Greece : The conditionnalities against sustainability

Chapter 5

17 August 2015 by Truth Committee on the Greek Public Debt

Chapter 5, Conditionalities against sustainability, presents how the creditors imposed intrusive conditionalities attached to the loan agreements, which led directly to the economic unviability and unsustainability of debt. These conditionalities, on which the creditors still insist, have not only contributed to lower GDP as well as higher public borrowing, hence a higher public debt/GDP making Greece’s debt more unsustainable, but also engineered dramatic changes in the society, and caused a humanitarian crisis. The Greek public debt can be considered as totally unsustainable at present.


The outcome of the Memoranda has been a deep economic recession, coupled with a terrible social regression. Reality did not confirm the economic projections made by 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.
in 2010. Instead of a quasi-stagnation (-1.5%), between 2009-2014 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.
declined by 22%.

- The “rescue programmes” were based on patently wrong assumptions and its unsustainability was predictable. However, the main goals were the rescue of private creditors and the forced imposition of neo-liberal reforms in Greece.

- The conditionalities have been counterproductive in terms of their aims regarding debt sustainability, and simultaneously engineered dramatic changes in society. Economic performance has deteriorated, competitiveness has not been re-stored, and the debt-to-GDP ratio increased.

- The current scenarios of the IMF and the EC are still based on the same unrealistic assumptions. These assumptions greatly hinder the future growth of the country and, especially, its ability to engage in developmental and ecological transition.

- These detrimental impacts (on GDP, investment, labour productivity, output/capital ratio and employment) amount to a radical change of economic circumstances. An ecologically and socially sustainable economic development is incompatible with the existing austerity policies. For this reason, the Greek public debt can be considered as totally unsustainable at present.

Greece has been implementing the so-called structural reforms (in labour and product markets, pensions, health) along with the MoUs, as the OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
points out: “Since 2009-10, Greece has the highest OECD rate of responsiveness to structural reforms”. [1]

In its June 2013 evaluation, the IMF congratulates Greece for its pension reform as being “one of the main achievements of the program”. [2] The out-come of these policies has been a deep economic recession, coupled with a terrible social regression, as documented in Chapter 6.

1. When economic dogmatism meets political will

In May 2010, the report from the IMF on the Re-quest for Stand-By Arrangement [3] made projections associated to the programme of fiscal consolidation.

GDP was supposed to decrease by only 1.5% between 2009 and 2014 (-4.0% in 2010, -2.6% in 2011, +1.1% in 2012 and +2.1% in 2013 and 2014). In reality, GDP declined by 22% in this period.

This substantial divergence was perfectly predictable, even inside the IMF. Many executive directors expressed their deep scepticism on these “overly benign” economic projections at the board meeting on 9th May 2010. [4] They raised “considerable doubts about the feasibility of the program”, which could prove to be “ill-conceived and ultimately unsustainable”: “It is very likely that Greece might end up worse off after implementing this program” which is only “a bailout of Greece’s private-sector bondholders, mainly European financial institutions”.

The final decision was nevertheless pushed forward by the US and most European directors arguing that “the striking thing is that the [Greek] private sector is fully behind the program” and “debt restructuring has been ruled out by the Greek authorities themselves”.

This clearly assumed decision relied on the ad hoc theory of “expansionary fiscal consolidation” [5] which was summarized a little later by the President of the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
: “It is an error to think that fiscal austerity is a threat to growth and job creation”. [6]

As early as October 2010, the IMF becomes more cautious and discovers that “fiscal consolidation typically has a contractionary effect on output”. [7] In 2011 the IMF’s Chief Economist, Oliver Blanchard admitted that austerity is bad for growth [8] and formalised this in the 2013 admission that “fiscal multipliers were substantially higher than implicitly assumed by forecasters”. [9] Given that access to Fund resources is designed to enable countries to “correct maladjustments in their balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. without resorting to measures destructive of national or international prosperity” [10] the IMF operations in Greece clearly and intentionally breached the Fund’s objectives.

