One big loser from Greece’s (likely) default is the reputation of the International Monetary Fund.
The IMF, we used to believe, only stepped in when a country’s path to debt sustainability was clear and economic revival could be plotted with reasonable confidence. The organisation’s standing as a global lender of last resort relied on the even-handed application of that principle.
In Greece, it’s hard to say the debt was ever sustainable in the world after the global financial crisis of 2007-09. In 2010, when the IMF contributed €30bn to the first bailout programme, Greece hadn’t yet experienced its deep recession. But the risk of deep spending cuts making the position worse was obvious: the unpromising backdrop was a weak eurozone in which banks remained under-capitalised.
Indeed, the IMF itself has admitted that it let its lending standards slip in Greece and that its economic projections may have been “overly optimistic”. A 2013 evaluation report confessed there was “a tension between the need to support Greece and the concern that debt was not sustainable with high probability.”
The response was “to lower the bar for debt sustainability in systemic cases”. In other words, Greece was viewed as an exceptional case because it was a member of the eurozone, where a blow-up could ricochet around the world. You can’t blame non-eurozone contributors to the IMF coffers for smelling a European rat. The managing director of the IMF in 2010 was Dominique Strauss-Kahn and he was followed by another member of the French financial establishment, Christine Lagarde.
Hindsight is perfect but even in 2010 the IMF was behaving out of character. Normally, the body only gets involved when other lenders have been made to accept steep losses. In Greece, debt relief only arrived in the second bailout in 2012 and, even then, private lenders suffered only modest financial pain. Over the past six months of talks, the IMF’s stance on debt write-downs has also been wishy-washy: it seemed to be in favour without ever championing the cause openly.
In the end, the IMF, at the head of the queue of creditors, will probably be repaid by Greece. But this saga is an embarrassment. The body watered down long-held lending principles and its economic projections turned out to be worthless. There is fuel there for critics of the IMF who argue the body is designed for the pre-globalisation world of the 1940s. Those voices will grow louder.
Thomas Cook Green donation
Call it a semi-satisfactory outcome: the former Thomas Cook chief executive, Harriet Green, will get 4.1m shares, worth £5.6m, as her prize for the financial turnaround but will donate a third of the award to charity after “consultations” with the parents of Christi and Bobby Shepherd, the children who died from carbon monoxide poisoning while on holiday with the tour operator in Corfu.
Green, note, was not the boss at the time of the awful events in 2006; nor was the company held directly responsible for the deaths. But she was in charge for part of the period in which Thomas Cook aggravated the parents’ pain by trying to block an inquest in the UK into the deaths.
The happy part is that the parents are said by the company to have “expressed satisfaction” with Green’s donation. The troubling element, from a corporate governance perspective, is that Thomas Cook’s board had no power to reduce Green’s award itself to reflect damage to the company’s reputation.
The 4.1m shares flow from the mechanical application of financial measures – the share price, cash generation and earnings. There was no scope to act outside that remit. New contracts, we are told, include “malus” provisions – about time too.
Javid CBI jibes
Sajid Javid, the business secretary, makes a reasonable point about the CBI: no company would ever approach commercial negotiations in the way the business lobby group is treating the UK’s membership of the European Union.
The CBI comes across as so loudly in favour of membership at all costs that its preference for a “reformed EU” is relegated to a sub-clause. As noted in here in the past, it’s a bit like easyJet entering price talks with Airbus on new planes by announcing that it is not prepared to buy from Boeing. Negotiating bite is lost at the outset.
Javid would like to hear more circumspection from the CBI. Fair enough. But CBI wonks might respond that Javid could level his criticisms at his own boss, David Cameron, who has done little to dispel the impression that a few cosmetic reforms would suffice from the negotiations.
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