by Michael Roberts
So the Greek parliament has approved the terms of the Memorandum
of Understanding (MoU) with the Euro credit institutions for a third
bailout deal valued at €86bn over three years (Greece MOU).
The terms of the bailout funding commit the Greek government to a new
round of austerity measures, including pension cuts, tax increases, a
‘fire sale’ of state assets, a reduction in labour rights and an end to
minimum wage rises and a reversal of public sector re-employment.
No wonder about 32 Syriza MPs voted no to the deal and another 11
abstained. That means that the Tsipras government would not command a
majority in parliament in any confidence vote if that rebellion was
repeated. Tsipras plans an emergency Syriza conference in September and
then will probably call a general election for the autumn. That adds a
new political uncertainty to the implementation of this deal.
But that is not the only uncertainty. The economic uncertainty is
whether, even if the Greeks follow the deal to the letter, it will work
to reduce Greece’s public sector debt burden, restore economic growth
and reduce unemployment and reverse the drastic fall in living
standards. The answer to that question is clear. It won’t.
The IMF is not prepared to provide any further credit as part of this
bailout because it does not think that Greek public sector debt can be
stopped from rising as a share of GDP and that the Greeks can ever
service it by borrowing from the market. In other words, the debt is
‘unsustainable’. And in its latest analysis, the EU Commission experts
also agree with the IMF.
Here is the summary statement from the IMF released just today on the Greece’s public sector debt sustainability: “Greece’s
public debt has become highly unsustainable. This is due to the easing
of policies during the last year, with the recent deterioration in the
domestic macroeconomic and financial environment because of the closure
of the banking system adding significantly to the adverse dynamics. The
financing need through end-2018 is now estimated at Euro 85 billion and
debt is expected to peak at close to 200 percent of GDP in the next two
years, provided that there is an early agreement on a program. Greece’s
debt can now only be made sustainable through debt relief measures that
go far beyond what Europe has been willing to consider so far.” That could not be clearer (IMF on Greek debt).
So the Greeks are being subject to further severe austerity in trying
to run surpluses on the government account (before interest payments)
rising to 3.5% of GDP by 2018 – to no avail. Indeed, the IMF says in
its statement that “Greece is expected to maintain primary surpluses
for the next several decades of 3.5 percent of GDP. Few countries have
managed to do so”, Yes, the IMF says, it is decades of austerity!
Both the IMF and the EU Commission reckon that the Greek government
debt ratio, currently around 180% of GDP, will probably rise to over
200% of GDP before there is any sign of a fall and will anyway stay
well above any level that is considered ‘sustainable’. So the whole
thing is a waste of time and pain. No wonder German finance minister
Schauble wants to forget it and let Greece take a ‘holiday’ (for at
least five years) from the euro – see my post, https://thenextrecession.wordpress.com/2015/07/26/grexit-de-long-and-the-wages-of-sinn/.
Of course, this partly depends on what is considered ‘sustainable’.
As I have shown in previous posts, the interest to be paid on the
current Greek public debt is quite low, just 2% of GDP. So if the Greek
economy grows by an average of 2% a year over the next three years, and
assuming that the government balances its books from now on, then the
annual debt servicing costs can be covered without any rise in debt to
But that is a big ‘if’. It’s true that the Greek economy actually
grew 1.4% yoy in Q2 2105, but that was before the impact of the closure
of the banking system in July and the squeeze on credit for businesses.
The IMF reckons that the debt bailout programme agreed also assumes
that the Greek economy will “go from the lowest to among the highest productivity growth and labor force participation rates in the euro area”.
How likely is that given the austerity measures? Even the so-called
labour reforms planned (trade union rights, cuts in public sector
employment, pension rights etc) won’t deliver. Indeed, as I have
pointed out before, IMF researchers have found no evidence that such
neo-liberal labour reforms deliver any improvement in growth
and Box 3.5 in
And yet, both the Euro institutions and the IMF insist on these
measures. Of course, these labour ‘reforms’ are not really about
improving efficiency and productivity, but more about squeezing labour
and boosting profit share.
The other escape clause for Greek debt could be if Eurozone economic
growth were to accelerate and thus revive the Greek economy, as a rising
tide lifts all boats. But the signs of regional growth much above 1% a
year are not good. The latest Q2 data out today showed both Germany,
France, Italy and the Netherlands slowing, so that Eurozone GDP expanded
And anyway, the Eurogroup and its credit institutions, as well as the
IMF, want the debt ratio to fall and for their previous loans to be
paid back. The target for 2030 is a 60% of GDP limit for all Eurozone
members. But even if Greek governments apply austerity right through to
then, the Greek public debt to GDP will still be above 100%.
Moreover, there is no way the Greeks can ‘return to the market’ to
raise money to repay the IMF and the Euro institutions at a 2% interest
rate. The market will charge at least 6%, according to the IMF, and
that is impossible for the Greeks to pay. So this ‘bailout’ would have
to be followed by another and another, as far as the Greek and German
eyes can see.
That is why there is all this talk of ‘debt relief’. This could mean
actually cutting the debt outstanding in cash terms, similar to the
deal that Germany got in 1953, in ‘writing off’ the debt it owed to the
Allied Powers after the second world war. That was done to allow
Germany to return to the capitalist fold and allow economic recovery.
But no such ‘haircut’ is being considered for Greece. The German
leaders do not want to tell their electors that Germany must accept a
haircut on its portion of the loans to Greece. The IMF has proposed a
30% haircut but that would only get the debt down to 120% of GDP – and
the IMF and the ECB will not consider any haircut on their outstanding loans.
The other option is to reduce further the interest charged on the
loans and extend the period of repayment and the maturity of the loans
even further. Already, the existing Euro institution loans do not start
to be paid back until 2022. One proposal is that the old loans and the
new bailout loans repayments be pushed back for 30 years or even
longer. In effect, to use the economic jargon, this would lower the
‘net present value’ of the debt to such a low level that Greece could
fund the debt costs each year ‘sustainably’. The debt would
‘perpetually’ rolled over. The Euro institutions would get their
interest but never be repaid any of the principal in successive
Such a solution remains on the table and will depend, it seems on the
Greek government, whatever its complexion in the autumn, keeping to the
terms and schedule of the MoU, as reviewed by the ECB, the
International Monetary Fund (IMF), the European Commission and the
European Stability Mechanism (ESM), the newcomer making it a ‘quadriga’,
not a Troika any longer. This is Greece’s third macro-economic
adjustment programme in five years, after the first in 2010 and second
in 2011. It looks just as likely to fail as the last two in restoring
Greek ‘debt sustainability’, let alone economic growth, employment and
What is the alternative? I outlined some options in my July post: https://thenextrecession.wordpress.com/2015/07/05/no-but-what-now/.
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