It is almost eight years since the Greek debt crisis began. Now, with Greek GDP 25% lower than at the start of the crisis and nearly one quarter of the work force unemployed, the European creditor countries have once again failed to reschedule the debt in a way that would be sustainable and allow Greece to have the prospect of growing again. The IMF argues that the debt is ‘highly unsustainable’ and has tried to use its bargaining power to achieve a sensible resolution in the latest negotiations, but the eventual compromise was that Greece would be given enough support by the Europeans to meet its debt repayments next month, while a rescheduling decision would be deferred. This is bad news for Greece, but also says something about the governance of the IMF, unable to impose sensible economics when opposed by a block of powerful member-countries with their own agenda.
The nub of contention is seemingly trifling. The Europeans believe that Greece can attain 1.25% growth on average in the longer term, while achieving a primary budget surplus (the budget balance not counting interest payments) of nearly 3% of GDP. The Fund thinks a primary surplus of 1.5% is all that can reasonably be expected, and tougher budgets would put the growth forecast - already overly optimistic - out of reach.
This might seem to be a trivial difference, especially as forecasts are so uncertain. But there is a fundamental difference of mindset. The IMF argues that Greece has already reduced its budget deficit by more than 10% of GDP and its current account deficit by 15% of GDP. There is only so much that can be achieved within the political constraints: to push too hard will stifle growth and put debt sustainability even further out of reach. The Europeans (led by Germany) note that the reform task is incomplete: the pension system deficit is still 10% of GDP and tax arrears are 70% of GDP. They want to keep Greek ‘feet to the fire’ to maintain pressure for reform, with the ultimate threat being forced departure from the euro. The tough strategy has left Greece with no recovery in prospect, its banks weighed down by unrepayable loans, and no possibility of foreign borrowing until old debt is clearly resolved.
The Greek rescue has been a debacle from the start. The debt burden should have been resolved back in 2010 (which would have meant very substantial rescheduling, with big, ‘haircut’ losses for private creditors). The European governments, anxious to protect their own banks which had foolishly over-lent to profligate Greek governments, essentially took over most of the private-sector debt in 2012, without requiring sufficient ‘haircuts’ to put the debt within Greece’s capacity to repay. Thus, despite spreading the debt over more than 30 years and reducing interest rates, it is still unsustainable. For their part, the spendthrift Greeks got themselves into such deep trouble that it will take a generation of austerity to reform their tax and pension systems, and meanwhile many of the most dynamic elements in the economy will depart the country, seeking their fortunes elsewhere.
The current deal has left everyone unsatisfied: all agree this is not the best solution. Europe has managed to get its way, with no further rescheduling. The Fund is still participating (as the Europeans demand), but will not release any more funds until a debt rescheduling is reached. Another vexed negotiation lies ahead.
There is a reminder, here, of the Fund’s governance challenges. There is a good argument that the rescue of a euro-member should have been left to the euro-countries. The Fund, pressured by its European members and the then-Managing Director - Frenchman Dominique Strauss-Kahn - was shanghaied into participating in the rescue and now can’t withdraw, even though it disagrees fundamentally with the crisis-recovery strategy. Its contribution is relatively small: €13 billion so far, compared with the EU’s €226 billion. But the IMF is supposed to represent all its members, not just do what the Europeans want.
In a broader context, it is also a reminder of the failure of the international governance system to produce a satisfactory procedure for international bankruptcy. Domestic bankruptcy processes allow a debtor to move forward again after resolution. Even in the simplest case of international debt – that of sovereign debt – self-serving creditor pressures have prevented sensible procedures from being developed.
The sad history of this Greek debt crisis was covered in an insightful CIGI paper by Paul Blustein. He will be talking at the Lowy Institute on the evening of 4July, on the twentieth anniversary of the Asian crisis (he wrote the definitive book on the IMF’s role in the crisis – The Chastening), covering in particular the IMF’s role in debt crises over recent decades