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IMF criticizes EU bailout of Greece. Other paths to economic stability?

The IMF released a report Tuesday that found the new bailout terms were based on idealistic projections of Greece's future economic success and proposed solutions to mitigate the financial crisis.

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    Greek Finance Minister Euclid Tsakalotos and International Monetary Fund (IMF) Managing Director Christine Lagarde (back C) attend an euro zone finance ministers meeting in Brussels, Belgium on July 12, 2015.
    Francois Lenoir/Reuters
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A report by the International Monetary Fund (IMF) released Tuesday attacks the viability of the new bailout terms between the EU and Greece, which would see creditors – the eurozone  and IMF – pay a total of €86 billion towards restoring the Greek economy.

These funds would help the debt-plagued nation recapitalize banks, repay debts and interest payments, according to the BBC.

But according to the report, this won’t be enough.

It states that “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

The IMF analysis goes on to criticize the financial path Greece had been traveling down.

“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.”

The report found if stakeholders had successfully implemented the targets set in 2012, “no further debt relief would have been needed to reach the targets under the November 2012 framework (debt of 124 percent of gross domestic product (GDP) by 2020 and “substantially below” 110 percent of GDP by 2022.)”

Instead, “debt is expected to peak at close to 200 percent of GDP in the next two years, provided there is an early agreement on a program.”

This means the new €86 billion bailout package may not be enough.

The IMF also finds the new deal is based on overly idealistic economic projections for Greece’s future.

For example, under the new bailout plan, the report notes, “Greece is expected to “maintain primary surpluses for the next several decades of 3.5 percent of GDP” even though “few countries have managed to do so.”

It is also “assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area.”

The plan also ignores the possibility Greek banks could need more cash in the near future.

Greece needs to pay €4.25 billion on bonds held by the European Central Bank by a Monday deadline, according to The New York Times. The Times notes the Greek government will struggle to make the payment unless it can secure temporary financing from EU creditors. Failure to repay the money may result in a failure of the banking system.

In addition, the EU has already missed two deadlines to pay the IMF €1.6 billion in debt interest on loans it has already received, the BBC reports.

“The closure of banks and imposition of capital controls” in the last two weeks have led to a “further significant deterioration in debt sustainability relative to their predictions in their recently published debt sustainability analysis from two weeks ago,” the Fund notes in its report.

The Guardian reports the IMF had "estimated that Greek debt would peak at 177 percent of GDP and fall to 142 percent by 2022. It now believes the debt ratio will still be 170 percent in 2022 after hitting a peak of 200 percent.”

Although the report is a scathing critique on the new bailout terms, a person with direct knowledge of the debt discussions told The Times on Wednesday, “I don’t think [the report] will kill the Monday deal.”

However, the IMF’s outlook on the Greek debt crisis is quite clearly pessimistic, in relation to the expectations of the new bailout deal. Tim Worstall, in an analysis on Forbes.com, doesn't see a silver lining to Greece's indebtedness.

“That debt just isn’t going to get repaid. No way no how. All anyone can do now is decide how they would like to lose their money.”

Worstall suggests another course of action.

“Bring back the drachma, default and devalue. That would produce some months of very heavy economic pain. And then growth really would return: and rapid growth too. To the point that give it 18 months or so and Greece would happily sit down to discuss the terms upon which it will pay back that defaulted debt.”

The IMF proposes the following alternatives:

  1. Maturity extension on Greek debt with grace periods of 30 years on the entire stock of European debt.
  2. Explicit annual transfers to the Greek budget
  3. Deep upfront haircuts – a reduction in the amount to be paid back – which the EU has already stressed “cannot be undertaken” in the Euro Summit Statement on Greece

According to this statement, the EU made it clear that “the Greek sovereign can […] honour its debt obligations in the coming weeks.”

As The New York Times pointed out, this means “the creditors would not forgive any Greek debt and offered only a general assurance of further discussions about reducing annual debt payments by stretching out payment periods or reducing interest rates.”

The statement also noted “the Greek authorities reiterate their unequivocal commitment to honor their financial obligations to all their creditors fully and in a timely manner.”

However, the decision wasn’t an easy one.

The New York Times reported Prime Minister Alexis Tspiras signed the agreement but said in an interview on state radio on Tuesday that he considered it flawed.

Tspiras said the alternative – Greece’s being forced out of the euro zone – was the greater evil.

 
 
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