The outcome is a systematic underestimation of the recessionary effects of the adjustment program. In 2010, the entire first programme even assumed renewed market access from 2012 and the end of financing by the ‘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.

’ as soon as 2013. [11]

Another “mistake” admitted by the IMF was that “ex ante debt restructuring was not attempted” although “one way to make the debt outlook more sustainable would have been to attempt to restructure the debt from the beginning”. Instead, “a delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands”. [12]

2. A general deterioration of economic performance

The austerity policies had a dramatic effect on investment: the volume of gross capital formation fell by 65% in 2014 compared to 2008 and the labour productivity by 7%. [13] The latter is the result of a decrease in capacity utilisation rate which is reflected in the growth of the fixed capital to GDP ratio, from 3.6 in 2007 to 4.9 in 2013 and 4.8 in 2014. In the manufacturing sector, the capacity utilization rate decreased from 73.5% in 2006-2010 to 65% in 2013 and 67.7% in 2014. [14] The increase in the fixed capital to GDP ratio also explains the fall of profitability, which has been much more important, since 2007, in Greece than in the euro area, despite the substantial growth of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. margins.

The adjustment policies greatly hinder the future growth of the country and its ability to engage in development and ecological transition. The consequences of such policies are serious, not only for the present, but also for the future of Greece.

3. Competitiveness has not been restored

The trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. is almost zero in 2014. But this is not due to the success of adjustment policies. This rebalancing has been achieved by a decrease in imports, which is itself the result of the recession. The internal devaluation Devaluation A lowering of the exchange rate of one currency as regards others. was meant to restore competitiveness, [15] but wage cuts were not passed on to export prices: since 2008, unit labour costs have fallen by 24% compared to the trade partners of Greece. But export prices remained flat and export profit margins increased by 36% (relative to competitors). The EC itself has highlighted this phenomenon: “profit margins increased – particularly in tradable industries – thus absorbing part of the reduction in unit labour costs”. [16]

4. The design of the conditionalities increased the debt to GDP ratio

Figure 5.1 - Alternative scenarios

Source : Gechert and Rannenberg, 2015.

Calculations by the Hans Boeckler Foundation in Germany show that without austerity the Greek economy would only have stagnated rather than lose 25% of its GDP. [17] Consequently, in the absence of austerity, the 2014 debt to GDP ratio would actually be 8.1 percentage points lower (see Figure 5.1). Furthermore, had only tax increases been implemented, without spending cuts, the 2014 estimated debt to GDP ratio would be 37.1 percentage points below its actual level. The implementation of fiscal and wage austerity in Greece, which already lacks structural competitiveness, produced prolonged recession and unemployment with adverse feedback effects on the financial fragility of the government. [18]

A New Deal Plan for Greece, [19] based on an EU-funded transfer of €19.8 billion, which could be used to finance a direct job creation programme of at least 300,000 jobs for unemployed workers, [20] combined with a moratorium on interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. payments to public sector institutions, would have been significantly more successful in terms of growth, employment, and debt to GDP ratio.

5. The humanitarian damage of conditionalities made debt economically more unsustainable

TABLE 5.1 - Effects of the actual fall in the wage share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. in Greece on growth, tax revenues, debt and public debt/GDP

*Actual data supplied by AMECO European Comission DG ECFIN.
** Own calculations based on estimations by Onaran and Obst 2015, based on the methodology in Onaran and Galanis 2012.

As a result of the changes in minimum wages, collective bargaining processes, public wages, and the rise in unemployment, real wages were 17.2% lower in 2014 compared to 2009. The share of wages in national income has fallen from 60.1% in 2010 to 55.1% in 2013 - a major fall of 5% points in only three years. A fall in the wage share has crucial effects on growth, and hence tax revenues, public borrowing, public debt/GDP ratio, and thereby the sustainability of debt.

