Friday, 12 June 2015

The IMF isn't entirely wrong


The big spat between Greece and its creditors is over how much money to extract from a shrinking economy.

The International Monetary Fund believes the Greek government can and should extract about two percent of GDP (3.6bn euros) more, by enforcing VAT tax strictly and by lowering pensions at the higher end.

Greece says that such measures will depress the economy, as similar spending cuts and tax hikes did during 2009-2013.

Who is right? Maddeninly, both are. Greece cannot sustainably pay more than half its pension costs from national coffers. These have become its biggest single public expense, drawing money from education and health. They have also been a major cause of the over-borrowing that bankrupted Greece in the first place.

The IMF’s spokesman, Gerry Rice, offered a comparison with Germany on Thursday, as he announced that the IMF was giving up on talks for now: “Pensions and wages account for 80 percent of Greece's total primary spending. So it's not possible for Greece to achieve its medium term fiscal targets without reforms and especially of pensions.”

“So I think it's been acknowledged on all sides, that the Greek pension scheme, system is unsustainable. The Greek pension funds receive transfers from the budget of about 10 percent of GDP annually. Now, this compares to the average in the rest of the Euro zone of two-and-a-half percent of GDP. The standard pension in Greece is almost at the same level as in Germany and people, again on the average, retire almost six years earlier in Greece than in Germany. And GDP per capita increase, of course, is less than half that of the German level.”

The IMF wants Greece to cut one percent of GDP (1.8bn euros) from pension payouts, which Greece refuses to do.

A European deal? 

There is a bit more convergence on VAT, Greek officials said on Thursday. They believe they can come to an agreement with European creditors - the European Commission and European Central Bank - on raising more money from stricter enforcement of consumer tax, or VAT. The officials believed this would be in the area of two billion euros, closing a tax revenue gap in 2015.

By making this concession, Greece hopes to reach a stopgap agreement with the Europeans that will finance it through the next nine months - the remaining contractual period of IMF oversight of the Greek economy. Presumably, once the IMF programme ends in March 2016, Greece will sit down with only its European creditors to discuss the more difficult issues of pension reform and debt restructuring.

Greek officials have let it be known that they would like the European Stability Mechanism – which operates under Commission control – to purchase the 27bn euros of Greek debt currently owned by the IMF. That would allow the remaining two institutional creditors to reschedule a total of just over 200bn euros in Greek debt to be paid over a longer period – the key request of the Greek government.

The IMF has not been the bad guy all along. It admitted in 2013 that it had underestimated the effect of austerity on the economy. Spending cuts had a recessionary multiplier effect of about 1.7 times the value of the cuts, its chief economist Olivier Blanchard said in an Ex Post Facto assessment.

And as early as 2010, the IMF told Greece’s European lenders that Greek debt was too high to finance, and should be partly forgiven. European governments opted against this, because at that time their banks owned an estimated 95bn euros of Greek debt, and would require a bailout.

The current thinking is still not to give the Greeks an outright discount on the principal they have borrowed, but to extend the repayment period – a discount through inflation. This would hopefully convince European taxpayers that they aren’t giving the Greeks a free ride, and prevent the Greeks from bleeding their economy white to repay their debt.

John Psaropoulos

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