Once again, it appears that Greece — the current “sick man of Europe” — will have to go hat in hand to the European Union, asking for help in dealing with its massive debt.
Greek’s debt is at an astronomical 175% of GDP, despite years of austerity budgets and three bailout packages. Now, the International Monetary Fund, a partner in all of those bailouts, is going to put its foot down and refuse to help the European Central Bank supply Athens with a fresh infusion of cash, saying Greek debt is on an “explosive path.”
Greece is running out of cash, but it needs to make repayments to creditors including the European Central Bank. Major bills are coming due in July.
If Greece cannot make the payments, it will default on its debt and spiral out of the eurozone.
Meanwhile, its latest bailout — the third since 2010 — is effectively frozen. The negotiating positions of major players are further apart than at any point since the bailout was agreed in June, 2015.
There is even disagreement over the size of the problem facing Greece.
“The IMF’s latest review of Greece’s debt position was surprisingly pessimistic,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of top eurozone finance officials. “It’s surprising because Greece is already doing better than that report describes.”
The IMF, Greece and creditors led by Germany all have very different priorities. Here’s what each wants:
The IMF has called on Greece to make more ambitious changes to its economy, including labor market reforms. The IMF didn’t join the third bailout when first agreed in 2015 because it did not view Greece’s debt as being sustainable. It still maintains that Greece cannot be self sustaining without major debt relief.
Greece’s main creditors agree that Athens should implement the reforms proposed by the IMF. However, they have categorically ruled out any debt relief, a position reiterated by eurozone finance officials on Tuesday.
Greek Prime Minister Alexis Tsipras, meanwhile, shows no sign of yielding to demands for additional reforms. He insists that debt relief is needed before any new concessions are made.
It’s a classic standoff and investors are watching to see which party blinks first.
Tsipras and his far-left Syriza party ran on a platform of throwing off the “austerity” shackles imposed by the EU and IMF and demanding debt relief. The delusional Greek prime minister claimed that because he won the election on that basis, the rest of Europe must fall in line behind the Greek voter.
Needless to say, the gimlet-eyed bankers in Germany and France felt no obligation to the Greek voter, much less the prime minister, and gave the loony lefty a deadline to propose severe cuts in the Greek welfare state and tax increases.
Tsipras, faced with a choice of seeing Greece default on its debt and be kicked out of the EU or impoverishing his people, took the road that the bankers always knew he would. He made the cuts and Greece fell into an economic depression.
Now Greece needs another infusion of cash beyond the tranche that’s due them this quarter. With the current bailout plan supposed to last until 2018, it’s problematic whether Athens will need more cash before then:
Greek GDP has started to grow, expanding by an estimated 0.4 per cent last year, but it is on a very weak path. IMF economists expect the country to grow at less than 1 per cent per year over the long-term, which is too low for it to pay down its debts.
That means Greece’s “public debt remains highly unsustainable, despite generous official relief already provided by its European partners,” the IMF believes.
Even if the country successfully implements all of its planned financial and economic reforms – which has been a struggle so far – its debt is projected to fall to from 179pc of GDP a year ago to 160pc of GDP by 2030 “but become explosive thereafter”.
“Greece cannot be expected to grow out of its debt problem, even with full implementation of reforms,” the IMF warned on Tuesday.
Despite Eurogroup protestations that the Greek bailout was sustainable, the IMF estimates that by 2060 its debts will amount to a crushing 275 per cent of GDP.
The IMF said progress to date in turning the crisis around has been “significant” but also acknowledged that the deep cuts to public services and pensions had come “at a high cost to society, reflected in declining incomes and exceptionally high unemployment.” Unemployment is currently still stuck at above 23 per cent.
Ted Malloch, President Trump’s expected choice for U.S. ambassador to the EU, told Greek TV that the fate of the eurozone will be decided in the next 18 months. The reality of Brexit, the possibility of another banking crisis, and a decision on what to do about Greece and its ever present, ever expanding debt will tell the tale.