“Sorry the failed policies we forced on you shrunk your GDP by 27% and gutted your economy. Now please run a budget surplus.”

July 2, 2015


For the first time the IMF has said in public that Greek debt is unsustainable and needs to be restructured. At the same time leaked background documents detailing the most recent offer from the Troika (the one the Greeks are putting to a referendum) also explicitly accepts that debt restructuring is needed.

The IMF acceptance of the need for restructuring comes in a report entitles Greece: Preliminary Draft Debt Sustainability Analysis. The executive summary of the report reads as follows:

“At the last review in May 2014, Greece’s public debt was assessed to be getting back on a path toward sustainability, though it remained highly vulnerable to shocks. By late summer 2014, with interest rates having declined further, it appeared that no further debt relief would have been needed under the November 2012 framework, if the program were to have been implemented as agreed. But significant changes in policies since then—not least, lower primary surpluses and a weak reform effort that will weigh on growth and privatization—are leading to substantial new financing needs. Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable. This conclusion holds whether one examines the stock of debt under the November 2012 framework or switches the focus to debt servicing or gross financing needs. To ensure that debt is sustainable with high probability, Greek policies will need to come back on track but also, at a minimum, the maturities of existing European loans will need to be extended significantly while new European financing to meet financing needs over the coming years will need to be provided on similar concessional terms. But if the package of reforms under consideration is weakened further—in particular, through a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary.”

Meanwhile the German newspaper Süddeutsche Zeitung has obtained a pack of six documents that were part of the full set of materials that comprise the “final” proposal sent to Greece by its creditors last Friday, the pack included a report entitled “Preliminary Debt Sustainability Analysis for Greece” clearly based on the IMF report and which contained various debt projections. The Süddeutsche Zeitung got hold of the documents because they they were sent to all German MPs with the expectation that the deal the Troika was offering would be accepted by the Greeks and would thus need to be approved by Germany’s parliament.

The report on debt sustainability shows that Greece would face an unsustainable level of debt by 2030 even if it signs up to the full package of tax and spending reforms demanded of it, and that even the Troika accepts that Greece’s needs substantial debt relief for a lasting economic recovery. They show that, even after 15 years of sustained strong growth, the country would face a level of debt that the International Monetary Fund deems unsustainable.

The documents show that the IMF’s baseline estimate – the most likely outcome – is that Greece’s debt would still be 118% of GDP in 2030, even if it signs up to the package of tax and spending reforms demanded. That is well above the 110% the IMF regards as sustainable given Greece’s debt profile, a level set in 2012. The country’s debt level is currently 175% and likely to go higher because of its recent slide back into recession.

The documents admit that under the baseline scenario “significant concessions” are necessary to improve Greece’s chances of ridding itself permanently of its debt financing woes. Even under the best case scenario, which includes growth of 4% a year for the next five years, Greece’s debt levels will drop to only 124%, by 2022. Of course without a drastic change of policy such growth rates are ludicrously unrealistic. The reports best case scenario also anticipates €15bn (£10bn) in proceeds from privatisations, five times the estimate in the most likely scenario.

Under all the scenarios laid out in the reports, which all assume a third bailout programme, Greece has no chance of meeting the target of reducing its debt to “well below 110% of GDP by 2022”, a target set by the Eurogroup of finance ministers in November 2012.

In the creditors own words: “It is clear that the policy slippages and uncertainties of the last months have made the achievement of the 2012 targets impossible under any scenario”.

While the analysis underlines the fact that Greece has already benefited from a number of debt reducing measures, for example maturities have been extended, interest payments are similar to those of less indebted nations and the PSI in 2012 cut debt by about €100bn – the document also admits that under the baseline scenario “significant concessions” would improve sustainability.

But despite the lenders’ admission that Greece cannot thrive without debt relief the documents provide no clarity about what such a package might look like, nor does it provide any detail of a third bailout programme despite assuming one would exist. They promise only a more detailed debt sustainability analysis in due course.

There are two powerful forces preventing any sensible acceptance of a coherent debt restructuring program by the Troika. One is that up until now all the members of the the Troika, the EU, the IMF and the ECB, have resolutely refused to accept that there was anything substantially wrong with the program imposed on Greece, even though every single projection made at all stages of the program since 2010 has proved wildly inaccurate and over optimistic. The Troika program has produced results so different, and so much worse, than projected that it must count as one of the most spectacular failures in modern economic policy.

