Transcript of a Conference Call on the Completion of the First and Second Reviews of Greece’s EFF ArrangementWashington, D.C.
Friday, January 18, 2013
Poul Thomsen, Deputy Director, IMF European Department
Mark Flanagan, Advisor, IMF European Department
Ángela Gaviria, Senior Press officer, IMF Media Relations
MS. GAVIRIA: Hello, everyone. I'm Angela Gaviria, with the IMF's External Relations Department. Welcome to this conference call on the staff report for the completion of the first and second reviews of the Extended Fund Facility for Greece. With me here are Poul Thomsen, who is deputy director in the European Department, and mission chief for Greece, and Mark Flanagan, who is deputy mission chief for Greece.
Poul will make a few introductory points and then we will take your questions.
MR. THOMSEN: Yes, thank you, Angela, and welcome to all of you. As you know, our Executive Board on Wednesday completed the review of the program. The program was approved 11 months ago, and this was a long-delayed Board meeting, reflecting the fact that the political situation in Greece following the approval of the program last year threw the program significantly off track, to the extent that there was a standstill in the implementation of some policies.
The government has worked determinedly on catching up and putting the program back on track. I am glad that we concluded that the program was back on track, and we could bring it for the Board's consideration on Wednesday. Let me comment on a few of the main areas.
On fiscal policy the government clearly had been dealt a difficult hand, in that it faced the need for significant further fiscal adjustment at a time when there had been, I think it's fair to say, excessive reliance on tax increases, and compression of capital and other discretionary expenditures. So there was no way around for the new government to undertake a politically and socially difficult cut in wages and social transfers, and it did so. I think this shows, really, the determination with which the government has gone about bringing this program back on track.
All of these measures, most of them, some 5 percent of GDP of these measures are up front for 2013. And they are approved with the budget that was approved by parliament. So the upcoming implementation on certain things is minimal, as far as the budget is concerned.
In the fiscal structural area there continues to be significant effort to improve tax administration. This is an area where, as you know, the program has clearly disappointed so far. A lot of effort in the program is going into improving tax administration. A lot of effort is also going into improving public expenditure management, where there has been a problem of, among other things, accumulation of arrears. This is some of the focus of the structural reform in the fiscal area.
Broader structural reforms key to restoring growth over the medium term include continued liberalization of closed professions, and liberalization of the economy more generally, not least in the energy and transportation sectors.
There is a very significant other part of the program: some 50 billion euros is going into helping to restructure and recapitalize the financial sector. There is a program in place for that. And that has obviously not gone unnoticed. We have seen a very significant reflow of deposits into the Greek banking system since it became clear that the government is successfully putting the program back on track.
So, overall, if we look at the policy package, I think it's a strong package, and that has not gone unnoticed by Greece's European partners. Because of the deterioration in the economy since the program was approved, and the less favorable outlook, the debt sustainability analysis showed a notably worse outlook for debt than when the program was approved. Greece's European partners have responded by providing significant additional debt relief up front, and they have also agreed to further debt relief down the road, contingent on Greece meeting the targets for the primary balance in 2013 and 2014.
On the basis of these measures, our projections suggest that debt will fall to 124 percent of GDP by 2020, and substantially below 110 percent of GDP by 2022. But it will require, as I say, these additional measures by Europeans, contingent on Greece adhering to this program.
Overall, Greece continues to make significant progress. The fiscal adjustment, as we have said before, is very, very significant already. Greece will enter a primary surplus sometime this year.
As I said before, the banking system has stabilized significantly. The economy is becoming notably more competitive.
All of this said, there are still very important challenges ahead. A lot needs to be done, not least in the area of structural reforms, where the progress has been uneven since the program was approved, and where the key will be to have a sort of sustained and determined reintegration of structural reforms.
So, let me just leave it here, and take any questions that you might have.
QUESTIONER: So, Poul, I just want to make sure I'm reading this correctly -- it refers to a gap of 5½ to 9½ billion euro remaining for 2015 and 2016, with a promise of financing from the European partners. And my question is this: How can a promise of financing be construed as "financing?" And, therefore, how does this meet the IMF's requirement that programs be financed?
MR. THOMSEN: Well, you're right that there is a gap, according to our preliminary projections for 2015 and 2016 of 9½ billion euros. That's the number you referred to. The IMF's policy is that the program needs to be fully financed and we need concrete assurances for the 12 months ahead. So the undertaking of our European partners to fill the gap, whatever that gap will be in 2015 and 2016, is entirely in line with our policy, even if they are not concrete about it now. But we need a concrete assurance for 12 months, that's standard IMF policy.
QUESTIONER: You said 9½ billion? What is the gap, 5½ billion or 9½ billion? Is it fair to say 9½ billion by 2016, then? Also, regarding debt relief in graph 51, when you suggest a combination of haircuts, etc… is that for post-2020, or does that refer to as early as 2015?
