Why the IMF, Eurostat Failed to Catch Greece

story_images_Greek-ChorusAs a speaker at this spring’s Global Investment Conference in Banff (April 5 – 7), Dev Kar, Lead Economist at Global Financial Integrity, will be sharing his views on the statistical assessment systems of the  IMF,  why the system failed to alert users of serious problems with the Greek fiscal data and how IMF assessments can be improved to minimize the risk of such critical failures in the future. In advance of the conference, we asked him to answer questions about how important statistics are to the correct pricing of sovereign debt instruments, which are of paramount importance to  prudent investors. To find out more about Dev’s presentation and the Global Investment Conference, click here.

Q: How significant have the IMF and Eurostat data become for pricing sovereign risk?

A: The IMF publishes member countries’ data and reports extensively on their website. This is a far cry from when I initially joined the IMF way back in the early 1970s when  the reports were not largely public and  the data were not so extensively disseminated. So with greater dissemination of member countries’ data and macroeconomic conditions, this allows  sovereign creditors as well as private lenders to correctly evaluate the risks of extending credits to emerging markets and to price debt instruments accordingly. So this has an impact. The IMF’s own study shows that the countries that subscribe to the Special Data Dissemination Standard, or SDDS, enjoy new bond issues which have a lower cost by up to 20% or on average about 55 basis points. In other words, the currentness, transparency of underlying methodology, and the quality of data have an impact on borrowing costs.

Q: How accurate is the IMF and Eurostat data?

A: Obviously, the quality and timeliness of data vary  from one to another. To the extent member countries are able to invest in the compilation of high-quality data in a timely manner and  adhere to the international methodological standards recommended by the IMF and other relevant international organizations, all users, whether public or private, benefit. The IMF is playing a leading role in providing guidance to members as to how to compile  various macroeconomic statistics such as balance of payments, fiscal and monetary accounts. The IMF, in collaboration with other international organizations, provides that guidance and  technical assistance to member countries to improve the data quality and to build statistical capacity.

Q: Have there been instances where countries have not reported the data accurately?

A: Yes. There have been several instances in my experience. I worked in the IMF’s statistics department for 12 years in many areas of statistics and I came across many instances where countries did not follow the IMF guidelines with regard to balance of payments, monetary, or fiscal statistics for various reasons ranging from budgetary issues, shortage of trained manpower, political instability, or other reasons.

Also I would mention political indifference in the composition of accurate statistics; some governments  want to maintain a degree of opacity for domestic consumption because they don’t want to let the cat out of the bag. So there are a lot of reasons why the quality of the data sometimes deviates from what has been recommended by the IMF and other international organizations.

Q: Does Greece fit in that category?

Absolutely. Greece was an unfortunate case, and played a prominent part in precipitating the Eurozone crisis. Greece, of course, for years, borrowed heavily to finance consumption rather than investment. They had a bloated public sector, very generous retirement benefits, and pensions and medical insurance for retirees. All these items are nice, but then of course it has an impact on the budget.  The Greek government was not collecting taxes that would finance these kind of expenditures. Instead they were relying on external borrowing. That’s one of the reasons for the country’s debt crisis.

The second reason, of course is that they don’t have any independent monetary policy due to a currency union (the  Eurozone). That takes away one instrument which they could have probably used to improve their external competitiveness to make the export sector more resilient and competitive. So Greece is  stuck with fiscal policy to deal with unemployment, inflation, and other macroeconomic imbalances. They decided to postpone the day of reckoning and go on financing their bloated public sector through external borrowing. They tried to stave off this financial crisis as long as they could and then of course it caught up with them. So I think that the statistical problem that we had was part of this game that they played, basically pulling the wool over the eyes of external creditors. In retrospect, I think that the IMF and Eurostat should have been on their toes, but they failed to catch it. So my presentation would highlight the different ways in which the statistical assessment systems used by the IMF and Eurostat failed and how such failures can be avoided in the future.

Q: How do you prevent this type of problem in the future?

A: One contribution that international organizations can make is to strengthen the statistical systems so that external creditors are able to read the signals better and price the sovereign risks accordingly, instead of getting false signals that everything is fine and they can carry on as usual. Of course, this is not good for the creditor governments themselves, because they’re always believing that they can keep on borrowing at these unrealistically low rates when in fact the reverse is true and the situation is deteriorating. If the risks are priced correctly, they should see rising borrowing costs, which would act as a brake on the rate of growth of debt. So one way to prevent that is by strengthening statistical systems. But that’s only one part of the equation. It is not a panacea; there are other actions and measures that need to be taken. So the whole focus would be on trying to have an early warning system to take measures before it becomes a crisis and to always implement prudent macroeconomic policies.

To learn more about the Global Investment Conference, please visit the events section of the website. If you are interested in attending the event, please email Garth Thomas to be considered, as limited space availab