IMF Greek GDP Projections

 IMF ForecastActual Outcome
2010-4.0-4.9
2011-2.6-7.1
20121.1-7.0
20132.1-4.2

IMF Greek Unemployment Projections (%)

 IMF ForecastActual Outcome
201011.812.6
201114.617.7
201214.824.3
201314.327.3

The second reason the Troika refuses to discuss the details or timetable of the inevitable debt restructuring is because the entire political narrative from the Troika, and across the political leadership of the eurozone, has been that you cannot trust the Greeks and that Greece must be punished for letting the side down, the refusal to accept debt restructuring is seen as a necessary enforcement mechanism because without restructuring the Greeks have to keep coming back for fresh bail out funds and therefore they will remain under the authority of the Troika.

The documents also reveals that the much hyped €35bn investment package that several governments, including Germany’s, have this week pointed out was offered to Greece last week is actually a cheap conjuring trick, intended to look generous in the media but that actually delivers almost nothing.

The second document in the pack of six, titled “Reforms for the Completion of the Current Programme and Beyond”, show there was much less to this offer than suggested by commission president Jean-Claude Juncker and Germany’s vice-chancellor Sigmar Gabriel. The cash on offer is not an ad hoc investment but is actually an EU grant that is regularly available to all member states. And, as Süddeutsche Zeitung points out, accessing the cash requires a 15% co-financing contribution from Greece’s, which it cannot afford. Because of this inability to meet co-financing requirements, Greece already has unspent sums from its €38bn 2007-2013 pot of available EU grants.

A third document outlines the “financing needs and draft disbursement schedule linked to the completion of the fifth review”, spelling out how Greece would have received €15bn to meet its obligations until the end of November. The cash would have been handed over in five tranches starting in June (as soon as the Greek parliament approved the proposals) to cover Greece’s financing needs. However, 93% of the funds would have gone straight to cover the cost of maturing debt for the duration of the extension.

The remaining documents in the bundle obtained by Süddeutsche Zeitung includes details of what was demanded of the Greeks in order to extend their unsustainable debt/bail out program

The core demand was that Greece achieve a primary budget surplus target of 1%, 2%, 3%, and 3.5% of GDP in 2015, 2016, 2017 and 2018 respectively (both sides agree on these targets – an indicator of how far Syriza has compromised). The surplus was to be built upon VAT changes producing additional revenue of 1% of GDP and a reform of the pension system that leads to savings of 1% of GDP in 2016. On VAT reforms, the proposal suggests broadening the tax base at a standard rate of 23%, and would include restaurants, and catering. There will be a reduced rate of 13% to cover a limited set of goods, that includes energy, basic foods, hotels and water (excluding sewage). There was also to be a super-reduced rate of 6% on pharmaceuticals, books and theatres, an increase on tax on insurance and the elimination of tax exemptions on certain islands. The creditors had originally wanted only a two-tier VAT system.

In terms of pensions, which have been the stickiest point in the negotiations, the plan demands reforms to create strong disincentives to early retirement, including changes to early retirement penalties, adopt legislation so that withdrawals from the social insurance fund will incur an annual penalty, for those affected by the extension of the retirement age period, equivalent to 10% on top of the current penalty of 6%, and ensure that all supplementary pension funds are only financed by own contributions. The plan included the gradual phase out the solidarity grant (EKAS) for all pensioners by end-December 2019 and freeze monthly guaranteed contributory pension limits in nominal terms until 2021. It was also demanded and increase the relatively low health contributions for pensioners from 4% to 6% on average and extend it to supplementary pensions.

On Monday Juncker insisted – incorrectly – that these measures did not amount to a cut in pensions. However, the creditors were correct in saying that they had compromised and the plans had some flexibility. They also suggested that Greece could provide alternative proposals as long as they are “sufficiently concrete and quantifiable”.

As far as I can see the Greek government have made very significant concessions and accepted far more austerity than the platform the were elected on, but the key and essential missing component, without which the whole thing is just a meaningless exercise, is debt restructuring.

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