Transcript of a Conference Call on Greece with Poul Thomsen, Deputy Director and Mission Chief to Greece, IMF European Department and Conny Lotze, Deputy Chief, IMF Media RelationsJuly 13, 2011
MS. LOTZE: Thank you very much. Good day everybody. I want to thank you for participating in this call. Hopefully you've all had access to the document on the Media Briefing Center under embargo. This call is also under embargo. Everything goes live at 11 o'clock, that's 11 o'clock Washington time, 1500 GMT, or 1800 Athens time. Please all keep to the embargo. We just want everybody to have a chance to ask questions and report on this properly.
I have Poul Thomsen here, the Deputy Director of the IMF's European Department and the Mission Chief to Greece. We will try to keep this call focused on the staff report and on the documents that you have and on Greece. So any broader questions on Europe, I would like you to restrain on those because this is really supposed to be focused on Greece. Poul is on the record of course-- starting at 11 o'clock when the embargo is lifted. I'll hand it over to Poul who will make some opening remarks and then we'll go to your questions. Thank you.
MR. THOMSEN: Thank you very much. Let me start by giving you a little introduction on the big picture of where I think the program is. I think this particularly important because I of course see statements that the program is seriously off track and this is not the case. Let me start up front by saying that I think that the program has up to now delivered most of what the authorities set out to do. Let me explain what I mean by that and also explain to you where there are problems.
The contraction in the economy has so far been only some 1 1/2 percentage points larger than expected. This is certainly a small deviation for a program of this sort, for a program with this kind of adjustment. The economy is rebalancing. According to the most recent year-to-year data, manufacturing wages are down by 7 percent, unit labor costs have improved by 8 percent and manufacturing exports is up by some 22 percent. Inflation, if we adjust for the impact of tax increases, is running well below the Eurozone average. This is an improvement in competitiveness, this is how a country in a currency union improves competitiveness and that improvement in competitiveness is clearly well underway.
Of course, the export base—we know that—is low. So despite this significant improvement in exports, GDP is still contracting because improvements in exports are being dwarfed by the sharp contraction in domestic demand. But underlying here is a notable increase in competitiveness or improvement in competitiveness.
Turning to fiscal policy, the authorities have continued to meet quarterly fiscal targets, most recently those for March, we don't have the information for June, but preliminary information suggests they will also meet the targets the June. So since the program was approved, all fiscal targets have been met. This is of course a major achievement. If we look at last year, we saw a reduction in the headline deficit of 5 percent of GDP against a strong headwind in the form of a recession of 4 1/2 percent of GDP.
As to this year, it's true when the mission was there that we discussed that there was a gap in the 2011 budget of I think it was about 2 1/2 to 3 percent of GDP, but remember some 2 percentage points of that reflected in effect an upward revision of the deficit for 2009 compared to what we knew when the program was approved. So less than 1 percentage point of this gap that we had to close this time reflected an effective nation from the program since it was approved. This is another measure that this program, in terms of implementation of agreed measures, has largely been on track.
This is not to say that there have been no problems in the execution of fiscal policy. As was expected from the outset, it proved difficult to control expenditures at lower levels of government, for instance in the health sector, and this caused expenditure overruns and accumulation of arrears at lower levels of government early on. But mindful of this risk, the authorities followed developments at local levels very closely and took offsetting expenditure cuts at the state level in a timely manner thereby ensuring that the overall targets as mentioned before were met quarter after quarter. So I do think that the authorities should get good marks for the way they have closely monitored the fiscal program and stood ready to take corrective actions as circumstances evolved.
This being said, however, it also became clear by the end of last year that reforms were slowing down and that there was a need for reinvigoration. As I have said on a couple of previous occasions, one cannot continue to respond to these problems at lower levels of government by cutting expenditures at state levels. That is an unsustainable strategy and therefore we have been saying for some time that in order to have further progress in bringing down the deficit, in order to prevent the deficit from being entrenched up there at around 10 percent, Greece has to take structural fiscal reforms, for instance, health sector reforms, in tax administration and across the board in the fiscal sector and that is explained in detail in the staff report.
