Views & Commentaries

Published in Ethnos, June 15, 2014

According to your report, Greece will need more money in the next few years. You also talk about the need for Greece to meet its needs. On the contrary, the Prime Minister calls for correction of the injustices against the people. Where will Greece find the money that you say it needs?

We currently estimate the financing needs through the end of the program in March 2016 to be about €30 billion, of which €18 billion can be covered through funds already committed by the IMF and Greece’s European partners. The remaining financing gap is about €12½ billion, which could be covered from a number of sources, including market financing. Thus, it is not clear yet whether Greece will need new money from its European partners.

Which scenario “scares” you the most in terms of political and economic developments in Greece?

The key challenge is to continue implementing structural reforms that are essential to achieving strong, sustained, and balanced growth over the medium term.

The Prime Minister and the new finance minister talk about the need to reduce taxation and ease austerity measures. There are rumors around that they have already decided “no more measures, enough is enough.” What's your response? And what is going to happen if the Troika asks for measures and Greece refuses to take them?

We have just completed a review, and I am confident that the government will meet the commitments that they have undertaken in this regard. After all, the government’s determination is demonstrated through its performance on the fiscal targets, which has been exceptional by any international comparison.

As for measures, we support the authorities’ desire to avoid across-the-board cuts in wages and pensions. But this is also why it is important to press ahead with structural reforms to modernize Greece’s fiscal institutions, such as strengthening tax administration, where progress continues to lag, so that everyone pays their fair share of taxes. Only with progress in these areas will it be possible to avoid further painful expenditure cuts.

You said that there is ground for cautious optimism. The people of Greece see only “darkness.” Can you tell us when you see Greece coming out of this crisis?

We expect growth to turn positive this year, after six years of recession. In fact, the numbers for the first quarter of 2014 showed the smallest quarterly decline in output in a long time, and confidence indicators are pointing to improvements.

Ireland and Portugal have emerged from their austerity programs. Spain is doing better. Why is it that Greece, four years after the introduction of the program, still sees no light at the end of the tunnel? What went wrong?

Problems in Greece were deeper to start with. We must also remember that political turmoil in 2011–12—in particular the lack of broad political support—raised doubts about Greece’s place in the euro zone, damaged confidence, and severely worsened the adjustment pains. With the coming into office of a broader coalition government, and determined implementation of policies, fears of “Grexit” have been taken off the table. And, as I have just explained, economic conditions are beginning to turn around. I do not agree that there is no light at the end of the long tunnel.

A week ago Ms. Lagarde and you, met in Paris with Mr. Stournaras and Mr. Papastavrou. According to them, you discussed debt relief. Is it true that you discussed starting talks for the restructuring of the debt or a haircut?

We discussed a number of key issues lying ahead, including debt. There were no detailed discussions of the debt issues. Debt issues are likely to be discussed in detail in the coming months.

Some people in Greece believe that the Troika didn’t do anything to fight unemployment and help growth. They also say that the “medicine” given, doesn’t work. What is your response to that argument?

The program has, from the outset, been rich on structural reforms to raise output and restore jobs. However, progress has been uneven in this area, in part because political turmoil and lack of broad support in 2011–12 setback progress, until the coalition was able to come together and pursue reforms, as I have just mentioned.

Path-breaking labor market reforms were implemented in 2012 that have helped wages to adjust in line with productivity. However, product prices have not declined commensurately with wages, and Greece remains relatively uncompetitive. As a result, export performance continues to be quite weak when compared with similar euro area countries, and this is hindering a faster return to growth and job creation. This highlights the importance of timely implementation of structural reforms, such as to liberalize product and service markets, transform investment licensing, and remove remaining excessive restrictions in the labor markets.

You talk constantly about the commitment of Europeans regarding the financing needs of Greece and Greek debt relief. If Europeans do not show the determination needed or the courage to take bold decisions, like last time, what is the IMF planning to do?

We are confident that the European partners will deliver on their commitments.

Do you believe that Greece's debt is now sustainable or do you believe that the situation needs new and drastic interventions? Are European commitments to contribute to debt relief enough for the IMF? What could the potential tools for debt relief be?

The agreed framework is credible, provided that Greece and its European partners deliver on their promises. For Greece, this means continuing to advance reforms and achieving and maintaining a fiscal primary surplus of 4.5 percent of GDP. For the European partners, this means providing additional debt relief, if required, to keep debt on the programmed path. Thus, if adhered to, the framework will make the debt sustainable. 

What should be done to deal with the high level of non-performing loans?

Let me be clear that there is no acute stability risk in the banking sector. But the large nonperforming loans, if not dealt with upfront, will force banks to deleverage and starve the economy of credit. It is essential for a sustained recovery to avoid a prolonged deleveraging. Therefore, unless nonperforming loans start coming down swiftly, the regulators should take more aggressive action to force banks to provision against such loans.