Transcript of a Conference Call on Greece Article IV Consultation

June 5, 2013

With IMF Mission Chief Poul Thomsen
Washington, D.C.
Wednesday, June 5, 2013

MS. GAVIRIA: Thank you. I'm Ángela Gaviria, with the Communications Department of the IMF. This is the conference call on the publication of the IMF staff reports on the third review of the Extended Fund Facility and the 2013 Article IV consultation with Greece. Also published with this is the Ex-Post Evaluation of the 2010 Stand-By Arrangement with Greece. That refers to the previous arrangement with Greece; not the current one.

I also wanted to note that Ex-Post Evaluations are conducted in the IMF for all member countries using exceptional access to Fund resources since 2003.

And Poul Thomsen, Mission Chief for Greece, is on the line. Poul, do you want to start with a few remarks?

MR. THOMSEN: Well, yes. As you know, this was probably a one-off review that was concluded as one of the fastest, if not the fastest. I think that speaks to what has been a significantly improved record of policy implementation. And this is noteworthy in this regard: that we have a fiscal program for 2013 that is very ambitious, and continues a very ambitious adjustment; and it’s also ambitious in that it's focused mostly—and appropriately—on the [inaudible] side—what entails some very difficult but necessary cuts.

The new government came in from the difficult position that it needed to continue with fiscal adjustment, but too much of the adjustment had been focused on the tax side, on the revenue side, so it needs to refocus on the expenditure side. And it has done so, and it's implementing this program as agreed. This fiscal program is on track.

With the review, there was some shortfall on fiscal structure reform—notably on tax administration, and the government has taken some measures to catch up. These measures were implemented as a prior action before the Board meeting.

So, overall, I think that it's good news that we are able to, fairly quickly, bring this review to the Board. And, as you know, we're starting a new review, actually, this week. So, I'm going to just stop it there.

MS. GAVIRIA: Thank you, Poul. We're ready for questions now.

QUESTIONER: Is it true that the IMF admits mistakes on the Greek bailout? And, as you know, I'm talking about the Ex-Post Evaluation of exceptional access under the 2010 Stand-By Arrangement—if you could comment, please.

MR. THOMSEN: Sure. There is in this bundle of papers, there is a discussion of the past and, in the context of the Article IV Consultatio, a full report. And secondly, as you mentioned, this Ex-Post Evaluation that, as Ángela mentioned, we do for all countries.

And, sure, in reviewing what we have done the whole time, there are certainly things we could have done differently. We already had that debate six months ago on these multipliers and that if we should do it again, we would not use the same multipliers. We use estimated multipliers.

I think all our programs are going to be too low in the current environment, and we are usually, looking forward, to a more conservative environment.

The two issues that were raised by the EPE was on the debt restructuring—the so-called PSI issue. Could one have had it differently from the beginning? The EPE concludes no. If we were in the same situation, with the same information at that time, we would probably do the same again.

But, at the same time, it's also clear that, from the time when growth started to underperform—about a year into the program, in 2011—it became clear that some sort of debt restructuring would be needed. And from that time on, it took a year or so for it to happen, and the Board expressed the view that it would have been desirable if it had happened earlier in 2011. And so that's one point.

A second point is that the report says, as we all agree on now also, that growth assumptions were too optimistic for a number of reasons, including as the report said, that because of sort of the limited administrative capacities of Greece, these were ambitious assumptions.

The Article IV report also makes the point that Greece has been in sort of continued political turmoil since the beginning of 2011, and, clearly, that has not been consistent with the implementation of reforms at a pace that we had assumed.

So, what really is important is looking forward: how is this being internalized? As you know, we now have a framework on the table for reducing Greece's debt. We have a commitment on part of the Europeans to provide additional debt relief, if needed to keep the debt on the path in the program. This will kick in, starting in the beginning of next year, assuming that Greece's program stays on track.

So, I do think that the program has certainly internalized some of the lessons.

