The Greek Drama Continued - How About a Little IMF Debt Relief?

July 14th, 2015
in eurozone and euro

by Elliott Morss, Morss Global Finance


In spite of all the EU Summit drama and the "new Greek deal" there is nothing really new to report.  The important point: this drama will not end well. Below, I discuss the economic meaning of “austerity” and consider whether the IMF will offer any debt relief to Greece.

Follow up:

Austerity 101

Economic austerity can be defined as any government policy that reduces aggregate demand/increases unemployment. Table 1 shows what this meant for Greece when the IMF and its European partners first “cracked the whip.”

Table 1. – Greek Economic Data

Source: FocusEconomics

Joseph Stiglitz, the Nobel Prize winner and former chief economist at the World Bank provides context for this data:

…the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%. It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been.

Stiglitz has it just about right – except for one important point: the IMF gave up on austerity and thereby separated itself from Germany and its other European partners in 2011. As noted in an earlier piece, the Chief Economist of the IMF (Oliver Blanchard) reported in 2011 the IMF’s earlier estimates of unemployment effects of austerity were way too low. And here is what he meant: in 2010, The IMF projected that Greek unemployment would be 13.1% and 13.4% in 2011 and 2012, respectively. As Table 1 indicates, these rates turned out to be 17.9% and 24.4%.

So from 2011 on, the IMF gave up on austerity and pressed European nations to provide a second round of debt relief to Greece. But the European nations, led by Germany, have not given up on austerity and want no discussion of further debt relief. Perhaps it is more accurate to say that while nations of Europe are not in favor of an increase in the Greek unemployment rate, more austerity is all they have been able to come out with to resolve Greece’s economic problems.

The IMF’s Current View

Last Thursday, Blanchard issued a “blog” on Greece. Keep in mind this “blog” is not the view of a single person but a carefully vetted IMF perspective on what should be done in Greece. His key points follow:

  1. “…there may still be room for an agreement. It should be based on a set of policies close to those discussed before the referendum, amended to take into account that the government is now requesting a 3-year program, and a more explicit recognition of the need for more financing and more debt relief.
  2. …the Euro area faces a political choice: lower reforms and fiscal targets for Greece means a higher cost for the creditor countries.
  3. The Fund is committed to helping Greece through this period of economic turmoil. Given Greece’s failure to make a repayment due to the IMF on June 30, the Fund would be unable to provide any financing until the arrears are cleared. However, we have offered to provide technical assistance, where requested, and we remain fully engaged.”

Let us now briefly review the Fund’s actions and statements. The Fund developed and implemented the first Greek austerity program. It conceded it was a mistake: too much austerity. From then on, it pushed Europe for more debt relief. Between now and 2019 Greece is supposed to repay $22.3 billion in principal and $2.2 billion in interest. One might ask whether a little IMF debt relief should be forthcoming inasmuch as it has conceded its policy mistakes. I can hear the “why-nots” now: “it would set a bad precedent.”

The New Agreement

I start by again quoting Stiglitz:

“…what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

According to this latest agreement, this government surplus balance target would be achieved through spending cuts, tax hikes and pension reforms. This is austerity writ large. Government spending cuts mean less income spent by the government while tax hikes and pension reform mean lower incomes for the citizenry.

So what will Greece have to do to run a government surplus of 3.5% in 2018? FocusEconomics projects the government will run a deficit of 3% this year. To get to a 3.5% surplus on 2018, we are talking about a 6.5% reduction in the government’s demand as a percent of the Greek GDP. Using the Fund’s revised research data, this would mean unemployment increasing to over 30%.


An unemployment rate of 30%? No Greek government could survive. Everyone is angry at one another and sleepwalking. The Greek government should develop plans to leave the Euro zone. Until it is out for a couple of years thereafter, the economic waters of Europe will be quite choppy.

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