What we have here is that the authorities have responded essentially to the question, what are you going to do in order to ensure that the fiscal deficit is going to come down to 3 percent of GDP to meet the market limit over the medium-term? They have formulated a program of fiscal measures of more than 10 percent that's explained in the staff report that will achieve this.
So this medium-term fiscal program is the center of this review. It's a very impressive program. It's a program that touches upon I would say on what sometimes in the past have appeared to be taboos like closure of entities, like large-scale privatization and it's possible there might even be involuntary redundancies. It's certainly a program that is going to continue to ask for difficult adjustment through cuts in high-end wages and pensions and means testing of benefits and the elimination of tax exemptions. There's hardly a part of society that is not being affected, although as in the past like when the program was introduced, we have gone out of our way to try to alleviate the impact on the most vulnerable groups. This is undoubtedly a difficult program, a program that will be asking for some sacrifices and this is well understood, but I think the burden of adjustment is fairly distributed.
Going beyond the fiscal program, similarly there was the clear understanding that there was a need to reinvigorate broader structural reform if we are to get this recovery going early next year—as was programmed, by the turn of the year. This is also in the program on the structural side. One of the major new things on the structural side is the introduction of judicial reforms. There are two dimensions, the reinvigoration of fiscal structural reform to set the deficit on a renewed downward path including a deficit this year of down to 7 1/2 percent, and the broader structural reforms to lend credibility to our assumption that the economy will start recovering next year.
I think I should stop here, and if you have any questions, I would be happy to take them.
QUESTIONER: Thank you. I'd like to turn to the debt sustainability analysis. You are projecting that there will be private sector involvement and that there will be fresh European financing, but you are not saying anything about Fund financing. You are talking about official possible financing to fill the gap if PSI is disappointing. What's your projection here as regards to new financial assistance from the IMF?
MR. THOMSEN: Let me start on debt sustainability. There is a careful analysis of debt sustainability there. As you can see, it uses the expression that it's knife-edge. Debt is coming down but clearly there is no room for slippages. There's no room for underperformance on the policy side. On IMF financing, we have a program in place. This programs runs for another two years. The IMF—only half of this program has been disbursed so far and the IMF's share of the remainder is still 3/11th, like it was in the first half of the program. So the IMF is fully in there and will continue to disburse under this program. I understand of course that there is discussion on whether there possibly would be a new program. There is no request for a new program. So this is a moot point at this stage.
QUESTIONER: Thanks for doing this. I have sort of a combined question here, Poul, just to press you a little bit your comment that there was only a 1 1/2 percentage point deviation from the forecast GDP. What strikes me is that when you look at the debt sustainability calculations, a small variation in growth like that completely blows the program out of the water. At least that's what the curves seem to understand when Carlo talks about or the E.U. talks about this.
So I just wonder if you can just dismiss a 1 1/2 percentage point variation as insignificant. And along those lines, what struck me, and I'd like to get your comment on this, the language in the first dozen of pages of this when you're summing up really does indicate that this program is kind of hanging by a thread it seems to me. You've got a 6 1/2 percentage point of GDP primary surplus which you acknowledge is at the historic end of—the very, very high end I think is the phrase you use. And other aspects of this indicate that if anything goes wrong, and something always goes wrong, the numbers don't work anymore. So isn't this a fairly kind of uncompromising picture of where this is all heading?
MR. THOMSEN: On growth, certainly what the debt sustainability analysis shows is that potential growth over the medium-term was to be much lower, if they don't undertake the structural reforms and this is what this is all about: structural reforms to be competitive inside the Eurozone. If these reforms are not in place, yes, debt is not going to be sustainable. That's for sure.
Now whether this cyclical downturn that we are seeing now is going to trend 1 or 2 percent lower before it starts going up and picking up the potential growth part that we have is not going to make a fundamental difference in debt sustainability. The peak in debt is just going to come a little bit later and then it's going to go down on the same trajectory. So that's not a major issue. The issue is the reforms needed to restore robust potential growth once this cyclical adjustment here is beyond us.
On whether it's hanging by a thread, I don't think that is correct. It does show that, yes, there is no margin for slippages, but that's exactly why I we now have a program that explains how we are going to achieve and what are the structural reforms needed to underpin these, yes, admittedly ambitious fiscal targets? But now we have concrete structural reforms on the table. How are they going to be achieved?
