In Athens, Greek prime minister, George Papandreou announced a targeted program to cut spending, boost revenues, and modernize the economy (photo: Zuma/Newscom)
Staff-level agreement
Negotiators over the weekend wrapped up details of the package, involving budget cuts, a freeze in wages and pensions for three years, and tax increases to address Greece's fiscal and debt problems, along with deep reforms designed to strengthen Greece’s competitiveness and revive stalled economic growth.
In Athens, Greek prime minister, George Papandreou, announced the unprecedented deal, meant to shore up Greek finances with decisive upfront measures and prevent a crisis of confidence from undermining the Greek economy and spreading to other members of the eurozone and elsewhere. The measures, representing a break from the past, aim to bring Greece’s public finances under control and modernize the Greek economy.
In a joint statement, European Union Economic and Monetary Affairs Commissioner Olli Rehn and IMF Managing Director Dominique Strauss-Kahn said they recognized the sacrifices that will have to be made by the Greek people, but they were necessary to rebuild the Greek economy.
“We believe that the program is the right thing to do to put the economy back on track. Importantly, the authorities have also designed their program with fairness in mind," they added.
Improving the business climate
In a separate statement, Strauss-Kahn said that though the initial implementation period would be difficult. “we are confident that the economy will emerge more dynamic and robust from this crisis—and able to deliver the growth, jobs, and prosperity that the country needs for the future.”
Steps by the government include strengthening income and labor market policies; better managing and investing in state enterprises, and improving the business environment.
Reforms to fight waste and corruption—eliminating non-transparent procurement practices, for example, are also being undertaken, along with measures to clamp down on tax evasion and step up prosecution of the worst offenders.
Subject to reviews
The eurozone will contribute roughly two-thirds of the total financial assistance and the 186-member IMF one-third. The IMF Executive Board is expected to review the package, agreed at mission level, under its fast-track procedures. It is expected to go to the Board for approval within the week.
IMF support will be provided under a three-year €30 billion (about $40 billion) Stand-By Arrangement (SBA)—the IMF’s standard lending instrument. In addition, euro area members have pledged a total of €80 billion (about $105 billion) in bilateral loans to support Greece’s effort to get its economy back on track. Implementation of the program will be monitored by the IMF through quarterly reviews.
Greece’s defining moment
“This is a defining moment for Greece,” said Poul Thomsen, who heads the IMF negotiating mission to Athens. “The global economic crisis exposed Greece’s weak fiscal position. Revenues have declined significantly, while spending, especially on wages and entitlements has risen sharply.
“What the government has committed to is a tough, front-loaded program that will correct things for the future, although it will take time. Indeed, it will be a multi-year effort,” Thomsen explained. “The authorities have already begun fiscal consolidation equivalent to 5 percent of GDP and further legislative action is expected this week. There is also an emphasis on fairness, with measures to protect the most vulnerable. The authorities are asking the Greek people to share the burden fairly across all levels of society,” he added.
With Greece’s deteriorating fiscal position came downgrades of government bonds by rating agencies, putting pressure on financial agencies. Investors started backing out of Greek bonds, driving up their yields. Policymakers also feared a potential spread of the crisis to other eurozone countries. The IMF’s “focused conditionality” aims to tackle the twin issues of debt and competitiveness.
Twin challenges
Greece faces a dual challenge. It has a severe fiscal problem with deficits and public debt that are too high; and it has a competitiveness problem. Both need to be addressed for Greece to be placed on a path of recovery and growth.
First, the government’s finances must be sustainable. That requires reducing the fiscal deficit and placing the debt-to-GDP ratio on a downward trajectory. Since wages and social benefits constitute 75 percent of total (non-interest) public spending, public wage and pension bills—which have grown dramatically in recent years—have to be reduced. There is hardly any other room for maneuver in terms of fiscal consolidation.
Second, the economy needs to be more competitive. This means pro-growth policies and reforms to modernize the economy and open up opportunities for all. It also means that costs must be controlled and inflation reduced so that Greece can regain price competitiveness.
Rigorous fiscal adjustment
With the budget deficit at 13.6 percent of GDP and public debt at 115 percent in 2009, adjustment is a matter of extreme urgency to avoid the debt spiraling further out of control. Accordingly, the Greek government plans to implement rigorous fiscal measures, far-reaching structural policies, and financial sector reforms. Key elements of the reform package are:
• Fiscal policies. Fiscal consolidation—on top of adjustment already under way—will total 11 percent of GDP over three years, with the adjustment designed to get the general government deficit under the 3 percent level by 2014 (compared with 13.6 percent in 2009).
• Government spending. Spending measures will yield savings of 5 ¼ percent of GDP through 2013. Pensions and wages will be reduced and frozen for three years, with payment of Christmas, Easter, and summer bonuses workers abolished, but with protection for the lowest-paid.
• Government revenues. Revenues measures will yield 4 percent of GDP through 2013 by raising value-added tax, and taxes on luxury items, and tobacco and alcohol, among other items.
• Revenue administration and expenditure control. The Greek government will strengthen its tax collection and raise contributions from those who have not carried a fair share of the tax burden. It will safeguard revenue from the largest tax payers. It will also strengthen budget controls. The total revenue gains and expenditure savings from these structural reforms are expected to gradually total 1.8 percent of GDP during the program period.
• Financial stability. A Financial Stability Fund, funded from the external financing package, is being set up to ensure a sound level of bank equity.
• Entitlement programs. Government entitlement programs will be curtailed; selected social security benefits will be cut while maintaining benefits for the most vulnerable.
• Pension reform. Comprehensive pension reform is proposed, including by curtailing provisions for early retirement.
• Structural policies. Government to modernize public administration, strengthen labor markets and income policies, improve the business environment, and divest state enterprises.
• Military spending. The plan envisages a significant reduction in military expenditure during the period.
“The fiscal adjustment is large,” said Thomsen, “but given the starting point, where there is significant space to trim expenditure and spread the tax burden, the measures are feasible and hence we see them as being durable. The alternative would be much worse for the Greek people and the Greek leaders know that.”
Comments on this article should be sent to imfsurvey@imf.org
