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Analysis
Greek epic runs its course

Greek epic runs its course

Numbers and strategies didn't add up

by Mark Sobel in Washington

Mon 11 Jun 2018

Part-tragedy, part-epic: that describes, in the past eight years, the relationship between the International Monetary Fund, Greece and the rest of Europe. A new chapter beckons.

By all appearances, the IMF will not be activating its 'approval in principle' programme for Athens, under which the Fund's executive board approves country financing based on policy agreement, conditional on an accord with creditors on debt relief or new financing.

The new German government, which took office in March, has shown little more readiness than the previous one to decide necessary Greek debt relief. So, in its future interactions with Greece, the Fund – regrettably, but in the circumstances rightly – will move to surveillance and post-programme monitoring, without providing any funding.

Last year the IMF agreed a deft compromise by approving a precautionary standby programme for Greece, based on the approval in principle procedure, for a roughly one-year period coinciding with the European programme for Greece that expires in August 2018. The aim was to calm tensions and win time in the hope that creditors, especially a new German government, might agree to a debt deal.

Those hopes have apparently been dashed. Yet Athens is no longer at the centre of European skirmishing. Further, Greece's never-wholehearted commitment to reform has been in recent times something of a sideshow in the long-running feud between Brussels, Berlin and the Fund over debt.

The IMF should help its members, even under adversity. That is why it exists. But, as a global institution, the IMF must safeguard its resources. Fund programmes must uphold a semblance of high quality standards and ensure sustainability. Ultimately, in Greece's case, those tests were not met. This conclusion is justified, even if it entails difficult judgments that at times may seem arbitrary and unfair.

An ideal outcome would have been a government in Athens committed to reform; and Greece's European partners and the Fund working co-operatively to forge a brighter Greek future. Unfortunately, history has turned out differently.

Relations were never smooth, but there were some bright spots. A massive Greek-induced global fallout was staved off in 2010. In 2012, the IMF gave more support in the context of a large private sector debt reduction. Arguably, the Fund could have supported Greece with a further programme in late 2014 – it did not. But since then, the Fund has been largely right, despite much acrimony and finger-pointing.

Greece's willingness to decide positive structural change has been tenuous at best, even putting to one side the disastrous 2015 start by Prime Minister Alexis Tsipras's administration. To be sure, the Greek government has compressed spending significantly and run up unexpectedly large primary surpluses. Yet there is doubt about the quality and sustainability of the adjustment, particularly against the backdrop of constant arrears. The unseemly scapegoating of Andreas Georgiou, the former statistics chief, under the guise of judicial process, is another striking symbol of Greece's questionable commitment to reform.

The Fund's relationship with European partners has been tumultuous. Berlin has been key. In the light of domestic political difficulties in mobilising financial support for Athens, Germany wanted Fund involvement to ensure Greek reform credibility, act as a watchdog for the Bundestag and public opinion and keep the European Commission on a short leash.

Brussels, for its part, sought to span the gap between Berlin and the IMF. It has been a bridge too far. Berlin has been unwilling to provide the necessary precondition for Fund involvement: sufficient debt relief for Greece – even though Berlin knows the Fund will not lend to a country whose debts are unsustainable.

For its part, by going along with Europe's desire to avoid 'haircuts', the Fund argued that, with decades-long maturity extensions and grace periods at very low interest rates, Greece's debt might be sustainable.

That view was always questionable. It meant Greece would face many years with a huge debt overhang that could stifle investment and growth and thus impede debt service capability. However, Brussels and Berlin compounded the problem by rejecting the Fund's economic assumptions, arguing instead that Greece could unrealistically run large austerity-driven primary surpluses and yet still grow robustly well into the future, if not for perpetuity.

The Fund's clever manoeuvring to remain in the Greek programme to avoid upsetting markets and annoying the Europeans (especially the Germans) has seemingly run its course.

The Fund in recent years has been right to claim that Greek debt is not sustainable, and the numbers did not add up. In the end, given the parties' different interests, the strategies didn't either.

Mark Sobel is a former Deputy Assistant Secretary for International Monetary and Financial Policy at the US Treasury and until earlier this year US representative at the International Monetary Fund.

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