I think this is a very disappointing paper, in which Orphanides seems to be reasoning toward a conclusion — that conclusion being the standard one of the international policy community, which absolves the IMF, blames the EU creditor states (specifically Germany) and reinvents a version of history in which the IMF has been a pro-Keynesian, anti-austerity voice all along. Of course, it’s certainly not self-interest speaking (the policy he recommends would have ensured that the Cypriot banking collapse would have happened on his watch, rather than after he left), but it’s the fixation with the headline amount of debt which seems to be an occupational deformation of MIT economists looking at the Eurocrisis.
He actually gets it right on page 8, where he notes that the IMF took two decisions on Greece, not one. They decided that they could lend without a debt restructuring, and they decided to implement a completely unprecedented front-loaded fiscal consolidation program. The first of these was the subject of the “mea culpa” exercise, but the second has never been revisited by them — they actually defended it in the lessons-learnt paper and claimed that there was nothing wrong with the desired speed of adjustment.
It seems clear to me that it is the second mistake, not the first, which deserves the name “austerity”, and it is blindingly obvious that the overwhelming majority of the economic damage was done by the front-loaded nature of the fiscal cuts. (The IMF occasionally tries to claim that the headline number of the debt/GDP ratio had a negative effect on business confidence, but this seems pretty desperate to me when you’re trying to explain what happened to Greek GDP and the alternative explanation is simply the cut in government spending).
But having noted that the decision to slash and burn the primary deficit might have been a bad idea, Orphanides then spends the rest of the paper talking about the minor mistake which made hardly any difference! He has this “transferred loss” idea, which would only make sense if Greece was using mark-to-market accounting like JP Morgan. Inflicting an NPV loss on creditor countries would have created an NPV gain for Greece, but you can’t eat NPV gains and you can’t pay civil service salaries with them either. What Greece needed was current period, front-loaded financing for its primary deficit. And that’s what it got, in amounts which were totally unprecedented apart from the Marshall Plan.
It actually needed even more than it got, and an analysis of why the program was inadequate would be very interesting, if anyone would ever stop going on about debt/GDP ratios and write one. But the reason why it didn’t get adequate fiscal financing doesn’t look to me like something that can be blamed on the Euroland sovereigns overruling the poor Cassandra-like IMF. The IMF’s fiscal consolidation targets were the part of the 2010 program which everybody, wrongly, agreed on. If the idea is that creating a second banking crisis in Euroland would have made it more possible for the troika to lend money up front, this needs to be argued for. Orphanides doesn’t even assume this; he just shows a graph of the primary balance adjustment and its consequences, then goes away talking about the debt levels as if they were the same thing.
