Tweak­ing re­cap cov­er­age will cut debt

Ir­ri­tat­ing or not, the IMF’S crit­i­cism of the first bailout pro­gram has spurred the eu­ro­zone into ac­tion

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS The IMF’s as­sess­ment of the first Greek bailout pro­gram is cor­rect over­all and the self-crit­i­cism it has ex­er­cised should be wel­come. In a num­ber of as­pects, it agrees with part of the crit­i­cism di­rected at the de­sign of the orig­i­nal plan over the past few years. But the main goal of the as­sess­ment ap­pears to be to high­light the im­por­tance of mak­ing the Greek pub­lic debt sus­tain­able as soon as pos­si­ble. The ball is ob­vi­ously in the eu­ro­zone’s court but there are no signs it is will­ing to score.

Do­minique Strauss-Kahn, the for­mer man­ag­ing di­rec­tor of the In­ter­na­tional Mone­tary Fund (IMF), was right when he re­port­edly told Greek of­fi­cials back in May 2010 that the coun­try’s best course of ac­tion would be to re­struc­ture its pub­lic debt, es­sen­tially to de­fault. Nev­er­the­less, the then so­cial­ist govern­ment un­der Prime Min­is­ter Ge­orge Pa­pan­dreou had nei­ther the guts nor a plan to fol­low his ad­vice in the face of strong ob­jec­tions from Ger­many and France.

The two core coun­tries of the eu­ro­zone knew that some of their banks would have ended up with a big cap­i­tal gap be­cause of the large hold­ings of Greek govern­ment bonds (GGBs) and they also feared cre­at­ing havoc in in­ter­na­tional fi­nan­cial mar­kets if they agreed to a Greek debt re­struc­tur­ing at the time.

It is re­minded that Greece signed the first Me­moran­dum of Un­der­stand­ing ( MoU) with the Euro­pean Com­mis­sion, the IMF and the Euro­pean Cen­tral Bank in May 2010, hav­ing been shut out of the mar­kets af­ter the rel­e­vant Greek au­thor­i­ties had mis­han­dled the seven- year

Ge­orge Pa­pan­dreou with Ger­man Chan­cel­lor An­gela Merkel. Pa­pan­dreou had nei­ther the guts nor a plan to fol­low the IMF’s ad­vice for a debt re­struc­tur­ing in the face of ob­jec­tions from Ger­many and France. bond is­sue a month ear­lier.

There is no doubt that the first ad­just­ment pro­gram failed in many re­spects. The econ­omy shrank by 4.9 per­cent in real terms in 2010, 7.1 per­cent in 2011 and 6 per­cent in 2012 com­pared to the plan’s forecasts for a de­cline of the real gross do­mes­tic prod­uct (GDP) by 4 per­cent in 2010, 2.6 per­cent in 2011 and real growth of 1.1 per­cent in 2013 and 2.2 per­cent in 2012 .

What’s more, the un­em­ploy­ment rate was sup­posed to peak at 14.8 per­cent in 2012 from 7.7 per­cent in 2008, but in­stead rose close to 27 per­cent ac­cord­ing to the most re­cent data.

Of course, no­body wants to fa­ther a failed pro­gram, es­pe­cially if they have fi­nanced it. There­fore, it comes as no sur­prise that Ger­man and other Euro­pean Union of­fi­cials blame the fail­ure of the pro­gram on the in­suf­fi­cient im­ple­men­ta­tion of struc­tural re- forms by the Greeks. On the other side, crit­ics of the pro­gram largely blame ex­ces­sive aus­ter­ity, which helped in­crease re­sis­tance to re­forms as well.

Al­though the in­suf­fi­cient im­ple­men­ta­tion of re­forms has played some part in the pro­gram’s fail­ure, it is the over­dose of aus­ter­ity in a largely closed econ­omy along with a de­vel­op­ing credit crunch that caused the most dam­age in this coun­try.

First-quar­ter fig­ures for 2013 show­ing sin­gle digit growth in Greek mer­chan­dise ex­ports de­spite a sharp de­crease in unit la- bor costs – a yard­stick for in­ter­na­tional com­pet­i­tive­ness – in the last cou­ple of years ap­pear to vin­di­cate the sec­ond school of thought. This is be­cause struc­tural re­forms usu­ally yield fruit in the medium-to-long term, af­ter in­flict­ing costs and pain in the short term.

Un­doubt­edly, the IMF’s em­pha­sis on ren­der­ing the Greek debt sus­tain­able is jus­ti­fied since this will open the way for the state to re­turn to bor­row­ing in in­ter­na­tional mar­kets at rea­son­able in­ter­est rates, boost eco­nomic sen­ti­ment, prop up in­vest­ment spend­ing and lay the foun­da­tions for growth. How­ever, this is a call that will be made by those who pay, namely the eu­ro­zone and es­pe­cially Ger­many. It is def­i­nitely not an easy de­ci­sion.

Ger­man op­po­si­tion

Ger­man govern­ment of­fi­cials ap­pear to be op­posed to a hair­cut on the prin­ci­pal of the Greek Loan Fa­cil­ity (GLF), amount­ing to more than 52 bil­lion eu­ros, but one has to wait for the out­come of the Ger­man elec­tions in the fall be­fore draw­ing any con­clu­sions.

Eu­ro­zone lead­ers could help avert a hair­cut and still cut sov­er­eign debt suf­fi­ciently by al­low­ing or at least leav­ing the door open for the Euro­pean Sta­bil­ity Mech­a­nism (ESM) to re­cap­i­tal­ize banks retroac­tively in the next sum­mit in June. In this case, Greece could see its debt get slashed by up to 30-35 bil­lion eu­ros, or more than 15 per­cent­age points of GDP in the fu­ture.

This way, eu­ro­zone mem­ber states could make good on the de­ci­sion that they adopted last Novem­ber to take steps in 2014 and 2015 to bring the Greek debt to a level sub­stan­tially be­low 110 per­cent of GDP by 2022. It is gen­er­ally as­sumed that fur­ther in­ter­est cuts in the GLF and Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity (EFSF) loans could drive the debt ra­tio down to 124 per­cent in 2020, but many think it would take prin­ci­pal hair­cuts on the GLF to go well be­low 110 per­cent by 2022.

Al­low­ing the re­cap­i­tal­iza­tion of eu­ro­zone banks by the ESM retroac­tively makes that pos­si­ble, with­out re­sort­ing to prin­ci­pal loan hair­cuts or play­ing around with struc­tural funds ear­marked for Greece.

If the IMF’s in­ten­tion was to re­fo­cus the de­bate on the sus­tain­abil­ity of the Greek debt by re­fer­ring to the short­com­ings of the first Greek ad­just­ment pro­gram, it has cer­tainly been suc­cess­ful de­spite ir­ri­tat­ing the EU and the Ger­mans in par­tic­u­lar. Whether it can lead to a so­lu­tion where com­mon sense rules over the cred­i­tors’ be­lief that debtors must suf­fer for their sins is some­thing that re­mains to be seen.

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