The contradiction in the IMF demands
The mission chiefs from the European Commission, the International Monetary Fund, the European Central Bank and the European Stability Mechanism will likely be back in Athens after Monday’s Eurogroup, but the conclusion of the program’s current review may take longer than high-level government officials had hoped for. Greek officials are quick to blame the IMF for demanding more measures than agreed in last summer’s accord, while the IMF kicks the ball into the European lenders’ court by linking reforms with debt relief. From a technical point of view, the IMF may be right but it does not mean it tells the whole truth.
Greek government officials have been critical of the IMF’s stance in the ongoing review of the country’s third bailout program, arguing that it is asking for more measures than agreed last summer. The administration is especially critical of the Fund’s position that sizable pension savings are required to meet the medium-term primary surplus target of 3.5 percent of GDP. It cites the social function of pensions as many families affected by unemployment rely on them.
Bear in mind that in Greece the number of employed individuals amounts to about 3.6 million and the unemployed to some 1.18 million, according to the Hellenic Statistical Authority’s most recent monthly figures. Moreover, the number of pensioners exceeds 2.6 million and rising. In addition to the social cost, political analysts point out that pension cuts are more politically damaging than an increase in social security contributions, which explains why the authorities would prefer the latter, even though it has a detrimental effect on employment.
Poul Thomsen, the director of the IMF’s European Department, recognized on February 11 that pension reforms have a broader social function and it will be painful for those Greeks who have endured exceptional hardship in recent years. “In this regard, the government is right to point out that pensions in Greece have a broader social function. But using pensions in this way is not a durable solution. What is needed – and what the IMF has argued for – is a modern social safety net that is sustainable over the medium term,” he said.
Thomsen outlined the IMF’s position on the subject as follows: “To reach its ambitious medium-term target for the primary surplus of 3.5 percent of GDP, Greece will need to take measures in the order of some 4-5 percent of GDP. We cannot see how Greece can do so without major savings on pensions.” It is noted revenues have to exceed state expenditures excluding interest payments by 0.5 percent of GDP in 2016 and 3.5 percent of GDP from 2018 onward to make debt sustainable according to the targets of the program.
In other words, a lot depends on the primary surplus target. If the target is lowered well below 3.5 percent of GDP, Greece has to take fewer austerity measures. However, this would also necessitate more debt relief to make the country’s debt sustainable. It is estimated that around 68 percent of Greek debt was owed to official lenders, i.e. European countries, the ESM and the IMF, at the end of 2015.
The IMF has stated it does not want “Greece to implement draconian fiscal adjustment in an already severely depressed economy,” meaning it is in favor of lowering the fiscal target well below 3.5 percent of GDP. But the IMF does not want its loans to Greece to be restructured so the onus of the adjustment falls on the shoulders of the European lenders.
The latter have reason to be hesitant as some countries are poorer than Greece while others have to run relatively high primary surpluses to keep their public debt dynamics under control. So the Greek debt relief is a politically complicated affair. This in turn explains why the eurozone countries favor reprofiling the Greek debt, meaning long maturities, long grace periods and low interest rates, over a haircut.
In our opinion, the IMF is right to favor a smaller primary budget target and debt relief although it is a bit hypocritical to exempt its loans from any form of restructuring. However, we would also expect the Fund to come out and explicitly state that even the most generous reprofiling of the Greek debt – i.e. no interest payments made on the bilateral loans of 52.9 billion euros from eurozone countries ? will not have a material impact on the country’s annual gross financing needs until 2022.
So, this kind of debt relief, reprofiling, does not justify much lower primary surplus targets. The benefits of a typical reprofiling will accrue in the medium term according to analysts. Remember that the weighted average maturity of the debt is already long at 16.5 years and the average interest rate is very small as if Greece was rated AA. By contrast, subjecting the Greek debt to a large haircut, which seems politically impossible at this point, could have made it possible to lower the fiscal target significantly.
All in all, the IMF is correct in pointing out that fewer austerity measures are associated with a much lower primary surplus target, which in turn requires debt relief. However, one would also expect the Fund to publicly admit that making the present value of Greece’s debt even smaller relatively to its face value via reprofiling does not justify a sustainable medium-term primary surplus to the tune of 1.5-2 percent of GDP until 2022, assuming debt sustainability is still the objective.
[Kathimerini English Edition]
