Nomura’s chief economist Richard Koo lays into Europe and the IMF over their treatment of Greece in a note sent to clients late on Tuesday.
Koo says that the EU “refuses to acknowledge mistakes made,” “refused to accept responsibility for this collapse in [Greek economic] output,” and says the both the IMF and EU’s negotiating position was based on “highly unrealistic” assumptions.
That’s the killer phrase — “highly unrealistic”.
Koo says that only now is the IMF “slowly beginning to understand [the] Greek economy” after the recent publication of documents admitting Greece’s debt burden is unsustainable.
Slowly beginning to understand! After years of negotiations and a bailout deal massively in favour of creditors! That’s a damning assessment.
The “highly unrealistic” assumption Greece’s creditors made is this:
In particular, the IMF argues that “if the program had been implemented as assumed, no further debt relief would have been needed under the agreed November 2012 framework.”
This is essentially the EU argument that delays in implementing structural reforms were one of the causes of the difficulties Greece faces today. However, this argument is based on the highly unrealistic assumption that structural reforms can give a quick boost to GDP growth.
Greece’s creditors blame Greece for its worsening recession, saying that if they’d have deregulated, taxed, and privatised as they’d agreed back in 2012, everything would have been rosy.
That’s rubbish, says Koo. He points to Reaganomics as evidence that structural reforms aren’t a quick fix, saying the benefits of deregulation in the US under Reagan weren’t felt in the economy until Bill Clinton was President.
The EU and the IMF should be shouldering part of the blame for Greece 25% collapse in GDP over 5 years. The austerity measures forced on the country crippled an already weakened economy.
But, as Koo says, the Eurogroup “refused to accept responsibility” and has ploughed with plans for more austerity and massive privatisation regardless.
These measures are making their way through Greece’s Parliament on Wednesday. But Koo says even if the bailout is approved, which is far from certain, it “resolves none of the fundamental problems facing the effectively bankrupt nation of Greece.”
He says: “Agreement without debt waivers or growth forecasts is not a real solution.” Until Greece begins growing again, which isn’t possible without a freeze on debt repayments, then it will simply be a zombie nation existing solely to repay debts and will likely need another bailout further down the line.
That’s what the IMF is getting at when it says Greece’s debt burden is unsustainable. It’s also now saying that Greece could need huge amounts more than creditors have assumed and there are concerns about whether the IMF will even get involved in another bailout given that its own rules prevent it lending to countries with unsustainable debt.
All of these are understandable skeletons in the closet if, like Koo, you believe negotiations have been “highly unrealistic” since the start.