Greece: A Credible Deal Will Require Difficult Decisions By All Sides
IMF Blog, June 14, 2015
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- Authors: Olivier Blanchard
- Published: June 14, 2015
Negotiation context and core question
- Negotiations are between Greece and its official creditors: the European Commission, the ECB and the IMF.
- Core question: How much of an adjustment must be made by Greece, and how much by its official creditors?
- 2012 program arrangement: Greece was to generate enough of a primary surplus to limit its indebtedness, implement reforms to raise growth, and in consideration European creditors were to provide needed financing and provide debt relief if debt exceeded 120% by the end of the decade.
Original and revised primary surplus targets
- Original program targets: primary surplus of 3% in 2015, and 4.5% next year.
- These targets have become unattainable and "the target clearly must be decreased."
- Offer made to the Greek government proposed:
- Lowering the medium term primary budget surplus target from 4.5% of GDP to 3.5%.
- Giving Greece two more years to achieve that target—so the target for this year was reduced to 1%.
- Asking for a more limited set of reforms.
Tradeoffs between fiscal adjustment, financing, and debt relief
- A lower primary surplus target implies:
- Less painful fiscal and economic adjustment for Greece.
- A need for more external official financing.
- A commitment to more debt relief from European creditor countries.
- Limits exist both on what Greece can do and what official creditors can provide given taxpayers to consider.
Reform requirements and fiscal composition
- The IMF view: the lower new target cannot be credibly achieved without:
- A comprehensive reform of the value-added tax (VAT) involving a widening of its base.
- A further adjustment of pensions.
- Fiscal structure and required adjustment:
- Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.
- Pension expenditures account for over 16% of GDP.
- Transfers from the budget to the pension system are close to 10% of GDP.
- A reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and can be done while protecting the poorest pensioners.
- Alternatives for designing VAT and pension reforms are acceptable only if they "add up and deliver the required fiscal adjustment."
Debt relief modalities and conditionality
- Under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates.
- Any further decrease in the primary surplus target, now or later, would probably require haircuts.
- For a deal to be effective and credible:
- Greek government must offer truly credible measures to reach the lower target budget surplus and show commitment to the more limited set of reforms.
- European creditors must agree to significant additional financing and to debt relief sufficient to maintain debt sustainability.
Bottom line
- Both sides face tough choices and commitments: Greece needs credible fiscal measures and reforms; creditors need to provide financing and debt relief within their political constraints.
- The IMF view expressed: "We hope that agreement can be achieved along these lines."
Greece: A Credible Deal Will Require Difficult Decisions By All Sides — Olivier Blanchard, June 14, 2015.
Content in this bundle
- 希腊：为达成可信的解决方案，所有各方都必须做出困难的决定; iMFdirect博客; 2015年6月14日
- Ελλάδα: Μια Αξιόπιστη Συμφωνία Θα Απαιτήσει Δύσκολες Αποφάσεις από όλα τα Μέρη
- Grecia: Un acuerdo creíble exigirá decisiones difíciles de ambas partes; Por Olivier Blanchard