The International Monetary Fund on Wednesday confessed that there had been "notable failures" in dealing with Greece's first bailout program, which was launched in May 2010.
The Washington-based lender said in a report that it was too optimistic in its economic assumptions and felt that the debt restructuring should have been attempted at the onset of the crisis.
The European Union and the IMF granted Greece's first rescue package worth EUR 110 billion in May 2010 followed by EUR 130 billion bailout in February last year.
The first bailout package was put together in a very short period of time, without adequate political dialogue and, more importantly, with insufficient contributions by the authorities to tailor conditionality to the peculiarities of the economy and the Greek public administration, the Fund said in the report.
In its view, one of the failures encountered by the program was that it failed to restore market confidence, while the country's banking system lost 30 percent of its deposits, and the economy encountered a much deeper-than-expected recession with exceptionally high unemployment.
According to IMF, an "ex-ante debt restructuring" would have helped mitigate the depth of adjustment and the severity of the recession.
Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession, the report said. Structural reforms stalled and productivity gains proved elusive, it added.
The IMF had "misgivings" about debt sustainability and there was a tension between the need to support Greece and the concern that debt was not sustainable with high probability, which is a condition for exceptional access.
However, as the program was a necessity, given the danger of contagion, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases. "The baseline macro projections can also be criticized for being too optimistic," the lender said.
Though the significant fiscal adjustment during the program period failed to achieve the desired targets, it was difficult to argue that adjustment should have been attempted more slowly, given the highly unsustainable debt levels.
Moreover, a flatter adjustment path would have required more than EUR 110 billion in financing, which would have been politically difficult. The scope for increasing flexibility in fiscal targets was limited.
The Fund also admitted that the burden of adjustment was not shared evenly across society during the program period and the capacity to implement reforms was overestimated.
In another statement on Wednesday, the IMF said its Executive Board has approved disbursement of EUR 1.74 billion worth loan installment to Greece on conclusion of the third review the country's economic and fiscal performance.
IMF Managing Director Christine Lagarde said Greece is on track to meet its 2013 fiscal targets. She urged the authorities to accelerate structural reforms and to take stringent measures to tackle tax evasion.
The Fund forecasts Greek economy, which is in its sixth year of recession, to contract 4.2 percent in 2013. The economy shrank 6.4 percent in 2012.
For comments and feedback: editorial@rttnews.com