Greece is caught in a six-year recession which austerity critics say has been exacerbated by successive pay and pension cuts imposed at the behest of its EU-IMF creditors.
Last week the IMF published a review of the financial assistance given to Greece during its debt crisis. One of the key limitations identified in the report was that debt relief for the country was provided far later than it should have been. The second Greek rescue programme was undoubtedly late, it was also insufficient: amounting to a write-down of only around 33 percent of Greece's debt to GDP ratio. As a result Greece is likely to need a third rescue programme.
The IMF formulated the report largely as self-criticism, but the other two members of the troika, the European Commission and the European Central Bank (ECB), were not amused. The ECB rejected the critique with the calm air of the untouchable while the Commission, senior partner in the Greek rescue programme, reacted quite angrily.
There is a crucial paragraph in the IMF report (p.33) that sums up what went wrong: ‘Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output. The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook.
Under the first programme (2010-2011), the debt-to-GDP ratio ballooned by more than 40 per cent. Yet, the primary budget deficit contributed only 7 per cent to this 40 per cent rise. This was due to a dramatic turnaround in the fiscal situation: the IMF report notes that the ambitious conditionality on fiscal adjustment was pretty much the only thing that was slightly over-fulfilled by the Greek authorities at the time. The explosion of the debt ratio was the result of a collapsing economy, ie the denominator of the ratio declined, and high real interest rates since prices and wages dropped significantly.
The second rescue programme then conceded for the first time that sovereign debt had to be written down. By March 2012, private bondholders were cajoled into accepting haircuts that would bring down the Greek debt ratio to a sustainable level.
But contrary to the impression that the widely published figure of a ’70 per cent haircut’ created, the Greek government got much less debt relief. This was because the major private bondholders that had to write down their claims against the Greek government were Greek banks. But since the Greek banks became insolvent when they had to write down their holdings by such a high percentage, they had to be recapitalised. They were recapitalised out of the funds the government received under the second programme. So while the public debt that Greek banks held was written down, some of it came back on the Greek government’s books as debt to the EU and the IMF, with which the government had acquired shares in ailing domestic banks.
From the point of view of the Greek government, the second programme amounted largely to a swap of creditors, not to debt relief: the IMF and the European emergency fund replaced domestic banks. Greece will need a third programme because the second was not merely late, but also insufficient: the effective debt write-down was a rather smallish 33 per cent of Greece’s debt-to-GDP ratio and largely borne by Greek bondholders.
This reflects on tough austerity measures on official sector. That's why Athens has pledged to cut 4,000 state-sector jobs this year and another 11,000 in 2014 to keep drawing rescue loans under the EU-IMF package.
The rescue programme will have to live up to its name and not be a merely symbolic gesture that gives a completely distorted image of the Greek adjustment effort, the amount of debt relief granted and the distribution of the losses.
By Guylain Gustave Moke
Photo-Credit: AFP Greek Journalists' Protest photo