Imf and Greece

8/12/2019 Imf and Greece

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The intervention of IMF insupport of the Greek economy

Dimitris Routos

Law for Business and Trade in Eastern and

SouthEastern Europe

!rofessor" Ioannis T#ionas

April 30, 2013


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IMF and the Greek economy - Routos 2

$BSTR$%T

The global financial crisis of 2007 200 caused by the colla!se of the

mortgage backed deri"ati"es market in the #$% &as transformed into

so"ereign debt crisis across the 'tlantic( Greece being the )&eak link* in

the +uro area% &as the first country to face huge !roblems in funding its

so"ereign debt( The origins of the Greek-so"ereign debt crisis &ere the

country*s large fiscal and e,ternal imbalances( Greek go"ernments in the

last 0 or so years ha"e !ro"en to be incom!etent and corru!t and along

&ith the domestic !olitical and economic elites ignored the chronic ills of

the Greek economy and transformed Greece into a state based on

)corru!t legality*( IMF and +# u!on the risk of a Greek insol"ency offered

their assistance in the form of t&o bailout !rograms( IMF ha"ing the

)technical kno&-ho&* formed the conditionality of these !rograms( The

IMF*s !ro.ections are notorious for being consistently off the mark%

!recisely because they are fi,ated on im!osing antigro&th /structural

ad.ustment re1uirements% that ty!ically !roduce massi"e economic

de"astation( The Greek case &as no e,ce!tion(


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IMF and the Greek economy - Routos

I&TR'D(%TI'&

n '!ril 2rd2030% the Greek go"ernment a!!lied for a bail-out of its ailing economy%

through a rescue !ackage issued .ointly from +#% +45 and IMF 6Troika% totaling 330

billion 8( This de"elo!ment &as the result of a series of e"ents that follo&ed the

continuing deterioration of all Greek financial indicators since 200( The enormousamount of the unsustainable Greek !ublic debt% &hich reached at 299 bn( 8% or

329%2: !ercent of G;< in 2009% soared the 30-year Greek bond s!reads in early

2030% o"er =00 b!( related to the German bond 6figure 3(

Ten)ear Government Bond Spreads to German E*uiva+ent ,Soverei-n Interest Rate . GermanInterest Rate/

+,tracted from> )$a"ing Imbalances and the +uro 'rea* by ?iggins M( and @litgaard T( Figure 1

This signaled the !ractical inability of the Greek go"ernment to borro& from the

markets% and the 1uest of some sort of a rescue !ackage &as una"oidable( The

alternati"e o!tion &as default( The Greek so"ereign debt crisis follo&ed the

uncertainty of the global economy% due to the colla!se of the #$ banking sector after

the 2007 sub-!rime mortgage crisis( Ahen the &orld financial crisis began in 200%the Greek economy did not seem to be !articularly affected% mainly due to its banking

sector*s structural characteristics including moderate de"elo!ment and lo& e,!osure

to /to,ic financial !roducts( G;< gro&th for 200 &as around 2%9 !ercent and the

4entral 5ank of Greece !redicted stagnation for 2009( 'ccording to +urostat% Greek

G;< actually shrank by 2 !ercent in 2009 and &as !redicted to shrink by !ercent in

2030( Therefore Greece% being the &eak link in the +uro area% &as easily targeted by

the #$ rating agencies% its !ublic finances &ere se"erely scrutiniBed% its inability to

reform hea"ily criticiBed% and the result &as &hat has been re!orted as the /Modern

Greek Tragedy(3

3Martin Fernando% Aaller 4hristo!her% $o"ereign ;ebt> ' Modern Greek Tragedy% FederalReser"e 5ank of $t( Couis% 2033 'nnual Re!ort% May 2032% !!( =-37(


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IMF and the Greek economy - Routos =

The accumulation of Greece*s !ublic debt started after 390% and its !ublic debt to

G;< ratio deteriorated shar!ly in the follo&ing years 6from 22%D !ercent in 390 to

300%D3 !ercent in 399( ;es!ite the efforts for stabiliBation of the !ublic debt at

sustainable le"els from 399 u! to 200= 6around 300 !ercent of G;


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IMF and the Greek economy - Routos D

