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Greece: Past Critiques and the Path Forward

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All eyes are on Greece, as the parties involved continue to strive for a lasting deal, spurring vigorous debate and some sharp criticisms, including of the IMF.

In this context, I thought some reflections on the main critiques could help clarify some key points of contention as well as shine a light on a possible way forward.

The main critiques, as I see them, fall under the following four categories:

Critique 1: The 2010 program only served to raise debt and demanded excessive fiscal adjustment.

Critique 2: The financing given to Greece was used to repay foreign banks

Critique 3: Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression

Critique 4: Creditors have learned nothing and keep repeating the same mistakes

A Path Forward 

  1. Given the results of the referendum, and the mandate given to the Greek government, we believe that there may still be room for an agreement. It should be based on a set of policies close to those discussed before the referendum, amended to take into account that the government is now requesting a 3-year program, and a more explicit recognition of the need for more financing and more debt relief.
  1. Fundamentally, the Euro area faces a political choice: lower reforms and fiscal targets for Greece means a higher cost for the creditor countries. The role of the Fund in this context is not to recommend a particular decision, but to indicate the tradeoff between less fiscal adjustment and fewer structural reforms on the one hand, and the need for more financing and debt relief on the other.
  1. The room for agreement is extremely narrow, and time is of the essence. There should be no doubt that exit from the Euro would be extremely costly for Greece and its creditors. The introduction of a new currency, and of redenomination of contracts, raises extremely complex legal and technical issues, and is likely to be associated with a further large decline in output.  It may take a long time for the depreciation of the new currency to lead to a substantial turnaround.

In sum, we still believe there is a path forward. The Fund is committed to helping Greece through this period of economic turmoil. Given Greece’s failure to make a repayment due to the IMF on June 30, the Fund would be unable to provide any financing until the arrears are cleared. However, we have offered to provide technical assistance, where requested, and we remain fully engaged.