The IMF and Greece
In our discussion on the International Monetary Fund, we examined the case of Greece, and the role that the IMF was taking with regards to providing financial support for the country.
In late August of 2018, Greece left behind the final bailout provided by the IMF, after nine years of relying on the IMF for support. The amount, which was 289 billion Euros, was provided beginning in 2010, with additional bailouts in 2012, and 2015 (McCarthy, 2018).
The European Union has viewed this development as a rather positive one for a country mired in debt (Alderman, 2018). For example, the country is seeing some economic growth, although, it must be noted that the economy “is still only three-quarters of its precrisis size” (Alderman, 2018). Moreover, some of this is by refining imported oil, which may not have a great impact throughout the economy (Alderman, 2018).
Furthermore, unemployment has fallen. Plus, Greece’s leader Alexis Tsipras has refused additional credit, understanding the conditions that would be attached to it (Alderman, 2018). In terms of steps that Greece took, “The I.M.F. praised Athens for racking up a number of economic “successes” since it was placed on the first of three international financial lifelines ultimately totaling 320 billion euros, or about $375 billion. Greece reduced an enormous budget deficit and eventually created a surplus, it said. Successive governments forged legal tool kits to deal with a mountain of bad loans at the nation’s banks. They also moved to reduce the outsize public sector, and curbed collective bargaining to make wages “more competitive”” (Alderman, 2018). This surplus was not done easily, yet they were able to cut “its primary budget deficit nearly 18 percent of gross domestic product” (Bass, 2017).
However, while some are touting this as a success, others remain quite skeptical that Greece has righted the economic ship. For example, As McCarthy notes, “While unemployment has fallen from 28 percent at the height of the crisis to 19.5 percent today and the country has returned to growth, the economy remains 25 percent smaller than when the crisis began. Greece also has to face up to the fact that it’s going to remain debt-ridden for the foreseeable future and will likely have to pay off loans for decades. In total, Athens has a debt of €322 billion ($366 billion), 181 percent of economic output.” The International Monetary Fund itself came out with a report arguing that the debt is going to continue to be a large burden for Greece, and that, coupled with a lack of a growing economic, as well as the high poverty in the country, Greece will continue to face many issues (Alderman, 2018).
This is something that cannot be ignored. While having a balanced budget is important, one cannot ignore the high debt that will continue to limit Greece’s activities. Unless large amounts of capital flood into Greece (leading to a large economic boom), there does not seem to be any long term hope. Yes, creditors are willing to provide better (longer) terms with regards to interest and time to payback the loans. But even with this, Greece is still expected to be at 100 percent debt two decades from now (McCarthy, 2018).
Meanwhile, many in Greece are upset with the conditions set forward by the IMF during these borrowing periods. Yet, the IMF continues to be critical of government spending in Greece. As Alderman (2018) writes, “The social situation has deteriorated so markedly that the I.M.F., which many Greeks blame for worsening their plight as one of the original enforcers of harsh austerity, repeated its call for the Greek government to proceed with planned increases in targeted social support and investment spending. It also suggested reducing tax rates that in some cases reach as high as 70 percent of a person’s income. The Greek government jacked rates up so sharply in the last couple of years that the country’s notorious black market has grown again.” The IMF also wants the state to “cut pensions further next year [in 2019], and to resist restoring collective bargaining agreements, which cut the iron power of unions but also led to a drop in wages” (Alderman, 2018).
In their report, the International Monetary Fund writes: “Macroeconomic imbalances have been largely eliminated, but high public debt, weak bank and other private sector balance sheets, capital controls, government arrears, and the large at-risk population weigh on growth prospects, and progress with key fiscal and market reforms has lagged. Greece needs to continue its reform efforts if it is to achieve sustained high growth and secure competitiveness within the Euro Area, while also supporting those in greatest need. The authorities’ growth strategy contains promising elements in this respect, and further assessment of gaps, continuity with current reforms, and implementation will be crucial.”
They also want Greece to reach economic growth of 3.5 percent between 2018-2022, arguing that in order to do this, it will take increasing taxes and limiting government spending (IMF, 2018).
In the conversation about the IMF and Greece, it should not be lost that some look at the IMF as being far from efficient, and even being harmful to Greece’s economic recovery. For example, as Millman (2018) writes, “Two years ago [in 2016], the IMF’s Internal Evaluation Office issued an astonishing report about how the Greek bailouts came to be. With extraordinary candor, it described how the organization violated its own protocols, corrupted its independent analyses, and deceived its own board in order to hide the fact that the original bailout was not primarily intended to help Greece. Instead, it was clearly intended to help stabilize the European financial system and the political viability of the euro.” He goes on to say that “This choice had profound effects on what happened next. Had the bailout been about Greece, the IMF would have paid far more attention to the unsustainability of the country’s total debt load, as well as to how the bailout was letting private lenders off the hook for their own poor investment decisions. But by following its normal procedures and demanding a steep devaluation of Greece’s currency (which would require exiting the euro) and/or the restructuring of the country’s sovereign debt, the IMF also might have endangered the solvency of the German banking system — with catastrophic consequences for the global economy. So the IMF did an end-run around its own procedures to effectively sacrifice Greece to save the world.”