-3%00H

-3:%00H

-3=%00H

-32%00H

-30%00H

-%00H

-:%00H

-=%00H

-2%00H

0%00H

399D 399: 3997 399 3999 2000 2003 2002 200 200= 200D 200: 2007 200 2009 2030 2033

!EE" E#O$OM%&s 'WI$ DEFI#I'S

GJ( 5#;G+T H

to G;

aIm!lementation of austerity measures% to restore fiscal balance% b


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go"ernment assets &orth 8D0bn by the end of 203D% to kee! the debt !ile

sustainable% and cIm!lementation of outlined structural reforms% to im!ro"e

com!etiti"eness and gro&th !ros!ects( The !ayment of the Greek bailout &as

scheduled to ha!!en in se"eral disbursements from May 2030 until Oune 203( ;ue

to a &orsened recession and the fact that Greece had &orked slo&er than e,!ected

to com!ly &ith !oint b and c abo"e% there &as a need for one year e,tension to offerGreece both more time and money in the attem!t to restore the economy( In ctober

2033% +uroBone leaders conse1uently agreed to offer a second 830 billion bailout

loan for Greece 6IMF contribution 2 billion 8% conditional not only the

im!lementation of another austerity !ackage 6combined &ith the continued demands

for !ri"atiBation and structural reforms outlined in the first !rogram% but also that all

!ri"ate creditors holding Greek go"ernment bonds should sign a deal acce!ting lo&er

interest rates and a D%D !ercent face "alue loss( This !ro!osed restructure of all

Greek !ublic debt held by !ri"ate creditors% &hich at that !oint of time constituted a

D !ercent share of the total Greek !ublic debt% &ould according to the bailout !lan

reduce the o"erall !ublic debt burden &ith roughly 8330 billion( ' debt relief e1ual toa lo&ering of the debt-to-G;< ratio from a forecast 39 !ercent in 2032 do&n to

roughly 3:0 !ercent in 2032% &ith the lo&er interest !ayments in subse1uent years

combined &ith the agreed fiscal consolidation of the !ublic budget and significant

financial funding from a !ri"atiBation !rogram% e,!ected to gi"e a further debt decline

to a more sustainable le"el at 320(D !ercent of G;< by 2020( The second bailout

deal &as finally ratified by all !arties in February 2032% and became acti"e one month

later% after the last condition regarding a successful debt restructure of all Greek

go"ernment bonds% had also been met(7

4ommenting on the restructuring of the Greek debt ouriel Roubini noted that>

A myth is developing that private creditors have accepted significant losses in the restructuring of

Greece's debt, while the official sector gets off scot free. . . . The reality is that private creditors got a

very sweet deal while most actual and future losses have been transferred to the official creditors i.e.

ta!payers". . . .Greece's public debt will remain" unsustainable at close to #$% per cent of gross

domestic product& at best, it will fall to #% per cent by %% and could rise as high as #(% per cent of

G)*. +hy A -haircut- of ##%bn on privately held bonds is matched by an increase of #/%bn in the

debt Greece owes to official creditors. A significant part of this increase in Greece0s official debt goes to

bail out private creditors& /%bn for upfront cash sweeteners on the new bonds that effectively

guarantee much of their face value. Any future further haircuts to ma1e Gree1 debt sustainable will

therefore fall disproportionately on the growing claims of the official sector. 2oans of at least 5bn from

the 3uropean Financial 4tability Facility to the Gree1 government will go towards recapitalising ban1s in

a scheme that will 1eep those ban1s in private hands and allow shareholders to buy bac1 any publiccapital inection with sweetly priced warrants. The new bonds will also be subect to 3nglish law, where

the old bonds fell under Gree1 urisdiction. 4o if Greece were to leave the euro6one, it could no longer

pass legislation to convert euro7denominated debt into new drachma debt. This is an ama6ing

sweetener for creditors. . . .The reality is that most of the gains in good times . . . were privatised while

most of the losses have been now socialised. Ta!payers of Greece's official creditors, not private

bondholders, will end up paying for most of the losses deriving from Greece's past, current and future

insolvency.89

The 3stGreek bailout !rogram failed and as far as the 2ndone is concerned% the

+urogrou! met on 32 o"ember 2032% to discuss and decide on the e,act siBe and

terms for the Ne,tra bailoutN and the offered Ndebt restructureN( The need for the latter

