think it would be very
difficult to get the kind of returns that they were looking
for.
Nonetheless, in every program with Greece, the effort has
always been to push on the privatization, the inefficient
state-owned companies or even some of the better off ones, to
sell them to private entities to raise several billion euros
for the government. Between that and perhaps some of the real
estate holdings--but any mention in Greece of selling the
Parthenon or the--
Mr. Foster. But large government-owned hotels, I guess, are
a perfect example of something that would have an immediate
market value.
Ms. Lundsager. Right.
Mr. Foster. And those are difficult politically because
they are paying salaries higher than would be justified by a
peer-market solution?
Ms. Lundsager. That has been part of the problem, that they
do need to get back to competitiveness. But wages and prices
have fallen in Greece, meaning there has been some internal
devaluation, which has helped make Greece a little bit more
competitive. And, of course, tourism continues to do pretty
well. But otherwise, the productive sector is still
languishing.
Mr. Foster. Mr. Blustein?
Mr. Blustein. This is one of the great mistakes the IMF
made in the early stages of the crisis. It was actually after
the first bailout, it was in the spring of 2011, that the IMF
became kind of enamored of the idea that huge proceeds could be
reaped by privatizing Greek state-owned assets. And the numbers
were in the hundreds of billions of euros, so it was sort of
concomitant with the size of the debt.
One of the problems was that there were, particularly
involving real estate, which you mentioned, Congressman, so
many squatters who had moved into these state-owned properties
that it was politically just impossible for the government,
people who had built homes and to sort of sell that property
off and evict those people was going to be a--and that was one
of the--there were many, many problems that arose as--
Chairman Barr. The gentleman's time has expired.
Mr. Blustein. Okay. So 50 billion was the first number that
was used. They have ended up being able to reap about a billion
euros, I think, maybe from privatization.
Chairman Barr. Thank you.
The gentleman's time has expired.
And finally, the vice chairman, Mr. Williams, is
recognized.
Mr. Williams. Thank you, Mr. Chairman.
Earlier this month, the Slovak finance minister was
reported as saying the amount of IMF assistance in Greece is
not important. Instead, ``It is really symbolic.''
So for Dr. Nelson and Ms. Lundsager, my question would be,
what are the implications for the IMF if its lending becomes
symbolic? Wouldn't symbolic assistance mean that the Fund is
straying from its traditional functions?
Ms. Nelson. The traditional function of the IMF is to lend
to countries facing temporary balance-of-payments crises. It
doesn't really say anything about the amount. But I do think we
have veered from temporary. We are 7 years into the crisis, and
Greece is still reliant on financing.
Mr. Williams. Ms. Lundsager?
Ms. Lundsager. Congressman, symbolic perhaps isn't the best
word to use because IMF participation can be very, very close
in terms of recommendations on the policy formulation, the
monetary, fiscal, financial sector policies, exchange rate, if
needed, and then can be part of the team that monitors
performance and assesses how the country is doing in meeting
its fiscal targets or its inflation target. And IMF lending
doesn't have to be part of that at all.
And we have seen that work pretty well with a number of
low-income countries where the IMF actually established a
policy support instrument which does exactly that, has an
engagement with the country, the country invites the IMF in,
but there is no IMF funding included in that, it is more of a
partnership.
So absolutely, the IMF can be there. Its catalytic role
used to be it would lend small amounts and then you would bring
in other creditors. It doesn't really need to lend anything if
other creditors view the IMF assessment, its mark of good
progress, as sufficient for them to participate.
Mr. Williams. Okay. Just a quick follow up. So if people
think the IMF loan is symbolic rather than necessary, how do
you assess the effectiveness of a program? And how would the
Fund's evaluation officer or anyone else for that matter
evaluate symbolic lending?
Ms. Lundsager. For example, with the low-income countries,
there is actually a board review. Staff go out for periodic
reviews, assessments, and it comes before the IMF board. So it
is, in that case, a formalized process. It doesn't necessarily
have to be that formal, but the IMF prepares all sorts of
papers all the time, if nothing else the annual Article IV, the
annual review of an economy. And that can form the basis as
well for monitoring.
But if the country invites the IMF in and asks the IMF to
prepare a report, and share it with the board, and publish the
report, then that is a way of reinforcing that role of the IMF
as a designer of the policies and monitoring them as well.
Mr. Williams. Ms. Nelson?
Ms. Gelpern. Let me augment that.
Mr. Williams. Go ahead, please. No, go ahead, that is fine.
Ms. Gelpern. I'm sorry. The IMF's traditional role was to
support the gold exchange standard. It has evolved since its
founding to become a big player in crises, in debt
restructuring. Today, the task is precisely to make the Fund
effective in a world where it can never be or it can very
rarely be a huge financial player, as well as being effective
on the regional scale.
It did manage to go to Article IV for the eurozone. That is
a good thing. Whether it is able to stay effective with no
money or very little money on the line, I think, is a task for
them and for us.
Mr. Williams. Dr. Nelson?
Ms. Nelson. I think it would be difficult to assess the
symbolic sort of contribution of the IMF. However, I do think
any sort of IMF involvement in a country can be judged against
metrics of, is the country able to reenter capital markets at
the conclusion of the program? Is the economy stabilized at the
conclusion of the program? These sorts of metrics, I think, can
be assessed regardless of the amount of money contributed.
Mr. Williams. We only have a short time left.
Dr. Blustein?
Mr. Blustein. I think you have gotten brilliant answers
from my three colleagues here. I can hardly think of anything
to add to it.
Mr. Williams. Okay.
Mr. Chairman, I yield back.
Chairman Barr. Thank you. And I would like to thank our
witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And this hearing is now adjourned.
[Whereupon, at 11:42 a.m., the hearing was adjourned.]
A P P E N D I X
May 18, 2017
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