Will She….Won’t She? The Greek Government’s “Latin Tango” With The IMF

Well the wires are really alive this morning. Greece is receiving a visit from the IMF today. The meeting was scheduled well in advance, but that doesn’t mean the agenda was.

A team of International Monetary Fund officials arrive in Greece today to aid the government in its efforts to tame Europe’s biggest budget deficit. The mission, “within the context of the regular surveillance that the IMF provides to its membership,” will help the government with “pension reform, tax policy, tax administration and budget management,” a spokeswoman for the Washington-based lender said in an e-mailed statement yesterday.

Really we have what is know as a “fluid” situation right now, and no one seems to be very clear about what happens next. The IMF arrive in the wake of an Athens visit by EU and European Central Bank officials last week (to discuss the government’s plan to be submitted to the EU before the end of the month), and EU President Herman van Rompuy is also scheduled to visit today. It is hard to know what the outcome of last week’s visit was, but press reports speak of the delegation pushing Greece to adopt tougher measures to cut the fiscal deficit.

It is however very important to understand that the issue in Greece is not simply one of reducing public spending to rein-in the deficit. The underlying problem is the external deficit (15% of GDP current account deficit) and the distortions in the economy and loss of competitiveness that this reflects. Simply cutting the fiscal deficit without addressing these issues will not reduce the government debt to GDP ratio, and may well actually increase it. It is the sustainability of Greek finances in the longer term that is the issue, and the only way of putting government finances back on a sustainable path is to return growth to the economy, and the only way to do that is to carry out an internal devaluation.

This is one of the principle reasons that I personally am arguing of the the IMF to take Greece into its arms now. Basically, I fear the Greek government itself is far from convinced of the necessity for the measures it needs to take, and a government which is itself not convinced will prove incapable of convincing a citizenry who still remain substantially in the dark about why what is about to happen needs to happen. The IMF is the only institution which I can see available at this point to oversee the process with the firmness which will be needed.

Olli Rehn Fails To Convince

What is required of Europe’s leaders at this point in time is some clear speaking, and this is exactly what we are not receiving. Asked by the Catalan MEP Ramon Tremosa (CDC) during his confirmation hearing yesterday whether he intended to put in place the kind of mechanism which IMF European Director Marek Belka has been calling for Rehn fought shy of an outright commitment to direct means of compulsion, and suggested that the desired result could be achieved by using “incentives” to encourage states which found themselves in difficulty to move toward compliance adding that there was a need for “broader surveillance”. But he did pledge to use “all instruments” to help member states restore their finances and come into compliance with the terms of the stability and growth pact, so I imagine that we are still talking about a “fluid situation” whose actual significance will only become clearer at the February EU summit. It could simply be that in order to get the 2020 plan consensually agreed Olli Rehn is putting the emphasis on incentives rather than coercion, but it must be evident that the means of coercion must be there if needed, and this must be clear to all, and in particular to the electors who vote-in those otherwise wavering politicians.

Certainly Spain’s leader José Luis Zapatero hasn’t made things easy for Rehn, as he seems to have bungled matters yet one more time in the present case, and his proposal that the EU should adopt “biting economic safeguards” only met with a full frontal rebuttal from German Economy Minister Rainer Brüderle, who on being interviewed stated he was opposed to what he described as plans by the Spanish EU Presidency to “sanction” member states who do not comply with the European Union’s “growth objectives”.

Basically this confusion is all Zapatero’s fault, since he presented the proposals as a move to set binding economic goals for member states under the coming 10-year plan to boost growth and competiveness, and called for corrective measures for those that do not comply. The 2020 strategy is intended to replace an earlier plan (the Lisbon aganda) that has manifestly failed in its goal of making the EU the world’s most competitive economy by 2010.

“It’s absolutely necessary for the 2020 strategy […] to take on a new nature, a binding nature,” Zapatero told reporters in Madrid one week after Spain began its six-month EU presidency, a mainly organisational role in which it can influence policy. He made clear he had not secured the agreement of other member states to make the economic goals binding under the 2020 strategy, but called for such proposals to be discussed at an economic summit in Brussels next month. “The informal summit on 11 February must bring up, in my opinion, measures including incentives and corrective measures for objectives set out in our economic policy,” he said. “European competitiveness depends on two words – unity and competitiveness. European unity and a competitive economy.”