And let me finally say the primary numbers of 6 to 7 percent, this is—the debt-stabilizing primary balance is actually not that high. As soon as the primary deficit goes to around 4 or slightly above, debt will start stabilizing. The 6½-7 is just because we have been coming down with a very ambitious trajectory. If Greece were to maintain a primary surplus of 5 percent over the long-run, that would also restore sustainability.
QUESTIONER: Thanks for doing this. My question is on private-sector involvement. Can you tell us at what point did you decide that PSI was necessary or very desirable? Two, how are you going to counter ECB criticisms that it's going to spread contagion? Three, what kind of haircut, what kind of NPV write-down do you think is going to be necessary to restore sustainability?
MR. THOMSEN: You are going far beyond what I can answer. You understand that we are in the process of discussing PSI and I shall not prejudge that discussion by any speculation. There will be some form for PSI, but the concrete modalities I won't comment on.
QUESTIONER: Could you answer about when you came to the conclusion you needed PSI because I think that's something that comes as a surprise to some people, that you need PSI at all.
MR. THOMSEN: In the last couple of months there has been a discussion inside Europe that it would be desirable to have public sector involvement and the authorities and the Europeans have discussed this and agreed on that during the last few months.
QUESTIONER: Thank you very much. You mention in the report the very public debate in Europe over the additional help, and the involvement of the private sector is a major problem for securing confidence around the program. Given that, I wonder how urgent do you think it is that Europe could come into the debate and reach some agreement about the second rescue package? Thank you.
MR. THOMSEN: I'm not so sure I understand what reference you're mentioning—what reference you are referring to in the report.
QUESTIONER: Page 31 of the report, point 56, it says "Greece will take longer to regain capital market access, necessitating external support. Euro Area members have a need to provide this. Still the very public debate in Europe over this—and about the role of private-sector involvement—has been a major problem for securing confidence around the program." This debate is still going on and there is division in Europe around this help. I wonder how urgent do you think it is that Europe could come into the debate with a new rescue package. Thank you.
MR. THOMSEN: I think it's correct that the debate has affected market conditions unfavorably. There is no doubt about that and there is an urgency of coming to a conclusion on this issue. You will have seen from the latest statement of the Eurogroup from Monday night and Tuesday morning that the Eurogroup is realizing that and they are fast-tracking a decision on these issues including not only on PSI but on other possible policy initiatives that could help ensure debt sustainability.
QUESTIONER: A quick follow-up. Since the report was obviously written before the latest meetings in Europe, I wonder if you think that the latest meetings and whatever was said about fast-tracking a decision it is enough or still too much talking and nothing done. Thank you.
MR. THOMSEN: No, I think that the last Euro Group meeting was a very important step forward. Again it's too early to be concrete, but I think we are now in a phase where we will quickly come up with some concrete suggestions including on how one can possibly further improve debt service compared to now whatyou've seen in the report, by cutting the cost of debt servicing. That's a very important progress that has been achieved since the issuing of the report.
So I'm sure that the debt sustainability analysis that you would see next time around will be improved in the sense that the financing parameters would help pull this economy toward a clearly sustainable position. Again this primarily depends on reforms. Let's never forget that. Keep any eye on that this is all about making Greece competitive inside the currency union and the program is rich on the reforms that will achieve that. It will take some time to get traction and start to really resolve. But in addition to that, the terms on which the external financing is provided obviously also has a bearing for debt sustainability, so I do think that in the analysis next time around you will see that debt sustainability has improved relative to the scenario you now have in front of you.
QUESTIONER: Poul, thank you very much. Two easy questions. Number one, how much more money is the IMF willing to commit to Greece if the programs as one of the previous questioners suggested do not achieve their goals? How much more money are you willing to put in? And has there been any discussion, even a comment about the possibility of Greece leaving the Eurozone monetary union, about going back to a native currency? Thank you.
MR. THOMSEN: These are indeed very easy questions. There is no request for a new program. We have a program there. There is considerable undisbursed IMF money under that program. Two, there has been no discussion of Greece exiting the Eurozone.
QUESTIONER: A quick follow-up on number one. I'm sorry. Yes, I understand there's more money left under the current program and no request, but has there been any internal discussion about how much the IMF would ultimately be willing to commit should a new program be requested or is this it?