7htt!>LLen(&iki!edia(orgL&ikiLGreekPgo"ernment-debtPcrisis(ouriel Roubini 67 March 2032( NGreeceKs


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&as recently confirmed by the +uro!ean 4ommissionKs official autumn economic

forecast 2032% finding that if no ne& e,tra Ndebt restructureN is offered% then the debt-

to-G;< ratio &ould rise into ne& heights of 377 !ercent in 2032 and 3 !ercent in

203(9

The e,act reasons for the failure of the t&o Greek !rograms% lie on the sim!lecom!arison of IMF*s estimations and the reality that follo&ed 6figure (

Figure

The IMF*s !ro.ections about the effects of austerity are based on certain

assum!tions( ;es!ite the Fund*s su!!ort for !rotecting s!ending on !o"erty

alle"iation% o"erall e,!enditures cuts including !ublic in"estment and !ublic sector

em!loyment could ha"e detrimental conse1uences for long-term gro&th and

de"elo!ment !ros!ects( 's IMF*s main focus is the re!ayment of !ublic debt through

go"ernment budget*s sur!luses% and the lo&ering of !ublic debt to G;< ratio at

sustainable le"els% one should ha"e in mind the fraction &here the numerator is

!ublic debt and the denominator is G;


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/The turn to austerity after %#%, however, was so drastic, particularly in 3uropean debtor nations, thatthe usual cautions lose most of their force. Greece imposed spending cuts and ta! increases amounting

to #5 percent of G)*:.and unli1e the half7hearted efforts at stimulus, these cuts were sustained and

indeed intensified year after year. 4o how did austerity actually wor1 The answer is that the results

were disastrous7ust about as one would have predicted from te!tboo1 macroeconomics(30

%'&%L(SI'&S

The &ell-kno&n long lasting &eaknesses of the Greek economy are fueled by &idely

s!read ta, e"asion% corru!tion% bureaucracy% im!artiality% and an e,tensi"e

underground economy 6bet&een 22H and 29H as a !ercentage of G;< for the years

399 to 203033( 's a conse1uence Greece is suffering from lo& !roducti"ity% lack of

inno"ation% absence of Foreign ;irect In"estments( In addition to that% one of the

basic "ulnerabilities of the Greek state is the lo& 1uality of go"ernance% and the

subse1uent result of inca!ability to create go"erning institutions that &ill !romote

social trust( 's Rothstein notes>

;A high level of generali6ed trust is caused by what has been called high , corruption =in its many forms>, clientelism, nepotism and

political favoritism are very rare or non?e!istent when public officials or professionals

implement public policies:.Thus, designing institutions that implement public policy is to

create =or destroy> social trust.0#

Greek !olitical elites !ro"ed to be inca!able in im!osing the needed reforms that

&ould enable Greece to e,!erience sustainable gro&th along &ith fiscal disci!lineand social !ros!erity( The inability of the Greek !olitical elites to im!ose these

necessary reforms of the Greek economy and society% in order to !ro"ide a decent

!resence of Greece in the euro area% has long-li"ing roots in the "arious mechanisms

&hich !re"ail in Greece( Rent-seeking interest grou!s dominate the Greek economy

and society% earning a comfortable income &ithout !ro"iding any &ork at all( These

rent seeking grou!s interact in numerous formations and alliances% su!!orting each

other% e"ery time a reform !olitician or an +# directi"e threatens their rents( These

grou!s are re!resented by key actors in the Greek !olitical arena% and the Greek

economy( They strongly o!!ose any reform &hich may alter the status 1uo% and !ut

in danger the ability to continue earning their immoral and unethical rents( n theother hand the rationally ignorant "oters% suitably mani!ulated by the media 6&hich

are o&ned in a large !ro!ortion by re!resentati"es of the aforementioned rent

seeking grou!s% or members of these grou!s% also o!!ose any reform% because they

are con"inced that the reforms &ill hurt either their economic or their social &ell-

being( Thus they become a large !ressure grou! against reforms 6and actually

30htt!>LL&&&(nybooks(comLarticlesLarchi"esL203L.unL0:Lho&-case-austerity-has-crumbledLQ!aginationfalse33 $chneider Friedrich 62030% The @nfluence of the economic crisis on the shadow economy in

