Friday, July 03, 2015

IMF’s Latest Debt Sustainability Analysis for Greece

Are the IMF and the Greek government finally on the same side? The Greek government claims that the latest Draft Debt SustainabilityAnalysis (June 26, 2015) supports the government’s position. In reality, it does not.

My observations from the report:

First, the two sides continue to hold fundamentally different views on what is sustainable. The IMF believes that the debt trajectory that was agreed to in November 2012 was sustainable and that it only recently became unsustainable. Finance Minister Varoufakis disagrees with this premise and has always held that Greece’s debt has been unsustainable since 2010.

Second, the IMF did not call for a 30% haircut on Greece’s debt. Rather, the IMF noted that, “Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets.” In other words, the IMF is only referring to what it takes to bring us back to where we were in 2012. Plus, the only explicit reference to a reduction in debt is to the Greek Loan Facility (€53 billion)—meaning the European loans! So the IMF says yes to a possible haircut as long as it is someone else’s money. 

Third, the IMF believes that sustainability will come from primary surpluses (aka “austerity”) and from further reforms, including privatizations. SYRIZA would struggle to implement the reforms endorsed by the IMF and has consistently repudiated a 3.5% of GDP surplus (the IMF baseline); as such, their view on how the debt will evolve will remain irreconcilable.

Fourth, the IMF believes that the debt-to-GDP ratio is meaningless for a country with Greece’s debt profile. As such, it focuses on debt concessions that affect the real value of debt, but not the nominal value (prolonging maturities and extending the grace period). This, again, clashes with SYRIZA’s view that seems to focus on nominal debt (the actual amount of debt).

Firth, the IMF estimates that Greece needs €51.9 billion to cover its financing needs from October 2015 to December 2018. This assumes that Greece would raise €2 billion from privatizations and €9.4 billion from primary surpluses (1, 2, 3, 3.5 percent of GDP for 2015, 2016, 2017, and 2018). In other words, the IMF assumes more “austerity,” more reforms, more privatizations, and a third memorandum. Prime Minister Alexis Tsipras understands this but not publicly (he rarely references his own requests for new loans).

Sixth, the IMF argues that the exceptions it made to its sustainability analysis in the past are no longer valid because the debt is now held by the official, not the private sector. In other words, there is no longer a rationale for throwing good money after bad just to save the rest of the world. This is probably a view that SYRIZA shares, although as noted above, the IMF has not made a public wink towards accepting losses on its own loans.

Seventh, the IMF deems that concessions (longer maturities and extended grace periods), more plausible assumptions, and the debt relief that has been promised to Greece since 2012, would make debt sustainable with high certainty. By itself, this would imply that no “haircut” is needed—only extensions in existing debt. However, the IMF notes that if there is father fiscal relief (lower primary surpluses), then Greece would need more aid and a greater haircut (as noted above, they specify the European loans).

In short: two different views on what is sustainable and how to get there; a tacit recognition of the need for a third memorandum, more reforms, more austerity, and concessions; and a nod towards a haircut as long as it is someone else’s money. Not quite a consensus. 

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