IMF leak: European banks had committed to maintain exposure in Greek bonds after first bailout – but didn’t

In May 2010, the board of the IMF convened to decide on the plan of economic assistance to Greece. The IMF would be also part of the so-called troika of lenders together with the European Commission and the European Central Bank. For the first time a full summary of what was discussed was leaked to Spanish daily El Pais and to the Wall Street Journal. Here are the most significant revelations from the IMF minutes:

1. The European banks reneged on a promise to maintain their exposures

“The Dutch, French, and German chairs conveyed to the Board the commitments of their commercials banks to support Greece and broadly maintain their exposures.”

That is what they had promised. But then, immediately following the signing of Greece’s bailout loan, they did exactly what they had committed to not doing:  they pulled out. French and German banks unloaded the vast majority of their Greek bonds in the window of opportunity created by their very promise not to do so.

Just before first bailout, in the first trimester of 2010, German, French and Dutch banks held more than 122 bln dollars worth of Greek sovereign bonds. Contrary to what their governments had solemnly promised to the IMF board, the banks of those three countries began unloading as much Greek debt as they could in the spring of 2010. As the El Pais newspaper comments, “they sold them in haste, fuelling the Greek crisis and causing it to spread”. By the beginning of 2012, those same banks had only 66 bn dollars in Greek sovereign bonds. In other words, they had reduced their exposure by half. A significant part of this debt was passed onto Greek greek pension funds causing them to go bankrupt when the haircut eventually took place.

2. BRIC delegates “lament” bailing out of European banks

The IMF minutes show that directors of the IMF were already complaining that the program was designed to bailout the “European financial institutions” instead of including “debt restructuring and Private Sector Involvement (PSI)” from as early as 2010 .  The European delegates were astonished that even the Swiss ED (executive director) forcefully echoed the above concerns about lack of the debt restructuring in the program:

“Several chairs (Argentina, Brazil, India, Russia, and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement (PSI) to avoid, according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions’. The Argentine ED was very critical of the program, as it seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to Argentina’s crisis of 2001. Much to the ‘surprise’ of other European EDs, the Swiss ED forcefully echoed the above concerns about lack of the debt restructuring in the program, and pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism”.

3. The big question: Why did Greece, against its own interests, rule out the haircut?

The question raised of course is why the Greek politicians ruled out a solution that seemed to be in the best interests of their own country.

4. IMF staff found it ‘striking’ that Greek business interests fully backed the program
While IMF delegates themselves could see the dire effects that the program might have on Greek society, they were surprised (in their words it was “a striking thing”) to see that in Greece the private sector was “fully behind the program”.

“Staff acknowledges that the program will certainly test the Greek society. Staff met with the main opposition parties, nongovernmental organizations, and trade unions. In staff’s view, the “striking thing” is that the private sector is fully behind the program, as it is seen as the tool to bring to end and several privileges in the public sector”.

This assertion has been point of controversy in Greek public discourse for years as representatives of the business community (such as SEV, the Association of Greek Industries) have long denied backing the bailout program.