The International Monetary Fund says Greece's austerity package is failing because the public sector hasn't made as many sacrifices as the private sector, and because banks haven't been enabled to finance the growth of business.
Its annual country report, released on Tuesday, also ominously warns that even if Greece does everything it should to boost productivity and growth, its debt will eventually drown any recovery and needs to be restructured.
"Only about a quarter of the overall adjustment was directed at reducing public sector wages and pensions," the IMF says.
Greece spent more than €12bn on public sector salaries last year, and another €22bn on pensions and other social benefits (see table below). Together, the two absorbed 70 percent of tax revenue. The government's 2016 pension reform relied on raising contributions from those still in work and lowering their future pension payouts, but made no further cuts to current pensioners. The IMF calls on it to do so.
Greeks now also own the highest level of nonperforming loans in the eurozone - 45 percent of loans aren't being repaid, quadruple the rate of nonpayment at the beginning of the crisis. Banks are having difficulty closing the books on these loans by repossessing homes or by selling off the bad loan portfolio, partly because the government has not provided all the legal tools for doing so. Doing this requires the government to legislate exactly which debtors may be evicted from primary residences, which carries political risk.
The IMF wants the government to broaden the tax base by lowering tax exemptions, currently at €8,630 for salaried employees and farmers, because half of them declare annual income below that level. "More than half of wage earners are exempt from paying personal income tax compared to the euro area average of 8 percent," it says.
This will be difficult. Farmers, representing a fifth of workers, are currently asking for the tax exemption to be raised. Self-employed professionals, who represent almost a third of workers and had their tax exemption completely removed under the conservatives (2012-14), demand that it be reinstated.
Then there is the thorny issue of debt. The IMF refused to be part of Greece's third bailout in 2015 on the grounds that its debt is unsustainable. The Fund's charter doesn't allow it to extend loans to countries that already have unsustainably high debt. The eurozone wants the IMF to be involved. The powerful German finance minister Wolfgang Scheauble recently threatened that without the IMF the bailout facility might be brought to a halt, bankrupting Greece and forcing it out of the eurozone.
The IMF says the measures Greece has undertaken as part of its third bailout loan amount to four percent of GDP, but are "heavily reliant on revenue measures" for three quarters of that, leading to "further increases in already high taxes on narrow bases."
The IMF's thorniest disagreement with the eurozone, however, is that the eurozone, as the largest owner of Greek debt, needs to give Greece decades longer to repay it. "Even with these ambitious policies in place, Greece cannot grow out of its debt problem. Greece requires substantial debt relief from its European partners to restore debt sustainability," it says.
The IMF's modelling suggests that without restructuring, the debt will reach almost three times the size of GDP by 2060, and servicing it will absorb revenue equal to two thirds of GDP, a clearly impossible task.