All of this is really a complete confusion. The “binding measures” are need to reinforce the Excess Deficit Procedure which is applied under the Stability and Growth pact, and to give the right to the Commission to oversee the necessary structural reforms and internal devaluations. They are not needed to police growth targets which may or may not be realistic. No wonder the German economy minister got irritated. These measures are likely to be used against Spain, not Germany, and the growth issue only arises in the context of enforcing the SGP, since for those countries who enter a negative debt dynamic, a return to growth is essential, if default is not to be come inevitable.

Greece Is Not Argentina, Yet

Moving now from the ridiculous to the even more ridiculous, Desmond Lachman has an article in the Financial Times this morning entitled Greece looks set to go the way of Argentina.

“….much like Argentina a decade ago, Greece is approaching the final stages of its currency arrangement. There is every prospect that within two to three years, after much official money is thrown its way, Greece’s euro membership will end with a bang.”

This is nonsense, at least at this point. At this moment in time no country is either near, or even remotely near leaving the Eurozone, and I’ll tell you why. If Greece’s Eurozone membership ends with a pop (or even a whimper) that wouldn’t be anywhere near the end of the matter, since Spain would come hurtling right along behind, producing in the process the largest external debt default in recorded history, and the most likely aftermath would be that the whole Eurozone would end with a bang (with totally unknown consequences for the global financial system). So, quite simply, we cannot let that happen. Greece would not be Argentina (which was, after all the shouting, a mere financial pinprick). Greece could potentially be a much more serious matter than Argentina ever was.

I repeat, the issue is internal devaluation, and enforcing it. And if we can’t do it in the Greek case the markets would be quite entitled to draw the conclusion that we won’t be able to do it in the Spanish one.

The basic problem is returning the key countries to a sustainable growth path. As Standard & Poor’s stated when they took their recent decision to lower their ratings outlook on Spain, the reason for the change was the probability that the country will see “significantly lower” gross domestic product growth and “persistently high fiscal deficits relative to peers over the medium term”.

Personally I find nothing especially exaggerated in this judgement. S&P’s preoccupations seem valid, and widely shared, among others by the technical staff who prepare forecasts for the European Commission. The issue is not that Greece and Spain are on the verge of default, but that it would be dangerous to allow the situation in these two countries to deteriorate further. Reducing the level of external debt has to be one of the top priorities for both the Greek and the Spanish administrations, and it is clear that the only way to do this is by exporting more, importing less, and running a trade surplus. This is what the whole issue of restoring price competitiveness is all about, and since Spain no longer has the means to carry out a conventional devaluation the technique known as internal devaluation is the only one presently on the table and able to do the work in the time available.

So the immediate issue is not the inability of Greece and Spain to repay their external debt, but the fact that anti-crisis measures that simply have the effect of pushing up both the external debt to GDP ratio and the government debt to GDP one are hardly a helpful contribution. Both countries need to correct their external imbalances, not increase them further. What the Greek and Spanish governments need to apply are not policies which simply allow their countries to limp along from one year to the next, but reform measures which help them straighten out all the distortions which have accumulated during the course of the property bubble.

Obviously it would be proposterous to compare Spain’s fiscal situation with that of Greece, and indeed I know no one who has actually suggested that this is the situation. The concern being expressed is not that Spanish finances are on the verge of bankruptcy, but rather that the level of government debt to GDP is rising very rapidly, and that unless growth is restored to the economy the sustainability of public finances will become a problem in the longer term. According to the most recent EU Commission forecast Spanish gross government debt to GDP is set to rise from 39.7% in 2008 to 74% in 2011.

The situation with unemployment and job creation is similar. José Luis Zapatero has at long last publicly recognised that Spanish unemployment will only start to fall in 2010 (and not 2009 as previously forecast). The only problem with this is that outside Spain no one seems to recognise this seemingly good news, since the EU Commission and the IMF both maintain their forecasts for no improvement in unemployment in 2010 or 2011. In fact the forecasts for growth in GDP are still so low for 2011 (1% in the best of circumstances) that it will obviously be impossible to create increased aggregate employment if there is even a minimum level of productivity improvement.

Let us be clear then: the number one topic facing the Spanish government is how to restore growth to the economy. All the policy measures applied up to now have evidently failed to achieve this end. And now, following pressure the European Union to change course, Spain is going to have to increase taxes and reducing spending, while interest rates are likely to start to rise slowly. Far from adding momentum to the economy, all of these developments will simply serve to reinforce the recession, driving the level of GDP further and further downwards, and of course debt to GDP levels further and further upwards.

