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. Economists 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.
