Yves here. The difference between different flavors of austerity in Greece may seem like what the Japanese would call a height competition among peanuts. And it may seem even more peculiar to find the IMF trying to act as a moderating force on Germany.
The IMF has been pushing for some time for bona fide debt reduction for Greece, not more extend and pretend. As we’ve discussed at length in earlier posts, the staff at the IMF has been in an internal revolt over the Fund continuing in the Greece bailouts, to the extent of repeatedly leaking documents, like a program review that said in bureaucrat-speak that Greece couldn’t pay off its massive borrowings. The IMF’s rules require that loan be made to borrowers that look viable at the time of the loan, as they won’t require yet more lending to service outstanding debt.
While Greece not meeting that standard seems like a no-brainer, for the IMF to be revealed to be saying as much put the various European governments that have been telling their citizens otherwise in a hot spot.
With elections coming up this fall, Germany’s government is particularly loath to admit now that the loans to Greece need to be written down, even though this is a matter of loss recognition, not of the loans ever having a chance of being money good. The guest post below has some mind-boggling stats on how far the Greeks gone in squeezing their budgets to satisfy Troika paymasters.
The immediate pressure come from yet another bailout deadline, this one in early July. And a Financial Times story yesterday makes clear how important the optics in Germany are:
Eurozone finance ministers and the International Monetary Fund are exploring a compromise plan for Greece’s bailout that would provide much-needed funds this summer while delaying sensitive talks on debt relief.
Diplomats said the proposal, put forward by the IMF, would involve the fund taking a formal decision to join Greece’s bailout with the proviso it would not provide any money until the euro area gives further details on how it is prepared to ease Athens’ debts.
Supporters of the plan argue that it would deliver formal IMF backing for the Greek programme, which Germany has made a prerequisite for Athens to receive any further tranches of aid from its €86bn bailout. At the same time, the approach would buy time for politically sensitive talks on a debt relief package, which the IMF says is essential for Greece to recover…
The Washington-based fund had previously insisted it would decide to join the bailout only if the euro area provided much more detail on the debt relief it would give. But people involved in the talks said the IMF’s plan to initially withhold its bailout loans would remove this urgency and allow talks on debt relief after Germany’s elections in September.
Note that Greece met the conditions of its last bailout round, at even more domestic pain. The IMF will not join the July financing under the scheme sketched out above but has committed to participate if Europe, meaning Germany and other hard-core austerians like The Netherlands agree to, as opposed to make handwaves under duress about, debt cuts. While it still seems more likely than not that the IMF will blink in the end, sitting out a round of financing is a harder line than it has held so far.
The Eurogroup faces a difficult choice on Greece — implementing a debt reduction plan drastic enough to make a return to market borrowing possible, or agreeing to a fourth financial assistance programme and continuing to fund Greece at the preferential lending rate.
After long delays and tough negotiations, the Greek parliament has formally adopted the measures needed to conclude the current review of the third financial assistance programme, amid protests on the streets. The Greek government now expects the Eurogroup to come up with debt relief measures.
We have been here before. The conclusion of almost every review of the various Greek financial assistance programmes went the same way and left largely unfulfilled expectations for debt relief.
Meanwhile, even though almost two-thirds of the three-year financial assistance programme has passed, the IMF is still hesitating to join this third programme. Beyond various reforms, IMF demands lowered fiscal targets and debt relief – applied only to the European part of the official loans, not its own.
Debt relief measures were promised by European lenders at the inception of the current third financial assistance programme. Those measures were supposed to be specified toward the end of the programme, conditional on Greece implementing the programme conditions.
The programme ends in only about a year from now and Greece is implementing it, so it is time to think about what will come after.
There is certainly promising good news: economic growth in the past two years was much better than expected and growth is set to accelerate in the coming years. Unemployment is decreasing, though painfully slowly. The Greek government’s primary budget surplus well exceeded expectations and reached 3.9% of GDP in 2016. What’s more, since the Greek economy is estimated to perform well below its potential output level, the so-called cyclically-adjusted primary budget surplus reached an astonishing 8.7% of GDP in 2016, according to the European Commission’s May 2017 estimates. While the Commission’s cyclical adjustment methodology has a number of weaknesses (as I argued here), the 8.7% primary surplus estimate is remarkable. It suggests that, after all the negotiations and the pain, Greece has implemented major fiscal adjustments.
So what’s next? While Greek public debt is expected to fall, it remains very high. The European Commission’s most recent projection foresees a decline from 179.0% of GDP in 2016 to 174.6% in 2018. Even if Greece maintains an overall budget balance, new borrowing will be needed, because a large amount of debt will mature in the coming years which will have to be repaid (see here). Given the high level of debt, the dominant share of official creditors in Greek debt and all the uncertainties that characterise the Greek economy and politics, it is unreasonable to assume that Greece will be able to return to market borrowing at an affordable rate in the foreseeable future.
This leaves bitter choices for the Eurogroup: implement a debt reduction plan drastic enough to make a return to market borrowing possible, or to agree to a fourth financial assistance programme and continue to fund Greece at a preferential lending rate. None of the options is attractive to euro-area lenders.
Greece has suffered a dramatic economic and social collapse since 2008 and all Greek governments have bowed to the decisions of the Eurogroup. It is now time to fulfill the promise of debt relief and thereby offer more hope for the future.