Secondly, on growth, we still assume that there will be a recovery, and the recovery is driven by an improvement in sentiments, as reforms take hold. I think that's natural. I think it's a correct assumption, but I think we are more conservative than we were before about what can be expected from the recovery. So, we certainly realize it will take longer for Greece to catch up on the growth side.

So, I think on both these two key issues that I pointed to, I think that it's always a question of adjustment. But I think these points are well-taken, and, I think, looking forward, the program has already internalized that.

QUESTIONER: I just wanted you to clarify the thing about the debt relief, because this notion that investors' confidence may not be restored, and there could be the need for debt relief, frontloaded. And I'm always uncomfortable with the notion of frontloaded. Do you mean earlier? Do you mean just earlier? Could you clarify that?

MR. THOMSEN: Okay. So, what we have on the table right now is a framework that says that under the program, debt will come down to 124 percent by 2020. And I think the wording is “substantially”—well below 110 percent by 2022.

And there is a commitment of European partners that, if anything happens and we don't reach this path, according to our projections, they will provide more debt relief. That's a framework that is on the table.

But it's a conditional framework: that debt relief will be provided by the beginning of 2014 and beginning of 2015, based on the outcome for the primary balance in 2013 and '14. That's the framework.

So, we're saying that clearly, debt under this framework will still remain, admittedly, quite high. But most of it will be held by the public sector. That's one thing.

Also, it is [inaudible] on the balance sheets of the Greek banks. That's quite unique. Greek banks do not always [inaudible] some T-bills, but have always been performing; and do not hold Greek government papers.

And so it's difficult to see the channels through which all this debt—even if debt is high, how it's going to affect the private sector.

So, we hope that with all the debt being mostly on the public balance sheet, and with the public sector saying, "We'll take care of it. We'll provide more debt relief if [inaudible] is weaker, or if debt, for some reason, is higher, we'll provide more debt relief". We hope that this is a framework that will convince the private sector that private investors need not be concerned about the debt, because there is a framework to take care of it.

Now if, for some reason, we find out, as we go down the road, that investors are still concerned about debt, that the debt is weighing on investment, then we, of course, have to reconsider the framework. But we are quite optimistic that this framework is adequate. And, indeed, when I talk to investors, we are clearly in a situation where sentiment indicators of Greece are recovering faster than expected. Deposit reflow is very significant. There have been some upgrades.

We should, of course, not get ahead of ourselves; it's still an early sign of improvement and confidence. But when I talk to investors, the high debt in itself is not so much a concern, as far as I can see right now. So, it is really a question of continued commitment to policies on the part of Greece, but the people are concerned about [inaudible], and I think good implementation is also going to be good for sentiment.

But what we're saying is a debt framework is on the table. Let's see how it works. There's some good reason why it should work. If not, well, we'll have to reconsider.

QUESTIONER: Thanks for taking my question. I think you answered most of it already, but I guess I was just curious about what this means for the way you consider other programs in the future. You say you would have still helped Greece; you might have just have slightly different assumptions.

But in terms of working in programs where there's lack of this political support, where the official data may not be completely accurate, what does that mean for how you approach it? Would you refuse programs that are like that in the future, or how do you deal with that?

MR. THOMSEN: I think one needs to sort of look at it on a case-by-case basis, right? It's difficult to assess, what is a similar situation?

I mean, clearly, given what we know today, as we go forward, I think it's fair enough to say that we should have had earlier debt reduction in Greece. But it's also fair to say that if we had the same lack of information—and, at that time we were still looking at what was a fairly local problem in Greece—and possibly there's some contagion into some other countries in the periphery, but the crisis did not have this more comprehensive nature that it's developed later in 2011 and 2012.

So, I don't know. What I'm saying is that it's not clear we will not take the same situation again, under the same circumstances.

QUESTIONER: Could you please define what will be the fiscal gap for the period 2015/2016? And who is going to fill this gap? It will be the Europeans and the Greek government?