Using the methodology developed in a report for the ILO, [21] we estimate the effects of a 1% fall in the wage share on consumption, private investment, domestic prices, export prices, exports, and imports in Greece. [22] A 1% fall in the wage share leads to a fall in GDP by 0.92%. Using this finding, we estimate the loss in tax revenues, and the rise in interest payments and public debt as a consequence of the fall in the wage share in Greece. As can be seen in Table 5.1 below, our estimates show that the fall in the wage share has led to a 7.80% increase in the public debt/GDP ratio. The fall in wages alone explains more than a quarter (27%) of the rise in the public debt/GDP in this period.

The policy package attached to the MoUs has not only increased inequality, but also contributed to lower GDP as well as higher public borrowing, and a higher public debt/GDP. This has made the Greece’s debt more unsustainable. The conditionalities of the MoUs have been counterproductive in terms of their aims regarding debt sustainability, whilst simultaneously engineering dramatic changes in the society.

6. The current scenarios of the IMF and the EC are still based on unrealistic assumptions

The current baseline scenarios of the IMF and the European Commission [23] unfortunately only replicate their past aberrations. They postulate that the debt/GDP ratio should decrease from 177.1% in 2014 to 139.4% by 2019, i.e. by 37.5%. Growth is supposed to contribute for 27.3% and primary surpluses for 19.9%. Inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. and privatizations are expected to have a positive contribution to this decrease. Overall, this is expected to guarantee interest payments, which will cumulatively reach 25% points of GDP in 5 years. However, this scenario is not consistent, as is shown by the economists from the French OFCE, who failed to replicate this scenario, [24] because it is based on four unrealistic assumptions [25] : 1. the output gap would be closed within the next five years; 2. The recovery would be led by domestic demand despite high unemployment and low wages; 3. The contribution of public demand to growth would be positive although no actual increase in the share of government expenditures in GDP is foreseen; 4. the recovery would have a negative impact on imports (as a ratio to GDP).

Another striking fact is the concentration of repayments in 2015 and 2016 and - in a seemingly systematic way - in the next elections years, 2019 and 2023

Figure 5.2 - Greece’s Debt Repayment Calendar

7. Radical change of economic circumstances

Table 5.2 - Effects of a 1%-point fall in the wage share in Greece on private demand and growth

Source : Onaran and Obst 2015. Estimations are based on the methodology in Onaran and Galanis, 2012.

Adjustment policies led to a radical change of economic circumstances. They had detrimental impact on GDP, investment, labour productivity, output/capital ratio and employment. An ecologically and socially sustainable economic development presupposes, inter alia, a substantial increase of public spending (including public investment). It is incompatible with the existing austerity policies, because there is no room for any budget primary surplus. For this reason, we consider the public debt as totally unsustainable at present.

Chapters :
Chapter 1 : Debt before the Troika
Chapter 2 : Evolution of the Greek public debt during 2010-2015
Chapter 3 : Greek public debt by creditors in 2015
Chapter 4 : Debt mechanism in Greece
Chapter 6 : The impact of the “bailout” programme on human rights
Chapter 7 : Legal issues surrounding the MoU and Loan Agreements
Chapter 8 : Assessment of the debt as regards illegitimacy, odiousness, illegality and unsustainability
Chapter 9 : Legal foundations for repudiation and suspension of Greek sovereign debt
Preliminary Report of the Truth Committee on Public Debt in PDF

Additional :
Eric Toussaint’s speech at the presentation of the preliminary report of the Truth Committee


[1OECD, 2013. OECD Economic Surveys GREECE. Available at: [Accessed June 12, 2015].

[2IMF, 2013. Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement, IMF Country Report No. 13/156. Available at: [Accessed June 12, 2015].

[3IMF, 2010. Greece: Staff Report on Request for Stand-By Arrangement, IMF Country Report No. 10/110. Available at: [Accessed June 12, 2015].

[4Criminal case file transmitted to the Hellenic Parliament by economic crime prosecutors (September - November 2012) concerning statements of former Greek representative to the IMF, P Roumeliotis: IMF, Board Meeting on Greece’s request or an SBA – May 9, 2010, May 10 2010, Washington DC.

