SYRIZA, the IMF and the EU: Gambling with the future of Greece

7 April 2016 by Daniel Munevar , Costas Lapavitsas

An impossible agreement

The latest flare up regarding Greece has followed publication by Wikileaks of illegally taped discussions among IMF officials. To analyse the significance of this event it is vital to bear one point in mind: Greece cannot meet the terms of the bailout agreement struck on July 2015 by Prime Minister, Alexis Tsipras. The agreement is effectively dead and all parties involved are aware of that, even if they are not openly admitting it.

To establish this point there is no need to engage either in Debt Sustainability Analysis, or in macroeconomic projections of output. Suffice it to mention that the agreement requires Greece to ensure a primary surplus of 3.5% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
in 2018. The Greek economy actually returned to recession in the last quarter of 2015 and the available indicators since the end of 2015 have ranged from bad to appalling: industrial turnover in December was down 13.5%, retail turnover in January was down 3.8%, unemployment in the last quarter of 2015 was up to 24.4%, job vacancies for the whole of the economy in the last quarter of 2015 stood at a pitiful 3119, and the banking system currently has perhaps 115bn of non-performing exposure, roughly 50% of its loan book.

Once the austerity measures of the bailout agreement kick in, substantially reducing aggregate demand for 2016-17 via tax increases and lower pensions, the recession will become deeper. There is no way that this ruined economy could generate a 3.5% primary surplus in 2018. The problems thereby created for all parties to this disastrous bailout are legion.

The problem of the Greek government

In the worst position is the Greek government, which signed up to the bailout in direct contravention of everything that it had promised to do in 2015. As the reality of its deception and the harshness of the squeeze have begun to sink in, electoral support for Tsipras has vanished.

All competent polls show the opposition New Democracy – with a new leader – comfortably ahead. The outlook has become even worse for SYRIZA by the refugee wave, which has turned Greece into a kind of EU repository for refugees and migrants. For the time being the country has avoided a major crisis, but the situation remains extremely fraught as the deportation of migrants to Turkey has just started.

In this context, the last thing that the Tsipras government would like to do is to impose further pressure on wage earners, or tax payers in an attempt to meet the impossible target of 3.5%. On the contrary, it is extremely keen to complete the first review of the bailout programme on a nod and a wink, pretending that current measures are sufficient to hit the bailout targets. It then hopes to receive a tranche of bailout money that will give it breathing space for a few months. The government’s further hope is that investment will pick up by the end of 2016, possibly through foreign capital inflows, thus allowing the economy to recover somewhat.

The question of what will happen in 2017 and 2018, and whether the bailout will prove viable in the medium term, is very low on the government’s list of priorities. It is, of course, a measure of its desperation and naivete that it is banking on a spurt of private investment, the least predictable factor of aggregate demand. But such has been the trajectory of SYRIZA in power from the beginning.

The problem of the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
and the EU

For the IMF the problem is of a smaller, if still significant, order of magnitude. The Fund has been badly caught out by the Greek disaster, having masterminded two failed bailouts in 2010 and 2012. Its projections of growth have been wrong, its assessment of the multipliers was notoriously mistaken, its judgement of how Greece is positioned relative to the world markets has been poor. On any dispassionate assessment of the situation, the role of the Fund has been disastrous. The loss of credibility has been substantial, the exposure to Greece remains large, and the internal ructions caused by continuing with failed policies are far from negligible. Given the hopeless nature of the third bailout, the IMF is again in danger of being proven calamitously wrong.

In this context, the Fund has been calling for major debt relief for Greece to generate some feasible targets for 2018. After all, the reason why the country faces the impossible target of 3.5% is the need to service its enormous and unsustainable public debt. Not only this, but since the Fund’s Debt Sustainability Assessment shows that under current conditions the bailout terms do not add up, the IMF faces strong internal opposition to approving the review of the Greek programme. IMF staff and non-European members of the Executive Board are resisting continued involvement with what is becoming the biggest programme failure in the Fund’s history.

Thus, the IMF, without changing its basic approach, has been pushing for significant debt relief for Greece to give a chance of success to the bailout agreement. For the Fund this must go hand-in-hand with credible, and tougher, short-term measures that would allow Greece credibly to achieve a primary surplus target of 1.5% of GDP. Even though the position of the Fund does not represent a departure from austerity policies, the difference between the previous and new targets does imply a significant relaxation of the fiscal position of Greece over time. Furthermore, the debt relief that would be required to ensure consistency between the lower fiscal targets and debt sustainability would be quite substantial. According to the assessment conducted by the IMF in July 2015, any scenario in which the primary surplus for Greece was allowed to drop below 2.5% of GDP would require stretching debt repayments decades into the future as well as “a significant haircut of debt”.

And this is where the EU and the German government come in. For the Commission it is vital to appear as if the Greek problem is under control, the bailout is a success and no significant debt relief measures need to be contemplated. It is well known that Commission projections and forecasts have an optimistic bias, very much in line with its institutional role. In the case of Greece, the Commission’s formal assessment of the third bailout is more positive than the IMF’s, which means that the Commission is generally amenable to completing the review and releasing the bailout money.

