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Greece’s debt ‘unsustainable’ says IMF, warns of coming crisis, calls for debt relief

The Financial Times is reporting that a confidential IMF report is saying that Greece’s public debt is ‘unsustainable’ and is set to spiral to three times the size of Greece’s annual economic output, and that Greece’s economy cannot be expected to grow out of its debt problem.

Anyone genuinely familiar with the situation in Greece, and who is able to look objectively at the situation there, can see that this is so.  I recently wrote for The Duran my impressions of the state of the country after a short visit there in November.  I made the point that despite claims that the economy was growing, all the indications on the contrary were that the situation is actually deteriorating.

Here is how the Financial Times summarises the IMF report

Greece faces what is likely to be an “explosive” surge in its public debt levels that within decades will mean it will owe almost three times the country’s annual economic output unless given significant debt relief, the International Monetary Fund has warned in a confidential report.  The new report was prepared by IMF staff ahead of a February 6 board meeting to discuss the fund’s participation in an EU-led €86bn bailout of Greece and signals the continuing hard line the IMF is taking on debt relief for Athens. It offers a bleaker view of Greece’s economic dilemmas than an analysis prepared last year, warning that the debt load is “highly unsustainable” and would not improve even if it implemented further reforms recommended by the fund.

The origins of the Greek debt crisis unquestionably lie in the gross economic mismanagement of successive Greek governments stretching back to the Papandreou era of the 1980s, but growing to baroque proportions during the Karamanlis era from 2004 to 2009.  It is also obviously true that Greece was wrong to join the eurozone when it did, and that it was – to put it mildly – ‘economical with the truth’ in describing its economic situation to the European authorities in Brussels and Frankfurt.
Repeatedly saying this has however become something of an alibi for the European authorities, and for Angela Merkel’s government in particular, in explaining away their own responsibility for the economic catastrophe that has been wreaked on the country.
Not only did they prefer to believe in the rosy economic picture Greek governments were giving them – disregarding the warnings which I know for a fact they were repeatedly given in private both by their own officials and by some Greek officials, and also by numerous private individuals – but once the debt crisis in Greece rose to the surface in the aftermath of the world financial crisis of 2008, they refused to acknowledge the obvious reality that Greece was bankrupt, and acted instead as if Greece was facing nothing more than a short term crisis of liquidity, which could be fixed by further lending.
The result was that instead of Greece being left alone to restructure its debt in IMF brokered negotiations with its creditors – as it both could and should have done – it instead took on even more debt, with its existing debt however transformed from debt it owed private banks into debt it owed other European governments.
Since the debt is now owed to governments who are accountable for their lending to Greece to their electorates, it is politically speaking almost impossible for Greece to be forgiven it, a fact that became only too obvious during the negotiations staged by Tsipras’s hapless government over the course of 2015.
The Financial Times is making the point that as the IMF is now close to recognising that Greece’s debt is unsustainable it is reaching the point where its own rules prohibit it from participating in the current bailout
That assessment would, under the fund’s own rules, prohibit the IMF from taking part financially in the current bailout, something countries such as Germany have made a condition of their own support.  “Even with these ambitious polices in place, Greece cannot grow out of its debt problem,” IMF staff warned in the report, seen by the Financial Times and drafted as part of the fund’s annual review of member economies. “Greece requires substantial debt relief from its European partners to restore debt sustainability.”
The problem is that “agreeing the substantial debt relief from European partners to restore debt sustainability” is politically almost impossible in the light of the German, France and Dutch elections which are due this year.
Angela Merkel – the European politician most responsible for the present disastrous policy – would surely balk at presenting the German electorate with such an admission of her own failure, whilst in France Marine Le Pen – who has contested the sense of the Greek bailouts all along – would rightly say her stance has been vindicated, whilst in The Netherlands – where the anti-European movement led by Geert Wilders is currently leading in the polls – such a move would be if possible politically even more toxic.
Logically, if European governments cannot agree the debt relief the IMF says is needed, then the IMF should pull out of the current bailout, leaving Greece in default, at which point the bailout would finally unravel.
That would actually be an advance over the present ‘unsustainable’ position we have now.
Greece would presumably have to leave the euro, but that is anyway essential if Greece’s economy is to regain competitiveness.  Whilst the short term disruption – and the suffering it would cause – would no doubt be immense, ways exist to deal with it and over time Greece would finally have the space it needs for its economy to recover.
Unfortunately the consistent story of the Greek debt crisis is that instead of the necessary decisions being taken botched compromises are instead at the last moment cobbled together to safeguard the integrity of the euro project and the reputations of European policy makers – of Angela Merkel’s above all – who are in the end responsible for the disaster.  The result is that the crisis continues and just goes on getting worse.
The latest IMF memorandum looks like a bid to try to force the hands of European politicians before whatever window there is for debt relief closes because of the pending German and Dutch elections.
Unfortunately on past experience it is unlikely to work.  European politicians – too frightened of their electorates to do otherwise – will almost certainly resist giving Greece the amount of debt relief the IMF’s experts consider sufficient to make a real difference, whilst the IMF’s Board has consistently shown itself unwilling to call the Europeans’ bluff by pulling out of the bailout, even though that is what its own rules requires.
The most likely result therefore is that the present ‘unsustainable’ situation will continue – with the crisis again sugarcoated for a few more by some unsatisfactory compromise – until the final breakdown eventually occurs, by which time I seriously wonder how much of Greece will be left.

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