Germany, Greece and the other 3B) countries in %#%& +hat can be doneQ !a!er a"ailable at>htt!>LL&&&(econ(.ku(atLmembersL$chneiderLfilesL!ublicationsLCatestResearch2030L$had+cGreec

eP$e!t2030(!df

32Rothstein 5o 62033% 4reating a $ustainable $olidaristic $ociety> ' Manual% y Tid Ra!!ort9% 'renagru!!en% $tockholm% $&eden% !( 37(
http://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdf


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against their o&n interests% acting in fa"or of the rent seeking interest grou!s( The

una"oidable result is the entra!ment of any reform !oliticians% the failure of any

reform efforts% and ultimately the general go"ernance failure(3Greek !olitical elites

ha"e lost their legitimacy and so ha"e the !olicies that are im!lemented since the

first Mo# had been signed% bet&een the Greek go"ernment and the Troika(


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'nderson Oeffrey 6203% Ireland and Greece> ' Tale of T&o Fiscal 'd.ustments% The Institute of

International Finance Research ote% March 3% 203(

'ntoniadis 'ntonis%62030% ;ebt 4risis as a Global +mergency> The +uro!ean +conomic 4onstitution

and ther Greek Fables% The +uro!ean #nion and Global +mergencies> ' Ca& and Cikely 4auses% Mechanics andutcomes% B34ifo +or1ing *apero( 2::% o"ember 2030(

5enes Oaromir% @umhof Michael% The 4hicago the Gold $tandard% the +uro and the origins of

the Greek so"ereign debt crisis% 5ank of Greece Aorking $afe ?a"en% 4redit Rating 'genciesand the $!read of the Fe"er from Greece% Ireland 'nd


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IMF and the Greek economy - Routos 3=

+4 ;irectorate-General for +conomic and Financial 'ffair 62033% The +conomic 'd.ustment

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Featherstone @e"in 6200D% Introduction> )Modernisation* and the $tructural 4onstraints of Greek ' Failing $tate in a $ke&edRegime%Eournal of Bommon ar1et 4tudies, Jol( =9% o( 2( !!( 39237(

Foundation for +conomic and Industrial Research 6I5+ 62030% The Greek +conomy% Uuarterly

5ulletin o :0% Ouly 2030(

Frankel Oeffrey 62033% "er-o!timism in forecasts by official budget agencies and its im!lications%!ford eview of 3conomic *olicy% Jol( 27% o( =% !!( D:D:2(

Gros ;aniel 62030% Greece and the IMF% 4+ $taff Re!ort on Re1uest for $tand-5y 'rrangement% IMF 4ountry Re!ort o(

30L330% May 2030(

IMF 6203% Greece> First and $econd Re"ie&s #nder the +,tended 'rrangement #nder the +,tended

Fund Facility% Re1uest for Aai"er of '!!licability% Modification of


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IMF and the Greek economy - Routos 3D

IMF 62030% Ireland Memorandum of #nderstanding on $!ecific +conomic "er"ie&% the Greek "icious circle fromincremental ad.ustment to /critical .unctureQ% Benter for 3uropean 4tudies at Iarvard Cniversity,pen Forum B34 *aper 4erieso( 3% 2032(


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IMF and the Greek economy - Routos 3:

Rossi Janessa and 'guilera Rodrigo ;elgado 62030% o 5ail-ut Is Germany to 5lameQ%German *olitics and 4ociety% Issue 97 Jol( 29% o( 3 $!ring 2033(

+YZ[\]^_` \Z\` 6203% ] Zj ] ] 6% pZ]q] _j% \Zq

203(

vw\xY z] 62032% ]\Y{]_z _] _[_z \\|j [ \_| j]Z}] Y~p% jx Z]jq] % ]Z]Z`Z __| _] [_| {q{[%

v]Z 2032(
http://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcOECD2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcOECD2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcGreece_Sept2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcOECD2010.pdfhttp://www.econ.jku.at/members/Schneider/files/publications/LatestResearch2010/ShadEcOECD2010.pdf

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Imf and Greece