Friday, April 28, 2017

Greece on Collision Course With Creditors

Greece is in the familiar position of needing more money. It must come up with about 7 billion euros ($7.5 billion) in July 2017 for debt payments on loans from three previous bailouts. If it defaults on these payments, it will be out of the European Union.

Since the three previous bailouts have failed to provide Greece with a sustainable economy, there is great reluctance by the previous creditors to provide a fourth bailout. These creditors include the International Monetary Fund, the European Central Bank, and various European countries

Currently operating under the third bailout, which runs into 2018, Greece was expecting to receive enough of that remaining bailout money to meet its obligations for the July payments. However, the trio of inspectors who periodically review Greece's performance, found that performance unsatisfactory, which halted the payments to Greece. The IMF has taken the position that it will not participate in any further funding for Greece until there are economic reforms, particularly regarding pensions, labor laws, and broadening the tax base, that will allow Greece to reduce its debt to sustainable levels. The IMF's analysis concludes Greece's debt-to-GPD ratio, currently 179 %, is “highly unsustainable” and without the economic restructuring it recommends, that ratio will balloon to 275 % by 2060. By comparison, the European Union requires its nations to have a debt-to-gross domestic product ratio of no more than 60 percent. Economist generally consider the limit of sustainable debt to be around 80 percent.

In 2016 a paper by the European Stability Mechanism, which manages the bailout program, proposed to ease Greece's debt load by extending some maturities and locking interest rates on some loans as protection against interest rate hikes. Even so, an official ESM paper projects Greece's debt-to-GDP will be 104.9 % percent in 2060, assuming Greece fully implements the IMF-recommended reform measures —probably an extravagant expectation given its performance under previous bailouts. After 43 years Greece will still not have a sustainable economy.

Germany, by far the largest economy in the EU, was the largest contributor to the three prior Greece bailouts. But Germany has stated it will not provide further funds to Greece unless the IMF also agrees to resume lending to Greece. Moreover, Germany and the Netherlands have promised their parliaments that they won't ask for more money for Greece unless the IMF participates, too.
In 2015 Greece pledged to achieve a primary surplus of 3.5 % of GDP—before debt payments—in 2018 and for an unspecified number of years in the future, but the current track for Greece is for a primary surplus of just 1.5 % . Moreover, the IMF believes a primary surplus of 3.5% is wholly implausible. Few countries have ever managed such a feat—and none with such a weak political system as Greece.

Because the enormous size of Greece's debt is such an obstacle to achieving sustainability, it has been suggested that the nation needs to have some debt reduction from its creditors. That is even more unlikely than another bailout. In 2012, private investors “voluntarily” accepted losses on Greek bonds that wiped 107 billion euros off the country's debt. The public sector followed with a reduction of the economic value of the loans. No country in the world has ever received greater debt reduction, but  Greece still faces a debt problem.

Greece has had many of these crises but has always managed to survive by somehow pulling a rabbit out of a hat. Compromises were made, terms were adjusted, political leaders were changed, and when all else seemed to fail, another bailout arrived in the nick of time. But now there is little room for any of the participants to maneuver. The IMF rules state it cannot make loans to countries whose economies are unsustainable or unlikely to attain sustainability in a reasonable period. So, after proclaiming Greece's debt is “highly unsustainable” and getting worse, how can it justify another IMF loan to it? Moreover, having put its name on two failed programs, it is leery of further damaging its institutional credibility by doing so again.

Chancellor Merkel's promise not to participate in further help to Greece unless the IMF is also on board is welcomed by the German people, who are strongly against having their tax money going to Greece. In addition, Merkel has recently announced she will run for a fourth term in the forthcoming September election. So she is not about to join, much less lead the charge, to save Greece. Meanwhile, it is questionable whether the Greek government—or any Greek government—will have the political will and public support for accepting the demands of the IMF for reforms that will mean further years of even more harsh austerity for the people. The country's “fiscal and structural reforms...pension reforms, tax reforms, are only a down payment,” said the IMF's Poul Thomsen recently. He said restoring the country's pre-crisis levels of unemployment and income levels will require “deep structural reforms, many of which are not on the books yet.” The unemployment rate is currently 22 percent.

Will Greece avoid disaster one more time by somehow pulling one more rabbit out of a hat? It seems unlikely, but we shall know fairly soon.