This, of course, perfectly suits the short-term aims of the Tsipras government. From the perspective of Tsipras – who has always been primarily concerned with political expediency – it would be desirable for the IMF to leave the programme and for the Commission to have the decisive role.

The trouble is that, for the German government – the true power behind the bailout – the Commission does not have sufficient gravitas to guarantee the credibility of the Greek programme. The presence of the IMF acts as a guarantee for the Bundestag, which contains a sizeable contingent that is fervently opposed to bailouts in general, and to the Greek bailout in particular. Yet, at the same time, the Bundestag is strongly opposed to any substantial debt relief for Greece, particularly if that would involve a debt write off.

Quite how the German government will square this circle is far from clear. Its task has been made much more difficult by the refugee crisis, which has turned Greece into a convenient repository of migrants, keeping the pressure away from Germany, where the majority of refugees/migrants wish to go.

Is there an IMF plot to create a Greek crisis?

The import of the leaked discussions and the reasons for the attack on the IMF by the Greek government can be better understood in this context. The transcripts show that in exchange for supporting the lowering of fiscal targets and the provision of debt relief, the IMF is demanding an additional current fiscal adjustment amounting to 2.5% of GDP. This would include tax increases and pension cuts going way beyond the latest bailout agreement. Thus even though the IMF is now proposing what SYRIZA has demanded all along, i.e., less austerity and some debt relief, the price to achieve it is quite harsh. Indeed, what the IMF is doing is effectively to move the goal posts attempting to rescue a failed agreement that it designed in the first place.

Still, the bitter complaints of IMF officials about their Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

partners is underpinned by frustration about the politics of the Greek bailout. Thomsen and Velculescu claim that the Commission and the Eurogroup are well aware of what is required to ensure the participation of the IMF in the Greek programme. However, European politicians will do whatever they can to delay recognition of the hopelessness of the agreement. In the eyes of the IMF, the Commission is giving the Greek government an easy pass on the review of the programme to ensure continued disbursement of funds. The Eurogroup, meanwhile, keeps playing for time. Unable to accept the fiscal targets proposed by the IMF and their implications, it keeps sending technical teams to Athens to find more measures to achieve the impossible target of 3.5%. An entirely pointless exercise.

Thomsen and Velculescu insist that European leaders have to make a choice. Either they will continue kicking the can down the road on the basis of make-believe projections, which implies that the IMF would be out of the programme. Or, they will accept the conditions of the IMF for fiscal targets and debt relief, keeping the Fund in the programme. Such as choice implies a crisis somewhere down the line.

It is stating the obvious that every single important decision relating to Greece has always involved last minute agreements after marathon sessions and dramatic events. The accusation by the Greek government that the IMF is actively plotting a crisis to bring Greece to heel is not supported by the transcripts. The IMF functionaries are merely stating what is well known about the politics of the Greek bailout. They are breathtaking cynical in doing so, and they do not acknowledge the many faults of the Fund, but they are not plotting a crisis.

What is likely to happen?

It is clear that the outcome of the current negotiations hinges on yet another political gamble made by Tsipras. Implicit in his government’s attack at the IMF is the consideration that, for all its power, the Fund is still junior to the European lenders. Thus, even if Greece would deliver on the tougher measures requested by the IMF, the promise of debt relief would remain uncertain. After all, the IMF could do no more than threaten to abandon the programme in order to force a haircut.

From the perspective of Tsipras, when the unavoidable showdown with the European lenders would come, it is conceivable that Germany would keep Greece in the Eurozone, leaving the IMF behind. Inevitably this would take the issue of significant debt relief off the table. Greece would continue to receive bailout funds keeping it afloat, while pretending to follow the prescriptions coming from Brussels. The SYRIZA government would gain some more time. The Greek people, meanwhile, will continue subsisting in a netherworld of stagnation and poverty.

But it is also conceivable that Angela Merkel will find it politically impossible to exclude the IMF from the programme. In that case all should stand prepared for yet another Eurozone crisis. The Tsipras government will have a knife put to its throat to accept tougher terms in the short run, while some measure of debt relief will be put on the agenda to make the third bailout workable. The outcome of such a confrontation would be unpredictable, but it is unlikely that there would be a fourth bailout for Greece.

Daniel Munevar

is a post-Keynesian economist from Bogotá, Colombia. From March to July 2015, he worked as an assistant to former Greek Finance Minister Yanis Varoufakis, advising him on fiscal policy and debt sustainability.
Previously, he was an advisor to the Colombian Ministry of Finance. He has also worked at UNCTAD.
He is one of the leading figures in the study of public debt at the international level. He is a researcher at Eurodad.

Costas Lapavitsas

is a member of Popular Unity, Professor of Economics at SOAS and former member of the Greek Parliament.

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