The International Monetary Fund (IMF) on Tuesday released an update on the Greek government’s debt sustainability. It’s not pretty from the Greek perspective, and it’s a brutal swipe at the bailout deal the country just agreed to.
The IMF isn’t meant to lend money to any countries without strict agreements on how to make their debt profiles sustainable. Most countries do that, in part, through devaluing their currencies. But because Greece is part of a currency union that uses the euro, it can’t do this.
Here’s the most important part of the IMF analysis:
Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics.
In effect, things were already pretty bad, but the last six months, and especially the closure of banks in the last month, have made things much worse.
The report also makes three major changes to its views of Greek debt:
- Debt will peak at about 200% of GDP in the next two years, not 177%, as it thought last year. The IMF says that level “is already behind us.”
- Debt will also fall more slowly. By 2022, the IMF wanted it down to 142% of GDP, but they now expect it to fall to just 170%.
- Previously the IMF had expected Greece to spend less than 15% of its GDP on debt servicing, judging this to be sustainable but “highly vulnerable.” Now, that’s out of the window, and payments would be much higher.
It’s a pretty brutal assessment of Greece’s debt situation, and concludes with a call for Europe to do more:
The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date — and what has been proposed by the ESM.
The update effectively pans the bailout that Greece just negotiated with its European creditors, which offers no debt relief at all until the country is judged by a review to have successfully completed the first part of its austerity and reform programme.
Success in that programme may be completely unachievable. For starters, the privatisation programme Greece now has to put in place, which aims to raise €50 billion ($US55.83 billion, £35.97 billion), is incredibly optimistic. Without income from privatisation, it will have to find more money to make debt repayments. If it can’t find it, it will have to ask for another bailout programme, and take on further debts. You can see where this is going.
But there’s one part of the IMF argument that’s completely unfair — the idea that Greece’s debts have become unsustainable only in the last year.
It’s fair to blame the new government for a lot of things — they may have derailed the country’s modest recovery, negotiated poorly over the last six months and have been at least partly responsible for the seizing-up of the banking system.
But it’s totally ludicrous to pretend that the debt became unsustainable in the last half a year.
Check out the chart to the right from Oxford Economics — those are the constant revisions to Greek forecasts for nominal GDP (the measure of the economy most crucial to debt sustainability).
Greece’s has been constantly revised downwards, something that was clearly happening long before the current government came to power. In that sense it’s not too much debt but too much recession and not enough growth that’s causing the country’s debt to be unsustainable.
And drastically overestimating Greece’s growth potential is something the IMF is as guilty of as anyone else.