MR. THOMSEN: Well, Greece has undertaken to reduce the primary deficit to 4½ percent. And as we go and look at this now—actually not during this mission, but in the mission in September, at the time where we also do the 2014 budget—we're going to ask ourselves two questions: Are the gaps closed for 2013 and 2014? When we last looked at it, yes, the gaps were closed for 2013 and 2014. And what about 2015 and 2016? At the time, there was still a small gap for 2015 and 2016, which we hope could be filled through a number of structural reforms and modernization in the public sector.

But we're going to be looking at that. It is too early and I certainly hope that there is no gap for 2013 and 2014. If there is any gap for 2015 and 2016 relative to 4½, then Greeks would have to take additional measures—if there is any gap.

Now what these measures will consist of—hopefully, one can avoid these across-the-board [inaudible] that we have been looking at. I think we all want to avoid that. Hopefully, we can achieve that through the more targeted reforms in the public sector—efficiency savings, et cetera.

QUESTIONER: Thank you for taking my question. So, with respect to the fiscal multiplier, how is it possible that the IMF seems to be so off in calculating this one number? Like, how did you guys get it so wrong? And do you think that maybe the fiscal multiplier is not that useful a tool here?

MR. THOMSEN: Well, you know, this is a good question. It's also easily become a very technical question.

If you go out today, and you ask yourself, whatever went wrong—all the things that negatively affected output? If you put that into a denominator, and you put the change in the fiscal position, in the denominator, you're going to get a very big multiplier.

But clearly, a lot of those things that went wrong should not go in the denominator, because they have nothing to do with fiscal policy. This was a political crisis in Greece that slowed the reform that Greece [inaudible] on part of investors. That caused deposit offload, credit problems, and you know the story.

The same about that: the Europeans were slowly coming up with a comprehensive crisis response. Some of the Europeans questioned Greece's membership of the euro. So, that obviously affected the expectations and sentiment in a negative way and also affected output.

Now if you take all of this negative, and put it into the denominator, you get a very big multiplier. But that has very little to do with the fiscal multiplier.

So, yes, we would today assume a bigger multiplier, but nothing compared to some of these studies that are coming out that are making exaggerated calculation of the multiplier.

We would, instead of using a multiplier from 0.5 to 0.7 like we did at that time, depending on what complement or expenditure of revenue we're talking about, we would be looking at a multiplier of about one. And that's indeed what is in the program now, and that's what we include in other programs also.

It's not that dramatic a difference, but it is a realization that fiscal policy is having more of a negative impact in the current environment.

As I said, the multipliers at that time were actually multipliers that were in line with OECD estimates at the time. And we compared our own estimate, and they were very much in line with estimates by other institutions and in the academic literature at that time.

QUESTIONER: Yes. Going back to the former program, can I ask if—and it's to your credit that you accept there were some mistakes made from the IMF side—do you feel the Europeans made some mistakes? Did they maybe push for too-high interest rates, or, as you said, the fact that debt reduction was not on the table?

I would assume it was made because of them, since the IMF usually takes that path. I mean, is there—not blame; I don't know if that's the right word—but let me use it—blame to go around all over? I mean, you accepted some mistakes; the multipliers, plus the others, should the Europeans go to a similar analysis, or how do you feel about that?

MR. THOMSEN: I'm sure the Europeans would come to more of the same conclusion as we did. The fact is, when you deal with programs like that, it would be strange if there were not things that you had to change, and you had followed the program—I think most of you have followed the program, and we reviewed since.

I mean, we are constantly changing, as circumstances change, and circumstances evolve. And one thing I know for sure is that we will continue to have to change, right? We learn as we go along, and we always build into it the best experience or the best knowledge we have from doing this in the past, but things change, and this crisis had been a particularly deep and comprehensive and difficult one.

So, it's not surprising that those programs have been subject to major changes as we go along—all of our programs. I don't think it's useful to say who was guilty of what. There is a debate inside the Troika, as we go along. The three institutions have three different mandates, have three different perspectives, have three different sets of concerns. So, I think one needs to keep that in mind.

