While the Mediterranean nation is meeting key targets under its second international bailout, such as budget cuts and changes to labor laws, concern about its debt levels “hang over the program,” the staff wrote in a report released yesterday. A second paper cited “notable failures” in the fund’s first loan to Greece in 2010.
“If investors are not persuaded that the policy for dealing with the debt problem is credible, investments and growth will be unlikely to recover as programmed,” the staff wrote in the report. “Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, and strong program implementation by the Greek authorities notwithstanding, a more front-loaded approach to debt relief would need to be considered.”
The recommendation reflects the tougher approach the IMF has taken over the past year with Europe over the level of debt it deems sustainable as it draws lessons from the first Greek bailout. In the self-evaluation also released yesterday, fund staff said it would have been better for Greece to restructure debt held by investors as early as 2010, a plan the IMF didn’t push because Europeans opposed it.
“Not tackling the public debt problem decisively at the outset or early in the program created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output,” the agency’s staff wrote in an assessment of the first Greek loan, which ended with the largest debt restructuring in history last year.
“A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands,” the staff said.
In December, European governments committed to further ease the country’s debt burden to ensure that it falls to 124 percent of gross domestic product in 2020 and “substantially below” 110 percent of GDP in 2022, from a peak of about 175 percent this year.
Under the current goals, some debt relief will be provided at the start of 2014 and of 2015 if Greece meets fiscal targets, IMF mission chief Poul Thomsen said on a conference call yesterday.
According to a different IMF report on the Greek economy also released yesterday, reaching the current debt-reduction goals will also require additional relief from European nations of 4 percent of GDP by 2020 and at least another 3 percent by 2022.
The IMF hopes “that will convince the private sector that private investors should not be concerned about the debt because there is a framework to take care of it,” Thomsen said. “If not, well, we’ll have to reconsider it.”
The Washington-based IMF is co-funding four bailouts with European governments in the euro zone, where the Greek-born debt crisis engulfed five countries.
If measures are not implemented as planned, the debt reduction may be much smaller, according to the fund. In an alternative scenario of lower growth, with privatization proceeds at half the amount expected and fiscal plans delayed by two years, debt would still amount to 147 percent of GDP in 2020, it said.
While IMF staff said there’s no need for additional budget cuts this year and next, it warned the government against easing existing taxes, including the one on property or on restaurant sales.
“The impressive fiscal adjustment evident since the crisis erupted is continuing, and the competitiveness gap and the current account deficit are now narrowing fast,” according to the staff report.
“However, the adjustment is still taking place through recessionary channels, and although the contraction is clearly slowing and sentiments are improving, there is no evidence yet of the sustained expansion in investments necessary for a robust recovery to get under way.”
The review was among several papers the IMF released yesterday on its involvement in the Greek bailout, including an evaluation of the fund’s role in approving a loan three years ago as the crisis deepened.
That report showed the IMF had “misgivings” about Greece’s debt burden and that its macroeconomic projections were too optimistic.
The evaluation concluded the program had “notable successes” such as a strong fiscal consolidation and helping preserve the nation’s membership in the euro area. The report also cited failures, including incapacity to restore market confidence and a banking system that lost 30 percent of its deposits.
The oversight of the program with the European Central Bank and the European Commission in the so-called troika lacked clarity in the division of labor, with “occasionally marked differences of view within” the group, according to the report.
In addition, “Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program,” the staff wrote.
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