[5This “theory” was especially developed by Alberto Alesina. See Alesina, A.F., 2010. Fiscal adjustments: lessons from recent history. Harvard University. Available at: [Accessed June 12, 2015].

[6Liberation, 2010. Jean-Claude Trichet, Interview with Libération. Liberation. Available at: [Accessed June 12, 2015].

[7IMF, 2010. Will It Hurt? Macroeconomic Effects of Fiscal Consolidation. World Economic Outlook. Available at: [Accessed June 12, 2015].

[8Blanchard, O., 2011. 2011 In Review: Four Hard Truths. IMF direct. Available at: [Accessed June 12, 2015].

[9The fiscal multiplier is the ratio of a change in GDP to the change in government spending. Blanchard, O. & Leigh, D., 2013. Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper. Available at: [Accessed June 12, 2015].

[10IMF, 2011. Articles of Agreement of the International Monetary Fund. Available at: [Accessed June 12, 2015]. Art. I ii) and v).

[11IMF, 2010. Greece: Staff Report on Request for Stand-By Arrangement, IMF Country Report No. 10/110. Available at: [Accessed June 12, 2015].

[12IMF, 2013. Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement, IMF Country Report No. 13/156. Available at: [Accessed June 12, 2015].

[13Source: Ameco

[14European Commission, 2015. STATISTICAL ANNEX of European Economy SPRING 2015. Available at: [Accessed June 12, 2015].

[15Dafermos Y. and Nikolaidi M. (2012) and Argitis G. and Nikolaidi M. (2014) show that Greece suffers from non-price competitiveness, which can only be addressed by industrial policy and investments rather than wage cuts. The conditionalities deter any such policies. Dafermos, Y. and Nikolaidi, M. (2012) How can the Greek trade balance improve? Policy Brief 5, Observatory of Economic and Social Developments, Labour Institute, Greek General Confederation of Labour (in Greek), ; Argitis G. and Nikolaidi, M. (2014) Economic Crisis and Productive Restructuring in Greece: The Role of Manufacturing, Study 28, Observatory of Economic and Social Developments, Labour Institute, Greek General Confederation of Labour (in Greek),

[16European Commission, 2013. Labour Costs Pass-through, Profits and Rebalancing in Vulnerable member states , Quarterly Report on the Euro Area, vol. 12, n°3. Available at: [Accessed June 12, 2015].

[17Gechert, S. & Rannenberg, A., 2015. The costs of Greece’s fiscal consolidation, IMK Policy Brief, March. Available at: [Accessed June 12, 2015]. The authors use multipliers estimated based on a systematic meta-regression analysis for the recession periods for different fiscal components.

[18Argitis, G. & Nikolaidi, M. (2014) The financial fragility and the crisis of the Greek government sector, International Review of Applied Economics, available at:

[19Papadimitriou D.B., Nikiforos M. & Zezza, G. (2014) Is Greece Heading For A Recovery? Levy Economics Institute of Bard College, Strategic Analysis, December, available at:

[20Antonopoulos R., SMITH A., Kim K., Masterson T. & Papadimitriou D. B. (2014) After Austerity: Measuring the Impact of a Job Guarantee Policy for Greece Public Policy Brief No. 138, Levy Economics Institute of Bard College. October, available at:

[21Onaran, Ö. and Galanis, G. (2012) Is aggregate demand wage-led or profit-led? National and global effects, Conditions of Work and employment Series No. 40, International Labour Office, 2012, available at:

[22Onaran, Ö. and Obst, T. (2015), Wage-led growth in the EU15 member states : the effects of income distribution on growth, investment, trade balance, and inflation, Foundation of European Progressive Studies, available at: See Table 5.2 in Appendix.

[23IMF (2014), Fifth Review Under The Extended Arrangement”, IMF Country Report No. 14/151, June, available at: ; European Commission (2014), The Second Economic Adjustment Programme for Greece Fourth Review, April, available at:

[24Antonin C. Grèce : sur la corde raide, Revue de l’OFCE n°138, 2015, Available at:

[25MUNEVAR, D (2014), Public debt: a solution for Greece. November 9th.

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