Greece’s thriving tourism industry has been hurt by the debt crisis and recent demonstrations (photo: Zuma/Newscom)
Greece program
"Today's strong action by the IMF to support Greece will contribute to the broad international effort under way to help bring stability to the euro area and secure recovery in the global economy," said IMF Managing Director Dominique Strauss-Kahn.
“It sends an important and clear signal that the international community is willing to do whatever it takes to support Greece,” John Lipsky, First Deputy Managing Director, who chaired the meeting of the IMF’s Executive Board, said.
The program approved by the IMF’s Board makes about €5.5 billion immediately available to Greece from the Fund as part of joint financing with the European Union, for a combined €20.0 billion in immediate financial support. In 2010, total IMF financing will amount to about €10 billion and will be partnered with about €30.0 billion committed by the EU. The joint financing means that Greece will not have to tap international financial markets until 2012, Lipsky said, providing a breathing space for Greece to get its economy back on track.
“Today, the IMF has demonstrated its commitment to doing what it can to help Greece and its people,” Strauss-Kahn said. “The road ahead will be difficult, but the government has designed a credible program that is economically well-balanced, socially well-balanced—with protection for the most vulnerable groups—and achievable. Implementation is now the key.”
The IMF’s Executive Board met to approve the front-loaded package, under which enabling parliamentary measures have been approved up-front and financial support is fast-tracked, as European finance ministers worked in Brussels on measures to prevent fallout from the Greek crisis spreading to other parts of the European Union, and vowed to defend the euro.
Exceptional access
The Stand-By Arrangement, which is part of a joint package of financing with the European Union amounting to €110 billion (about $145 billion) over three years, entails exceptional access to IMF resources, amounting to more than 3,200 percent of Greece’s quota, and was approved under the Fund's Emergency Financing Mechanism procedures.
“The Greek government should be commended for committing to an historic course of action that will give this proud nation a chance of rising above its current troubles and securing a better future for the Greek people,” Strauss-Kahn stated.
“Together with our partners in the European Union, we are providing an unprecedented level of support to help Greece in this effort and—over time—to help restore growth, jobs, and higher living standards.”
Addressing the crisis
The Greek government, which secured parliamentary approval for its program last week, has designed an ambitious policy package to address the economic crisis facing the nation. 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 need to 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 government expenditure, this means that the public wage and pension bills 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 inflation be reduced below the euro area average, including by keeping wages and labor costs flat, so that Greece can regain price competitiveness.
Why not restructure debt?
Asked why Greece should not opt for restructuring its debt, Lipsky said debt restructuring would create more problems than it could potentially solve, with a default making things much worse.
• Restructuring debt would not help Greece’s capacity to grow. The type of fiscal and structural reforms being put in place under the Government’s program are designed to do that – to bring down costs, to make the labor market more flexible and to improve the business and investment climate.
• The web of economic and political inter-linkages—including that Greek bonds are held by a wide variety of private investors and public entities—severely complicates alternatives to the program the government has put in place. Any perceived positive near term effects of a debt restructuring need to be weighed against contagion effects.
• Most of the adjustment in Greece is needed to eliminate its large primary deficit (the deficit net of interest payments). This is the main issue for Greece, not the level of the debt.
But prudent debt management is part of the government’s strategy and it is updating its tools to ensure that risk is adequately managed.
Questions about conditions
Asked by reporters if the Greece Stand-By Arrangement marked a return by the IMF to earlier times of a “laundry list” of conditions attached to loans, Lipsky said that these were well targeted conditions that would help correct the imbalances in the Greek economy.
• The program is focused on Greece's two key problems: high debt and a lack of competitiveness. Conditionality is very much focused on these issues.
• The Greek authorities have strong ownership and leadership and it is their program.
• The program includes measures to protect the most vulnerable, which are a critical component to effective implementation.
Financial stability and recovery
In addition the program aims to safeguard Greece’s financial sector stability. As the banking system goes through a period of deflation, which is expected to impact profitability and bank balance sheets, the safety net for dealing with solvency pressures will be expanded by establishing a Financial Stability Fund (FSF).
Real GDP growth is expected to contract sharply in 2010–2011, and recover thereafter with unemployment peaking at nearly 15 percent of GDP by 2012. The frontloaded fiscal adjustment in 2010-11 will suppress domestic demand in the short run; but from 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms, are expected to lead to a rebound in growth. Despite the difficulty in implementing the measures, two recent opinion polls show majority support for the government’s program, which is designed with fairness in mind.
Inflation is expected to remain below the euro average. The needed adjustment in prices is expected to come from domestic demand tightening, both through fiscal adjustment and efforts to moderate public wages and pensions, and other costs in the economy. Due to their demonstration effects, private sector wages are also expected to moderate. This will help restore price competitiveness.
Comments on this article should be sent to imfsurvey@imf.org
