The IMF believes that official creditors should take a hit on their holdings of Greek debt; Germany is opposed. Who is right?
The IMF has a point. The private sector involvement (PSI) agreement aims to bring Greece’s debt to GDP ratio to 120% by 2020 – an improvement but hardly a game changer. Assuming that Greece receives a second bailout, the official sector will become a more important financier than the private sector; 60% of Greece’s public debt will be held by the official sector in 2013, according to the December 2011 IMF review of the Greek program (the number will depend, of course, on the final provisions of the PSI deal). Official sector debt is as problematic as private sector debt.
But Germany too has a point. The Greek Ministry of Finance shows a wider deficit in 2011 than in 2010. In part this is because revenues continue to disappoint – although this reality has not deterred Greece from making similarly optimistic assumptions about 2012. More importantly, spending is barely down: 1.2% by one measure, but including other special items, it may even be up. Reforms are stalled, and we have yet to see any privatizations. This is hardly a government that is taking its program seriously. Instead, it is compensating for its inability to make any reforms by raising taxes and trying to squeeze every last penny from the public (but, curiously, not from individuals and companies that owe back taxes).
The choice facing Greece’s creditors is simple: do you offer a break in hope that this will trigger reforms or do you demand real reforms in exchange for a break? My sense is the latter. It is clear that the new, post-Papandreou PASOK has no real reform momentum left in it. It inhabits a never-land of promising reforms but implement none. Rewarding it with yet another break will merely allow it to prevaricate, equivocate, hesitate and outright lie for longer.
The official sector should eventually offer Greece debt relief. But this gesture should be an accelerant for Greece’s positive debt momentum – it cannot be the ignition of reform. Greece has to stop pretending that everything hinges on decisions made in Brussels, Frankfurt, Berlin, or Washington. This program will be won or lost in Athens. Period. And until the government starts acting like it understands this, it deserves no more breaks.