Greece: Past Critiques and the Path Forward
IMF Blog, July 10, 2015
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Bibliographic details
- Authors: Olivier Blanchard
- Published: July 10, 2015
Overview
- All eyes are on Greece as parties strive for a lasting deal; vigorous debate includes sharp criticisms of the IMF.
- The main critiques addressed fall into four categories: (1) the 2010 program raised debt and demanded excessive fiscal adjustment; (2) financing was used to repay foreign banks; (3) growth-killing structural reforms plus fiscal austerity caused an economic depression; (4) creditors have learned nothing and keep repeating mistakes.
- The Fund believes a balanced solution must combine adjustment, financing, and debt relief.
Critique 1 — The 2010 program raised debt and demanded excessive fiscal adjustment
- Greece’s debt before the 2010 program: 300 billion euros, or 130% of GDP.
- The deficit before the program: 36 billion euros, or 15½ % of GDP.
- Debt was increasing at 12% a year, which was unsustainable.
- Gross financing needs were 20–25 % of GDP; without external support Greece would have been unable to borrow and would have needed immediate large deficit cuts.
- Primary deficit at start of program was over 10% of GDP; even full default would have required a sudden primary adjustment of 10% of GDP.
- The programs allowed Greece to take over 5 years to achieve a primary balance, reducing immediate social cost compared with abrupt unilateral adjustment.
- Slower fiscal adjustment ("Less fiscal austerity") would have required more financing and more debt restructuring; political limits constrained how much official creditors could ask their own citizens to contribute.
Critique 2 — Financing was used to repay foreign banks
- Debt restructuring was delayed by two years due to perceived contagion risks and lack of firewalls.
- As a result, an important fraction of funds in the first program were used to pay short-term creditors and to replace private debt with official debt.
- One-third of the debt was held by Greek banks and other Greek financial institutions, so bail-out funds also benefited Greek depositors and households.
- 2012 private sector involvement (PSI) operation:
- Led to a haircut of more than 50% on about €200 billion of privately held debt.
- Resulted in a decrease in debt of over €100 billion.
- Concrete reduction cited as 10,000 euros per Greek citizen.
- Shift from private to official creditors came with below market rates and long maturities.
- Cash interest payments on Greek debt "last year" amounted to 6 billion euros (3.2% of GDP), compared to 12 billion euros in 2009.
- Interest payments by Greece were lower, as a proportion of GDP, than interest payments by Portugal, Ireland, or Italy.
Critique 3 — Structural reforms and fiscal austerity caused a depression
- Pre-program productivity growth in Greece was dismal; structural reforms were seen as necessary (tax administration, barriers to entry in professions, pensions, collective bargaining, judicial system).
- Many reforms were either not implemented or not implemented on sufficient scale:
- Efforts to improve tax collection and the payment culture "failed completely."
- Fierce resistance to opening closed sectors and professions.
- Only 5 of 12 planned IMF reviews under the current program were completed; only one review completed since mid-2013 due to failure to implement reforms.
- Output decline was larger than forecast because multipliers were larger than initially assumed.
- Fiscal consolidation explains only a fraction of output decline; other contributing factors: output above potential initially, political crises, inconsistent policies, insufficient reforms, Grexit fears, low business confidence, weak banks.
Critique 4 — Creditors have learned nothing and keep repeating mistakes
- The election of a 2015 government openly opposed to the program decreased ownership and required revisiting the program in policies and financing.
- Arithmetically, a more limited set of structural reforms or a slower fiscal adjustment implies larger financing needs and therefore more need for debt relief.
- If European creditors forgave all existing debt and extended more financing, little additional adjustment would be needed, but there are political limits to what creditors can ask their citizens to contribute.
- The Fund’s role was to ask for specific credible adjustments and make explicit the financing and debt relief implications.
- The Fund insisted a small primary surplus, increasing over time, was necessary for debt sustainability and that achieving it required VAT reform and pension reform; these views coincided with European partners.
- Prior to the referendum, the Fund believed debt sustainability could be achieved through rescheduling existing debt and long maturities for new debt under the primary surplus assumptions; this was reflected in the preliminary debt sustainability analysis (DSA).
- The Fund had communicated the need for debt relief to European partners before publishing the DSA and believed current developments might imply the need for even more financing (including support for banks) and more debt relief than in the DSA.
A path forward — agreement possibilities, tradeoffs, and IMF engagement
- Given the referendum results and the government mandate, there may still be room for an agreement based on policies close to those discussed before the referendum, amended for:
- The government's request for a 3-year program.
- A more explicit recognition of the need for more financing and more debt relief.
- Fundamental Euro-area political choice: lower reforms and fiscal targets for Greece implies a higher cost for creditor countries.
- The Fund’s role is to indicate the tradeoff between less fiscal adjustment/fewer structural reforms and the need for more financing and debt relief, not to recommend a particular political decision.
- The room for agreement is extremely narrow and time-sensitive.
- Exit from the Euro would be extremely costly for Greece and its creditors:
- Introduction of a new currency and redenomination of contracts raises complex legal and technical issues.
- Likely associated with a further large decline in output.
- Depreciation of a new currency may take a long time to lead to a substantial turnaround.
- The Fund remains committed to helping Greece through economic turmoil but, given Greece’s failure to make a repayment due to the IMF on June 30, the Fund would be unable to provide any financing until the arrears are cleared.
- The Fund has offered to provide technical assistance where requested and remains fully engaged.
Olivier Blanchard, "Greece: Past Critiques and the Path Forward", July 10, 2015.
Content in this bundle
- 希腊：过去的批评和未来的道路; iMFdirect博客: 2015年7月10日
- Griechenland: Kritikpunkte der Vergangenheit und der Weg in die Zukunft
- ギリシャ： 批判を超えて過去を未来に進める: オリビエ・ブランシャール iMFdirect ブログ 2015年7月10日掲載
- Ελλάδα: Κριτικές του Παρελθόντος και ο Δρόμος προς τα Εμπρος
- Grecia: Le critiche del passato e le loro verifiche a venire
- Grécia: Críticas passadas e o caminho a seguir; Olivier Blanchard -- 9 de julho de 2015
- Греция: прошлые критические замечания и дальнейшие перспективы; Оливье Бланшар; 9 июля 2015 года