MR. THOMSEN: We need to fully see what the parameters are on the financing side. We are discussing PSI. We are discussing what are the terms of the official financing. And all of this needs to be—it's part of the same question and I can only answer questions in isolation.
MS. LOTZE: Can we go to the next question? Maybe there are some questions that are specifically to this report on Greece's progress, because we've gone a little bit in circles on the financing and the larger questions.
QUESTIONER: My question is actually what you say about the ECB and the ELA program. You say the ECB support is crucial. But could you explain exactly, because you mentioned a €30 billion figure and I'm not sure whether it's the ELA or whether it's an old program. Can you just clarify that, please?
MR. THOMSEN: It's obviously absolutely essential for the sustainability of the program that the ECB stands ready to provide liquidity support if needed. In the program there is this mechanism to the extent that banks are running out of eligible collateral and that new collateral can be created by banks issuing uncovered bonds guaranteed by the government and these bonds then become eligible for ECB repo operations in the ECB liquidity support, and that is indeed in the amount of up to €30 billion that's in –
QUESTIONER: That's the ELA?
MR. THOMSEN: No, it's not the ELA. It is not the ELA. This is a different thing. That is, that banks can take these bonds to the normal repo window in Frankfurt—bonds guaranteed by the government.
QUESTIONER: Do you encourage the ECB to accept bonds even if there's a partial default?
MR. THOMSEN: Sorry?
QUESTIONER: You know how the ECB says they won't accept Greek bonds because if partial default is declared credit agencies? Is that problematic?
MR. THOMSEN: The ECB has been very, very clear about that and any questions on ECB policies you should direct to the ECB.
QUESTIONER: Thank you. There is a projection in the report at page 26 that FSF will need the last quarter of 2011 about 20 billion euros. This means that this is your projection about the losses that Greek banks will have from the PSI?
MR. THOMSEN: No. No.
QUESTIONER: What exactly is this, please?
MR. THOMSEN: I'll have to look at the exact number you're referring to. The FSF is funded up to €10 billion and we think that this is adequate and at this stage we don't see any demand for FSF resources. It's a backstop mechanism to be ready in case there is a need for it. At this stage we still don't see the need, but we are continuing to build up the funding for the mechanism as originally planned because we think that this backstop mechanism needs to be there. But it's not a prediction of actual losses, no.
QUESTIONER: You say that an orderly preemptive and comprehensive PSI operation would improve the debt service profile.
MR. THOMSEN: Could you refer to the –
QUESTIONER: Yes, Point 37.
MR. THOMSEN: Yes.
QUESTIONER: So obviously the Eurogroup statement said that they want to avoid a selective default. Ratings have already declared that a voluntary PSI would be a selective default. How exactly would you bring out an orderly preemptive and comprehensive PSI according to the lines that your debt sustainability analysis relies upon?
MR. THOMSEN: Our debt sustainability analysis doesn't say that a PSI is essential for debt sustainability. On the contrary. It does say that most of the PSIs that have been under discussion will not have a material impact on debt sustainability. They of course will have an impact on the need for market borrowing if you want to have the liquidity to function. The PSIs that are under discussion will only—some of them will slightly deteriorate, some of them will slightly improve debt sustainability. But we should not forget that and now I'm coming back to the Eurogroup, there are other ways of improving debt sustainability and that's obviously why the Eurogroup has now tasked the working group with also looking at the cost of borrowing. So this is why I say I do think this decision on Monday was a major step forward.
Can I just say coming back on these issues of the IMF. As I said, there is no request for a new program. But of course we are thinking about what would be the need for financing going forward with or without a new program and what would our contribution be. You need to understand that this will depend on a number of parameters including the exact nature of the PSI and the terms on which financing is provided by our European partners. So you cannot expect me to give you a number because that does simply not exist for the IMF's contributions. All of these things hang together and we need to have decisions on the other financing parameters before you can expect us to come to a decision.
MS. LOTZE: Thank you very much. We'll conclude the conference call here. So the embargo is lifted at 11 o'clock. Thank you very much for participating. If you have any more questions, come and address them to me, Conny Lotze, firstname.lastname@example.org. Thank you very much. Good-bye.
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