MR. THOMSEN: On the 5½ billion to 9½ billion, that's just an estimated range. I mentioned 9½ billion before; I should have been more precise and said our estimate right now is a range for 2015 and 2016. It's obviously subject to a lot of uncertainty. What matters is that we see there is a gap. Precisely the size of this gap will be estimated as time goes by and we get closer to that point. What is key is that the Europeans know that there is a gap, and whatever the gap is, they'll have to fill it. So you are standing here at the end of 2012, you know. We cannot say for sure what the gap will be in 2015 and 2016.
Now, on the debt, Europe has not said exactly how it's going to provide the additional debt relief. There are various options. It can reduce interest rates on the Greek loan facility. It can provide additional direct transfers to the budget, if it wants. The key here is that Europe, for the first time, has recognized that debt is not sustainable without direct transfers, in one form or the other, from Europe to Greece, and that there is a commitment to provide that. And the targets are that they will provide at the beginning of 2014, based on the outcome of 2013, and at the beginning of 2015, based on the outcome of 2014, whatever is needed at that time, according to our estimates, to bring the debt down to the targets that I mentioned before. So, it's not relief that comes in 2020. It's relief that comes in 2014 and 2015, once we know the outcome of the budget for 2013 and 2014, so as to reach the target for 2020.
QUESTIONER: Understood. And just to follow up on the first part, because I saw there was that table that showed that there's going to be no disbursement under the EU plan for the second half of 2014 because everything has been put forward. Why is the financing gap only for 2015 and 2016? Is there not a financing gap for the second half of 2014, then?
MR. THOMSEN: The program needs to be fully financed for 12 months ahead and it is. It's fully financed well into 2014. Now, whether additional financing will be needed, you know, only from the beginning of 2015, or also towards the end of 2014, is just too early to tell.
QUESTIONER: Under which conditions could the IMF examine and approve a possible new haircut, in order for the Greek debt to become sustainable? And when? After September 2013, for example?
MR. THOMSEN: We have a framework that says that -- as I explained before -- by the beginning of 2014 and beginning of 2015 there will be two tranches of debt relief, with the aim of reaching the two targets that I mentioned before. Now, if the situation is much better than expected, you know, there would be no need for additional measures to reach these targets. If the situation is much worse than expected, there would be a need for more measures than currently estimated to be needed at that time. So we have this framework in place. The Europeans have committed to do whatever it takes to bring debt substantially below 110 percent of GDP by 2022. I think that answers your question.
QUESTIONER: Have you discussed the negative scenario with the Europeans, though?
MR. THOMSEN: It's clearly understood here that the debt sustainability analysis (DSA) that we have now is as we see the world now. As you know, these things will change, can go in either direction, and the Europeans understand that, you know, we cannot say now for sure how much it will take to get to these targets.
QUESTIONER: So you don't consider, at this point, official sector involvement (OSI), an official haircut?
MR. THOMSEN: Look, this word OSI that has crept into the terminology is quite imprecise. We think that there is already OSI there because the Europeans are taking exceptional measures already, like to agree exceptional transfers to Greece, including the transfer of profits from the SMP. That is OSI. There are other different channels for OSI. You can have much lower interest rates. You can have haircuts. You can have direct transfers. They all have, economically, the same impact. So we're already in a world of OSI.
QUESTIONER: I would like to ask about the statement in your summary that "Greece continues to adjust through recessionary rather than productivity-increasing channels." I wonder if you could explain that. I take it to mean that you would have preferred more structural reforms. And, secondly, if you could address the trends in unit-labor costs.
MR. THOMSEN: You're right, on the first part of your question, this relates to the issue of insufficient structural reforms. Greece had, when we started, a deep competitiveness problem, a big gap between the wage level and the productivity level. And if you want to be very simplistic about it, you can deal with that, either by becoming much more productive and boosting productivity, or you can deal with it by lowering wages and becoming less well-off, if you want to put it like that. We all, of course, want to do it through productivity-increasing reforms. Unfortunately, they lacked somewhat, and we have seen that the economy is still adjusting via lower GDP and higher unemployment, putting downward pressure on nominal wages. So the economy is becoming more competitive, but not quite in the way we had hoped that it would be achieved. And this is, of course, why it's very important to reinvigorate structural reforms, so that as we go forward, the continual rebalancing of the economy will lead to higher productivity, output, and employment, rather than continued downward reduction in nominal wages.
Unit-labor costs have started adjusting apace now, and that is a reflection of the lower nominal wages. I think they have declined by about 15 percent. So that's why I said in my introductory remarks, a big part of competitiveness gap has been closed.
