Αt the moment, there is a broad and open dialogue taking place between the EU and IMF officials about the possibility for the IMF to participate in the second fiscal adjustment program for Greece.
The Greek program has been ongoing for seven years, driven by the necessity of avoiding a painful bankruptcy. In 2009, the Greek government’s budget deficit was at levels well above those that would make its public debt sustainable. It was unable to borrow at reasonable interest rates on the markets in order to tackle its deficit and, eventually, refinance its debt.
A critical issue as to whether or not the IMF gets involved is Greece’s current debt sustainability. Despite major fiscal reforms, it seems to be unsustainable in light of recent reports. There is thus a very large possibility of a rupture between IMF and the Greek aid program (or at least its credit participation) if the dialogue between the Greece and EU officials (Germany’s representatives, in particular) does not lead to consistency and unity of views on future debt management policies.
The IMF’s Role So Far
In mid-2010, Greece resorted to the help of the International Monetary Fund, European Commission, and European Central Bank.
It was necessary for the IMF to involve itself in such an unusual and unexpected problem in the eurozone problem: Europe’s institutions could not directly aid a state risking bankruptcy, so only the IMF could be Greece’s lender of last resort in its time of need. What’s more, the IMF’s involvement was needed in practical terms – especially for its expertise gained in addressing the financial crisis in addition to its fiscal consolidation tools that could help counterbalance the Greek deficit.
So far, it is known that the IMF’s financial aid policies and the EU’s cooperation with Greece have not produced the best of results. This has opened up a battlefield in which each party seeks to carry the least possible responsibility for Greece’s economy becoming trapped in unsustainable debt, in order to protect their interests and even to maintain prestige.
This does not mean that successive Greek governments should not bear a degree of responsibility for its implementation, some more justifiably so than others. The current government, however, has lost too much time through chaotic negotiations, This is one of the reasons why the country’s credibility is challenged abroad.
Unsustainable Debt: The Main Reason for the IMF’s Withdrawal
Within the IMF, there are voices which call to cease participation – at least in terms of financial support – and to remain in an advisory role in order to ensure the repayment of loans from Greece.
This reasoning stems from the fact that the sustainability of Greece’s debt is not guaranteed: it requires restructuring, which will mean additional fiscal measures – which, in turn, will be added to existing ones, thus weighing heavily any expectations for positive GDP growth.
On the other hand, if IMF withdraws, Greece will arguably have to sign up to a new program without yet knowing how many and what kind of fiscal measures will be added to its obligations, and what debt management policies will have to follow for it to achieve sustainability.
In the coming weeks the debate is expected to peak in intensity. Any decisions about IMF’s involvement will likely be taken permanently after the closing of the upcoming second evaluation, which seems to be delayed because of the uncertain environment in the eurozone and difficulties in negotiations.
Europeans are also well aware that the presidential changeover in the USA will bring great upheavals in the IMF’s strategy. As time passes, the balance will be tilted towards non-participation on the IMF’s part, and therefore there is the willingness to achieve consensus as quickly as possible from those who hope to continue this cooperation. Those who are wishing for a rupture, it seems, seems that are those who delay the agenda with their vocal disagreements.
The Importance of the IMF’s Participation in the Greek Programme
The most important thing is that the IMF’s withdrawal will extinguish any hope for Greece to restructure its unsustainable debt, for which it must currently (and for the next several years) achieve large primary surpluses of 3.5% of GDP in order to maintain its finances. The IMF constitutes an ally to Greece’s larger problem whilst there is no consensus to be found in the EU. Also, the experience that IMF’s technocrats have is very important.
But a third important issue that makes the IMF’s continued participation important is that the EU and IMF have no reason to give off a Cold War-type economic picture to international markets, since their reputation is at stake.
The markets have shown confidence in the IMF-EU cooperation, and the bridge of dialogue and cooperation under this programme has helped both Greece and EU to build a profile in international markets that are not threatened by a potential domino collapse of a possible failure. The IMF remains an institutional guarantee that the EU can save Greece.
Could the EU Afford to Drive Greece to Debt Sustainability with its Own Powers?
Finally, it has been argued that the EU could bear all the weight of the rescue of the Greek economy itself if the IMF withdrew. But if Greece could not participate in the EU quantitative easing program in March last year, could the EU really ensure a sustainable debt management policy? Has the EU the needed expertise to establish fiscal adjustment program with development features?
Furthermore, has the EU the needed expertise to establish fiscal adjustment programs with development features (in the way that the IMF has)? In short, could the EU do better for Greece than what is provided by the cooperation with the IMF? If not, there is no sense either for withdrawal by IMF. The coming weeks will be very important, and negotiations are expected to be even tougher and even more pressing from the involved parties.
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