November 5, 2011
The Denials That Trapped Greece
By LANDON THOMAS Jr. and STEPHEN CASTLE
THE warning was clear: Greece was spiraling out of control.
But the alarm, sounded in mid-2009, in a draft report from the International Monetary Fund, never reached the outside world.
Greek officials saw the draft and complained to the I.M.F. So the final report, while critical, played down the risks that Athens might one day default, with disastrous consequences for all of Europe.
What is so remarkable about this episode is that it wasn’t so remarkable at all. The reversal at the I.M.F. was just one small piece of a broad pattern of denial that helped push Greece to the brink and now threatens to pull apart the euro. Politicians, policy makers, bankers — all underestimated dangers that seem clear enough in hindsight. Time and again over the last two years, many of those in charge offered solutions that, rather than fix the problems in Greece, simply let them fester.
Indeed, five months after the I.M.F. made that initial prognosis, Prime Minister George Papandreou of Greece disclosed that, under the previous government, his nation had essentially lied about the size of its deficit. The gap, it turned out, amounted to an unsustainable 12 percent of the country’s annual economic output, not 6 percent, as the government had maintained.
Almost all of the endeavors to defuse this crisis have denied the overarching conclusion of that I.M.F. draft: that Greece could no longer pay its bills and needed to drastically cut its debt.
Until October, when European leaders conceded that point, the champion of the resistance was Jean-Claude Trichet, who stepped down this month as president of the European Central Bank. It was he who insisted that no European country could ever be allowed to go bankrupt.
“There is simply no excuse for Trichet and Europe getting this so wrong,” said Willem Buiter, chief economist at Citigroup. “It is fine to make default a moral issue, but you also have to accept that outside of Western Europe, defaults have been a dime a dozen, even in the past few decades.”
If leaders had agreed earlier to ease Greece’s debt burden and moved faster to protect the likes of Italy and Spain — as United States officials had been urging since early 2010 — the worst might be behind Europe today, experts say.
The turning point came at a late-night meeting last month when Angela Merkel, the German chancellor, pushed private creditors to accept a 50 percent loss on their Greek bonds. Mr. Trichet had long opposed such a move, fearing that it could undermine European banks. Instead, at his urging, European leaders initially promoted painful austerity for Greece, prompting a public backlash that pushed Mr. Papendreou’s government to the brink of collapse and could force Athens to abandon the euro.
Many view the latest rescue plan as too little, too late.