Christine Lagarde, director of the IMF, says that Portugal’s debt should have been restructured and that really, it should not have lent the money in the first place.
The International Monetary Fund shut its eyes to the potential problems of Portugal taking on so much bail-out debt, according to a team of IMF experts in a study released yesterday.
The report reiterates concerns raised in June 2014 when Portugal formally closed its bailout programme.
The IMF now admits that at the time of the bailouts to countries like Portugal, exceptions to the rules were created to avoid exacerbating global problems.
"It’s hard to prove that the Portuguese debt was sustainable," reports the IMF study, "it was difficult to state categorically that there was a high probability that the debt was sustainable in the medium term.”
Rules were ignored due to concerns regarding ‘international systemic infections’ which were used as the excuse to justify exceptional access to IMF assistance by countries that should not have qualified as there was little hope of the IMF ever getting its money back.
"The same was done in relation to Ireland in 2010 and the second programme for Greece in 2012.”
The IMF notes that these "systemic exceptions" were crucial to prevent the governments collapsing. This was "one of the merits of ignoring the rules."
Portugal’s debt ratio was 97% when the IMF stepped in to help, now it is 130.5% and the IMF is as concerned now as it was then that Portugal is unable to pay back the mountain of debt which it now is struggling with.
Portugal borrowed €26 billion from the IMF as part of its Troika loan of €75 billion. The treasury has paid back a large part of the loan but still owes a chunky €20.7 billion. Much of this repayment plan was under the previous Finance Minister who borrowed money on the international market at lower interest rates and handed it to the IMF.
Portugal’s current public debt ratio of 130.5% equates to €231.9 billion with the country facing weak growth and a failed structural reform programme.
This June, the IMF argued that more rules should be broken and that it should allow loan restructuring when there are doubts about the affordability of country’s debt. This restructuring would have to go hand-in-hand with more definitive and radical austerity remedies with regard to debt.
But in the study released yesterday, the IMF regrets the effects of austerity on the capacity of a county to grow. In Portugal the tax burden, debt burden and lack of external investment is in a holding pattern with any surplus in the national accounts going straight back out in debt repayments, or into Albuquerque's 'cushion fund' of around €8 billion.
The IMF reported that fiscal consolidation in Portugal has backfired and the debt ratio has risen, not fallen, adding that austerity was necessary, but that after four years, the mistakes in its calculations and fiscal models now are evident and it has learned lessons - at Portugal’s expense.
As a result, the IMF repots stated that, "despite the fiscal adjustment, the debt ratio to GDP increased more than expected during the programme period in some countries.
The IMF definition of ‘some’ is Armenia, Bosnia and Herzegovina, Greece, Iceland, Ireland, Latvia, Maldives, Portugal and Romania.
