Greek Fire

As I write this a string of clichés come to mind: it’s a tragedy, Athens is playing with fire, ‘kicking the can down the road’ and so on. But in truth no cliché can do justice to two basic irreconcilable facts: Greece has had enough of austerity (with around 40% youth unemployment, roughly twice the average in the rest of the EU); and the beautiful country’s creditors have had enough with tossing (apparently) bad money after good.

There have been so many fudges between Athens and Brussels over the past five years that it’s difficult to think there won’t be yet another. Supposedly today (Thursday) is yet another deadline to achieve a deal, this time at a meeting of European Union finance ministers in Luxembourg. And yet…serious observers outside the fray are starting to contemplate the real risk of a Greek exit from the Eurozone. Larry Summers, a former US Treasury Secretary, wrote in the Financial Times last week that “when, as now appears likely, Greece financially separates from Europe it will at one level be no one’s fault.” He anticipated Greece turning into a “failed state” if it tumbles out of the euro, pointed out that Europe “will collect far less debt than it would with an orderly debt restructuring” and, to top it all, added that the “IMF [International Monetary Fund] is looking at by far the largest non-payment by a borrower in its history.”

Three agencies are monitoring Greece’s bailout: the IMF, the European Commission, and the ECB. They are united in wanting pension and VAT reforms in Greece, and the haggling today is over what precise form those will take. But whatever is agreed, it is certain to impose yet more austerity on already hard-pressed Greek citizens.

What does Greece owe – and to whom?

The total sum owned by Greece to official lenders is a staggering €242.8 billion – roughly equivalent to the total national gross domestic product (GDP) of Chile, somewhat more than Finland’s…and almost €50 billion more than Greece’s own GDP. Back in February this year Athens squeezed €7.2 billion from the EU in extra bailout funds, in exchange for promised economic reforms. Reforms that Alexis Tsipras, the left-wing Greek prime minister who still enjoys considerable domestic popularity, has now submitted are not to the satisfaction of the EU, and Athens has yet to get its hands on that €7.2 billion. Without that money Greece will be unable to repay €1.6 billion in loans from the International Monetary Fund by the end of June. Greece must also repay €85 million in interest to the European Central Bank (ECB) tomorrow (Friday).

Of the three agencies supervising Greek debt – the so-called ‘troika’ – it’s the IMF that seems to have played the poorest hand in this whole business. For one thing it’s puzzling that the older IMF loans carry a burdensome 3.5% rate of interest. Given that the ECB’s benchmark rate is 0.05%, the IMF rate is completely out of kilter and there is no justifiable reason for this high interest rate. The IMF promised Greece a total loan of €48.1 billion, of which €16.3 billion is still to come by March 2016, if Greece introduces promised economic reforms. As yet Greece has kept up its payments to the IMF.

The IMF has played a poor hand badly

Between now and 2023 Greece needs to repay the IMF more than €1 billion each year. After that date the repayments start to dwindle. Greece got its first IMF bailout in 2010, when the Fund agreed to a programme that most economists thought at the time was inadequate and couldn’t possibly guarantee the country’s long-term debt sustainability. The problem for the IMF was – and remains – that the Fund usually requires currency devaluation as part of any loan deal. But Greece was part of the Euro and therefore couldn’t devalue. The IMF therefore bent its own rules and said that a ‘systemic exemption’ would be made in the case of Greece; it waived its normal requirements.

The IMF also got its forecasting about probable Greek economic growth badly wrong, revising down the estimate it made in 2014 by 22% over 18 months. The economist Gabriel Sterne, formerly a staff member of the IMF and now chief economist at Oxford Economics, wrote that this was “the equivalent of revising away the combined output of the whole of California, New York and Florida” in the US. The IMF has extended debt relief to ‘Heavily Indebted Poor Countries’, but because of the tangled nature of the Greek negotiations – and, no doubt, the political bombshell of counting Greece among such countries as Burundi or Chad – this route is probably closed to Athens.

Debt relief the only long-term solution

Yet debt relief – let’s call it ‘restructuring’ to use the officially preferred euphemism – in some form is the only solution for the Greek crisis. With such austerity as the country has endured for years, economic growth is well-nigh impossible. Yet you can also understand the Europe creditors, angry that so little progress has been made on long-promised reforms, such as privatisations of state-owned companies. Few seem to want Greece to leave the Euro, but that might yet happen, out of exasperation as much as intent. By now it ought to be clear to everyone: Greece’s debt level is unsustainable and its borrowings will probably never be repaid in full. But all sides are intent on pretending otherwise, for fear of something worse. I expect we will all wake up tomorrow to learn that yet another deal has been struck to help Greece limp on; but it will be a case yet again of crisis deferred because everyone can’t face looking into the abyss.