Evidently the Spanish situation is not yet as severe as the Greek one is. But risks abound. In the first place, and as Olli Rehn says, what happens to Greece is vital importance to Spain.

“The problem in Greece concerning the excessive deficit and rapidly rising debt is a very serious one,” Rehn said. “It has also potential spill-over effects for the whole euro zone.”

But risks to Spain are also accumulating inside the country itself, in particular in the form of the large stock of unsold houses the banks effectively are taking onto their balance sheets, houses whose value are effectively an unknown quantity. There are an estimated one and a half million new properties in Spain awaiting a buyer. Some of them are on bank balance sheets after being accepted in debt for property swaps. But far, far more are indirectly on their balance sheet via loans to property developers which will eventually be defaulted on. Many of these loans are continuing to be restructured, with developers generally now unable to afford even the interest payments, which are tending to get “rolled over”.

And now a new threat is looming: the rising rate of repossesions that the banks will need to accept in 2010. According to a recent article in the Spanish daily Publico – as reported by Spain Property Insight’s Mark Stucklin – Spain’s banks will have to cope with between a further 100,000 and 150,000 repossessions which are likely to come to a head in 2010. Many of these foreclosures started as far back as 2008, but have been delayed by overloaded courts unable to process the avalanche of repossession demands. From now on these foreclosures will be the “biggest problem for the banks” according to one real estate professional quoted in the article.

And the situation has become even more complicated, since the banks now find it very difficult to take such properties to auction, for the simple reason that the people who are normally there to buy them – the subasteros – are unable to get the credit from the banks that they normally use to buy with.

As Mark points out:

The big question is what impact this new batch of repossession – the equivalent of 15% to 20% of the current inventory of property for sale – will have on the market. Unable to sell at auction, the banks might end up offering them for sale at their write-off values. The danger is that an avalanche of these properties dumped on the market at write off values will send the market into a spin, with prices falling another 20% to 30%.

So, my final point is, we should not take the idea that the Eurozone is not about to fall apart as a reason for being complacent. Risks abound, and are painfully evident. And what we now need from Europe’s leaders is action, more action, and yet more action to establish clearly in everyone’s mind that they are aware of the task in hand, and are up to the job of carrying it through.

This entry was posted in A Fistful Of Euros, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

11 thoughts on “Will She….Won’t She? The Greek Government’s “Latin Tango” With The IMF

  1. Consolidation, coercion, sustainability – are just words.

    If there will be a meta-policy imposed by some global power-center as EU or IMF, then the cornerstone of this policy will reflect only the demands of this power-center, and not the demands of the local population.

    Example Latvia: the cornerstone of the IMF+EU programme is the bailout of banks (internationally engaged) in Latvia. Which is minimally important for the local population because the bailed out banks are the ones which have minimal impact on local economy.

    If the EU will tailor a programm for Iceland, I am sure the most frequent word in this programme will be “Icesave”.

  2. If there will be a meta-policy imposed by some global power-center as EU or IMF, then the cornerstone of this policy will reflect only the demands of this power-center, and not the demands of the local population.

    I don’t think that’s really being questioned seeing as some Greeks decided to place a bomb on the doorstep of their Parliament building over the weekend, but you should remember the phrase “beggers can’t be choosers”.

  3. I was wondering. Should we really help out the Greeks? Those guys really lived the good live with money they didn’t own. They just spending great amounts of borrowed money, and plainly lie about their deficits. No, don’t help them, let them save their own ass. They are responsible for their own financial mass, so let them deal with it themselves. Why should we suffer for their irresponsible behaviour? But then again…
    As I was raised as a catholic child, I learned about that ancient story about those two brothers of who the youngest asked his father for his share of his inheritance, and spend it on making fun and visiting prostitutes. And when all the money of his inheritance was spend and he was down and out, he decided to return to his father and said that he was sorry. To celebrate his return, his father gave his youngest son expensive presents and organized a big welcome home party. But now the oldest son was going mad, for he had always obeyed all his fathers rules but never had received such a generous treatment by his father.
    Of course I am referring here to the Parable of the Prodigal Son, The famous bible story. The analogy is clear; the youngest son who stupidly spend his money is Greece, The father who ultimate is willing to forgive and help are the E.U. and IMF. And the oldest son are all those E.U. taxpayers like me, who don’t like to see their money go to the irresponsible behaving Greeks.
    Hmm, maybe I should have learned something from this wise and ancient story, and reconsider my point of view, but then again, I am not a catholic anymore…
    All right then, let’s help them out of this mass.

