The seemingly endless wrangling over Greece’s massive debt crisis took an unexpected turn late Tuesday when the International Monetary Fund leaked a staff-written analysis of the bailout plan that the Greek Parliament is supposed to vote on today. Bottom line: It won’t work.
The deal, reached after months of contentious debate between highly indebted Greece and the European countries and institutions that currently hold the majority of its debt, would force the country into crippling austerity measures coupled with enormous tax hikes. It would also result in Greece facing a debt burden equal to 200 percent of its gross domestic product, making it the second most indebted nation in the world, behind Japan.
The three-page analysis tells Greece’s creditors what economists across the globe have been shouting from the rooftops ever since the details of the plan became public early this week – that Greece cannot possibly repay its mounting debts and that the only realistic option for restoring its economy to a condition that can support the Greek people without a constant flow of support from other nations is immediate and substantial reductions in the amount of money Greece owes.
“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date,” the report says.
The possible measures suggested by the IMF include extending the grace period for repayment of Greece’s debt – both its existing obligations and the estimated 85 billion euros it will need to borrow through 2018 – by 30 years.
A three-decade extension of the grace period is, in effect, a debt reduction by other means. If the creditors surrender their right to principle and interest payments for that period, they are essentially slashing the net present value of Greece’s obligations by 30 years worth of inflation.
“Other options,” the IMF writes, “include explicit annual transfers to the Greek budget or deep upfront haircuts.”
That means that barring an extension, Greece’s creditors can simply plan on giving Athens money every year that Athens can use to pay them back – a pointless exercise – or they can just bite the bullet and forgive a large portion of Greece’s debts.
The paper also points out the highly – even ridiculously – optimistic assumptions that Greece’s creditors are making in order to make the deal appear viable.
For example, “Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so.”
Also, “Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms.”
Finally, the IMF points out that the Greek banking system will almost certainly need continued financial support that isn’t contained in the plan: “Further capital injections could be needed in the future, absent a radical solution to the governance issues that are at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard.”
The circumstances of the IMF’s decision to make the paper available to reporters were somewhat puzzling. A major creditor of Greece itself, the IMF has been a direct participant in the talks about its fiscal crisis and presumably made its concerns known to Greece’s other creditors.
European leaders have made it clear to Greece that, should its parliament refuse to endorse the bailout package, the only remaining option is “Grexit” – the departure of Greece from Europe’s shared currency. It now appears that Greek lawmakers are being asked to approve a deal that one of its major creditors believes is doomed to fail.