It's undoubtedly one of the major successes, that the increased labor market flexibility has enabled this adjustment in wages. But it also points to one of the shortcomings, namely that the reduced wages have not been reflected in lower prices to any noteworthy extent. And that's a reflection of the lack of liberalization in product and service markets. That is clearly a problem.
QUESTIONER: Yesterday the Managing Director said that confidence had returned to Greece. I gather she's probably talking about the Europeans, from the European partners, because there certainly is a lot of uncertainty still. And she also said it would take a year before you really know whether Greece is sticking to its commitments. Do you agree with that assessment? Also, how do you see the way that the authorities are now tackling the so-called issue of the "Lagarde list"? Do you think that further measures should be taken, just generally, on the issue of recouping taxes, and making sure the wealthy are paying?
MR. THOMSEN: On the issue of confidence, there are clearly signs of improvement in confidence. Now, obviously, this is from a low level, from a very impaired level. But look at the very impressive re-flow of deposits -- around 15 billion euros since the bottom was reached last year. This is very impressive. And that speaks better than anybody or anything else to the return of confidence. Also, when we talk to investors we see a renewed interest in Greece. We're by no means saying that we have all the difficult things behind us. We do not. But, you know, there's clearly an improvement in confidence, compared to where we were in the middle of last year.
On the "Lagarde list," I have no comment on that. It has become a domestic political issue and I have no comment on that. But, clearly, on tax administration, as I said in my initial remarks, improvement has disappointed since the approval of the program in 2010. The new government is determined to deal with tax administration, and we welcome that. But so far we have not seen any significant impact on tax collections.
QUESTIONER: I just wanted to get back to this issue of the gap, and I was wondering, Poul, if can you cite other examples where the IMF has pushed ahead, knowing there was a hole and allowing a promise to fill it? I know that you only need to look at a year, but are there other programs where you've pushed ahead even though there was a hole in the finances?
MR. THOMSEN: Yes. Greece, in the past, has been one of them.
QUESTIONER: Well, let's not talk about Greece in the past. Let's talk about other countries.
MR. THOMSEN: Portugal, right now, is another one of them.
QUESTIONER: Okay, can we move outside the euro zone?
MR. THOMSEN: I don't have a list of programs here. This is nothing unusual. In most programs there is an assumption that market access will be restored earlier. And therefore there is an assumption that, as you go through the program -- as in the case of Portugal right now -- they will come back to market. So, the Portugal program, for instance, is fully financed. It's a three-year program. But it assumes that, you know, by the second half of this year, Portugal will return to market. There's no official money available for the whole duration of the program. And that's the case for many programs.
In the case of Greece, because of the very high debt, we do not think that it's realistic that they will go back to the markets before the program is over. So we believe, in this situation, that we have a need for more money from the official sector before the program is over, and there is a commitment to provide that. The Eurogroup has said it will do so if there is no return to market access.
QUESTIONER: Poul, can I suggest that if, in fact, that's the case with most programs, then the answer to my question is, no, you can't find other examples where you push forward with the financing…
MR. THOMSEN: This is not a question I can answer here now without having looked at other programs.
MR. SCHNEIDER: But, typically, the financing is there, because they are returning to market.
MR. THOMSEN: That's correct. The exceptional thing here is that, because of the high debt, the process for returning to market will take some time. And we do not think that they will return to market before the end of 2016. Therefore, more money is, according to our projection, likely to be needed. That's why we only went ahead because we got assurance from the Europeans that they will provide the money.
QUESTIONER: Let's say that Greece does not meet its primary budget targets, and so Europe will not support Greece with new debt-relief measures. Then what? The IMF will leave Greece? We will have a Greek exit from the euro? What's going to happen?
MR. THOMSEN: I am not here to speculate about these scenarios. I'm sure Greece will meet these targets. The fact is that if you look at the fiscal program, Greece has done extremely well in meeting its fiscal targets. That means that as its circumstances have changed, it has taken the necessary additional measures to meet its targets. It appears that it met the targets for last year. We don't have the final data yet. But I'm not going to go into speculations there. I'm confident that Greece will meet these targets.
QUESTIONER: I would like to ask what's the IMF's benchmark when it comes to defining political struggles in Greece that might affect the program again? The report stresses that the program encountered problems because of the election period and the political instability in Greece. Right now the situation seems to have stabilized, but does the IMF have a sort of a definition of political troubles which might again affect the Greek program?
MR. THOMSEN: I am not quite sure that I understand your question. What we were saying is that, you know, political difficulties delayed implementation of the program, and caused a shortfall. There is a government in place that is determined to take the measures needed for Greece to put this program back on track, to take the fundamental reforms needed to be competitive inside the euro zone. And, clearly, if some developments are different from what's expected, the government is committed to take additional measures. I cannot comment on possible political developments in Greece.
MS. GAVIRIA: We need to wrap up here. Thank you and good bye.