Greece’s Creditors Should Follow The IMF Report

Created on Monday, 13 July 2015 09:41 Published Date

Parent Category: Economics, Geopolitics & Geography - Category: Economics

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By Constance Baroudos, Junior Scholar, Strategy International.

The European Central Bank (ECB), European Union (EU), and the International Monetary Fund (IMF) make up the troika that manages bailout programs for countries in danger of default within the Eurozone. If a member of the troika objects to a way for a country to pay off its debt it should be taken seriously. The ECB and EU should pay special attention to the report released by the IMF last week that identified suggestions for the future of Greece’s economic struggles to reach agreement on a bailout package this Sunday to avoid a “Grexit.”

Greece’s debt total is about 185 percent of its gross domestic product (GDP). The IMF report deemed Greece’s debt burden unsustainable without some relief, in agreement with the Syriza Greek political party in power. Some of the IMF recommendations include an extended grace period for 20 years for Greece until its economy can get back on its feet and a haircut on the total debt owed by Athens.  Such bold recommendations should not be a surprise — even if Greece’s economy were to grow by its historical one percent per year, Athens’ debt ratio to GDP would still be over 100 percent in 30 years even though Europeans promised the IMF that Athens’ total debt would be well below 110 percent of GDP by 2022.

Contrary to popular belief, Greece did not create this financial storm on its own. The Greek government began borrowing in the 1980s and hid its debt in currency swaps with the help of private lenders to meet Eurozone deficit criteria. Since the 1970s, Pasok and New Democracy, the two Greek political parties in control ever since, created an inflated public sector with generous pensions and a political culture filled with corruption and tax evasion that hindered growth of the economy and increased the country’s debt. Greece definitely is to blame for part of its financial mess, but so is the troika.

A few years ago when bailout packages were issued to Greece, the ECB and IMF made a very big mistake as fear that a Grexit could damage the world economy rose. Since that scare, the ECB and IMF decided to pay the majority of Greece’s debt held by private lenders with tax dollars from Eurozone countries. Hence, about 80 percent of bailout funds went to pay Greek and foreign banks – not the Greek state – which resulted in Eurozone government liability for about 65 percent of Greece’s debt (the ECB and IMF hold about 20 percent). Only about 10 percent of the bailout money went to soften the blow of the 2008 financial crisis and fund reforms for  Greece’s economy — the rest of the money went to pay debt and interest.  According to the Jubilee Debt Campaign, “Bailouts…for the European financial sector… [have been] passing the debt from being owed to the private sector to the public sector” — the bailout funds are recycling themselves and ballooning with interest.

It was the ECB’s and IMF’s decision to expose itself to the risky debt held by Greece. Now we can see why German Chancellor Angela Merkel is scolding Greece – she needs to give the money back to taxpayers that bailed out the private sector. On top of that, Greece’s debt is calculated by outdated standards, not by the criteria the European Commission recommends for other EU countries. Such accounting tricks are important because using modern standards puts Greece’s debt at about 36 billion euros instead of over 300 billion euros – a huge difference.

Some media outlets claim that the troika has been generous in negotiations for a third bailout package, but this is not true. Former IMF bailout chief Ashoka Mody stated that Greece’s creditors refused to consider the possibility of debt relief for the past five months — Mody supports wiping out 50 percent of Athens’ debt. James Galbraith also notes in Politico that the IMF has conceded to almost nothing over the past five months in regards to taxes, pensions, wages, or the total of Greece’s debt. Instead, Greece’s creditors have insisted on severe austerity programs that have resulted in over 25 percent unemployment in the country, with youth unemployment at over 50 percent.

Now, Greek Prime Minister Alexis Tsipras and the troika must reach a deal by Sunday or risk Athens leaving the Eurozone. Right now, Greek banks have been closed for over a week because the ECB capped the amount of liquidity emergency assistance (after the referendum was announced) that has propped up Greek banks. Capital controls have taken over — each Greek citizen can withdraw a maximum of 60 euros per day and pensions are capped at 120 euros per month. If a deal is not reached, Greece will soon run out of cash and a humanitarian crisis may begin as citizens will not have money to purchase food, medicine, and other basic goods.

While the Greek government and the troika share blame for the current financial fiasco, we should focus on a solution going forward. The EU and ECB should take advice from the IMF report: Greece needs to restructure its debt so that it can make its payments and allow growth in its market.  If an agreement is not reached by the troika and the government of Greece, the world will question the viability of the euro and fear other countries like Spain and Italy may follow. As a result, Europe’s growth will slow down, causing a domino effect that will also reduce the economic growth of Washington and Beijing since Europe is their largest trading partner. Such a scenario would be no surprise to Milton Friedman, a Nobel Laureate in economics, because he warned that the euro is not likely to survive the political disunity of the EU – each country has its own language and customs, and citizens feel more loyalty to their homeland than to the idea of a unified Europe.

Potential security issues also may arise if the troika refuses to reach a sustainable compromise with the Greek government. For one, Greece is a member of the EU and NATO, both consensus-driven organizations, as pointed out by Admiral James Stavridis, former NATO Supreme Allied Commander. This means that members must agree to move forward on important decisions, and if Greece is forced out of the Eurozone by the ECB continuing to withhold liquidity, important security decisions could be at risk, like sanctions on Russia for invading Ukraine, Iranian nuclear negotiations, and others that may arise. Secondly, Athens may have no other option but to ally with other countries like Russia and China for financial assistance and growth opportunities as it runs out of money.

The Greek people consider themselves European and want to stay in the Eurozone. However, they can no longer withstand the austere measures suffocating the country. An agreement must be made between Greece and the troika for future financial stability and not create more problems in the world. The troika and Greece must reach a deal that includes restructuring Athens’ debt so it can pay its creditors and enable growth. Modern accounting standards should also be applied to Greece’s debt as Athens should be treated equally to all EU members. After a deal is reached, the Greek government needs to consider this a wakeup call and diversify its economy by developing the private sector, making it easier to open businesses, and increasing transparency to allow for more accountability of politicians and collection of taxes.

This article was first published on Lexington Institute, July 10, 2015.