  4. Is there an IMF intervention success story, throughout history and across the globe? As a Greek I’m very interested, please enlighten me.

  5. How exactly does one do internal devaluation? The government can hardly decree lower wages, can it?

    Secondly, if wages are lowered a lot, you’ll get migration, which would create upward pressure on wages and possibly reduced productivity. How bad can that get?

    Thirdly, how big a hit on fertility will this mean?

  6. I think there could be a big difference in outcomes between an IMF fix for Greece and an ECB fix.

    A country that has to be bailed out by the IMF basically has to accept whatever conditions the IMF place on it. And that’s not necessarily a bad thing: the IMF dictating reductions in Government spending in the UK in the seventies was, arguably, one of the better things that happened to the country. Without the IMF it’s not clear that the Labour Party would ever have adopted those changes on its own.

    Within the EU, on the other hand, individual countries have a lot of lobbying power, partly because Pigistan fears that what happens to Greece today could happen to Pigistan tomorrow. How many EU members are going to say “Yes, we support the EU being able to dictate fiscal policy to misbehaving members” if they think that could happen to them some day? So we will likely finish up with the usual EU fix that says, in effect “You have to do this, but if you cheat, that’s OK, too”.

    We are always hearing about how Euro-membership protects countries from the wicked markets, but maybe Euro-membership also protects leaders from taking necessary actions, and from having to accept harsh measures.

  7. Question:
    What if Greece or any other country for that matter declares or threatens to declare bankrupcy? I mean high profile businessmen have done that and were able to reach a deal with lenders that would allow them to repay 10% of their debt, the rest forgiven and forgotten. Sure, it would mean short-term chaos, but also that the country would start afresh with basically no debt(or some 10% or something of whatever it owes). This might be the best solution for them. Other countries have already done that (I mean use the threat of bankrupcy to renegotiate the debt, since if the country goes bankrupt, people its owes money to will get nothing) with success. So it might be the best solution for them in the long run and might also be a lesson for lenders(like the banks in the housing bubble) to better assess where they are putting their money in.

  8. Scot,

    “What if Greece or any other country for that matter declares or threatens to declare bankrupcy……but also that the country would start afresh with basically no debt(or some 10% or something of whatever it owes)”

    Basically, you are forgetting the demographic transition. Greece would not be able to start afresh, since she would start with a very high, and growing, elderly dependent population, a shrinking workforce (which would shrink even more with the migration which followed default – 175,000 Argentinians arrived in Spain alone in 2002) and virtually non existent pension funds.

    It doesn’t work.

    And what if the defaulting country was Spain rather than Greece. Greece is manageable, but Spain…….?

    No, other solutions have to be found to these problems.

  9. Ed,

    I think you can only solve one problem at a time. Economic problems are somehow decoupled from demographic problems. I would imagine that if I had a big debt, I would think twice about having another child, since this also means more mouths to feed which can only come by lowering the standard of living, which is already suffering because of the need to pay the debts. If I am debt-free, then economically at least, things are much better.

    Anyway, my point is, I simply do not see how
    the IMF, ECB or anyone else would solve the demographic problem. Starting afresh does not mean a free hand to repeat the mistakes of the past. Reforms are clearly needed. Perhaps the
    plus in bakrupcy is that you will not be able to find too many lenders to support you in repeating the past mistakes and lose their money in the next bankrupcy. But it may mean that your past sins do not plague your future.

    If there will be migration, then there will also be opportunities; because people will still have to eat, dress and so on. Eventually these people who left will probably return when things get better.
    In the meanwhile, will the country be able to pay pensions? Probably not at the current level,
    but I doubt any IMF or ECB proposed/imposed reform will allow them to pay the same pensions as today.

    I also do not see why Greece is manageable, but Spain is not. The whole idea of bankrupcy is to trade short-term suffering for long-term benefit. It will not be pretty, but I am not sure any other solution is any better.

  10. Greece and Spain won’t pay back. The only thing Germans can do is:
    REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

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