QUESTIONER: Yes, Mr. Thomsen, I'd like to ask you, what has been the impact of the Cyprus settlement on Greek finance and economic activity? And what are you seeing right now, in terms of unit labor cost trends and in price trends in Greece?

MR. THOMSEN: Okay, good questions. On Cyprus, even though the economies are, of course, closely linked—these two economies, the Cypriote economy is, typically, closed. So for a small economy, we are estimating that, as a worst case, impact through the trade channel is something like 0.2, 0.3 percent on GDP. It's not a lot. It's clearly not a lot. Cyprus is just too small to have more of an impact to the trade channel.

Through the financial channels, since Greece is not borrowing in the market right now, the main impact is really through the deposits. And as I hope you know, we have had, since the end of last year, a significant reflow of deposits. We saw some small reversal or some reversal of that during the Cyprus discussions, and the first week after Cyprus, but the reflow has now resumed.

So, there was a temporary negative impact to this financial channel, but that has also dissipated by now.

So, we really don't expect much of an impact. And, as you know from reading the report, we are keeping the same macro assumptions that we had at the end of the last year. Actually, GDP, for the first three months, I believe, in the three or four months, came out slightly better than expected. But nothing that warrants us changing the framework.

So, that was on Cyprus. Your other question was?

QUESTIONER: Unit labor cost and prices.

MR. THOMSEN: Yes, unit labor cost and prices. Unit labor cost has come down significantly, as a result of the labor market reforms that were put in place at the beginning of 2012. This reform has clearly produced more flexibility, and allowed wages at enterprise level to be much more closely aligned with productivity.

And as we say in the report, the reduction in Greek unit labor cost and the reduction in the narrowing of the competitiveness gap is now pretty fast—something like half to 2/3 of the gap that we saw when we started has now been closed.

The problem has been that, once we have seen good labor market reforms, and a move to a more competitive Greece in terms of wages, that this has not yet been reflected in a major reduction in prices. Reflecting the fact that labor market reforms have been strong, reforms of the product and service markets have clearly been lacking. These are still markets that are too close, not sufficiently contested. Even though we are in the sixth year of recession, prices have not come down significantly.

I would say that there are good signs that we see now in the last couple of quarters. We are clearly seeing a tendency to negative inflation. Core prices are coming down, but still not in line with what one would have hoped for in this kind of decline in wages.

And this is a key issue, because, clearly, it's going to be a problem [inaudible] if these undoubtedly significant sacrifices are being made by [inaudible] are not being reflected in lower prices [inaudible].

This is clearly one of the areas where Greece has to do better.

QUESTIONER: The report indicates that the Troika didn't function very well in Greece. Since the Troika is still heading for bailouts planned in Europe, do you think that the days of the Troika are numbered? Thank you very much.

MR. THOMSEN: I don't see that at all. The report does not say that the Troika did not function very well. I think the report said that the Troika actually functioned surprisingly well, and the report says it could probably do better if there was more division of labor between the institutions. That is one of the points that the report makes.

But I think the view of everybody involved is--of the ones who have been on the inside, is that given that these are three institutions that have not had a history of working in that way together, it worked surprisingly well, but that doesn't mean it cannot work better. But I do not at all think that the report said that the Troika did not work well—not at all.

QUESTIONER: In the last report, you accused directly Syriza Party that its political views will drive Greece out of the Eurozone. Now you didn't make any strong criticism against them or other parties which are against the program. What changed since then?

MR. THOMSEN: You are making it up. You're just making it up. There's no accusation against specific political parties in the previous paper. There's nothing. There was a statement that said that there was political opposition to the memorandum; there was no mentioning of Syriza. This is made up.

MS. GAVIRIA: Is there anything you would like to add, Poul, at this time?

MR. THOMSEN: No, that's it.

MS. GAVIRIA: Okay, very good. Well, thank you, everybody. Thank you all for participating. Thank you, Poul. Goodbye.


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