Unprincipled politicking. Greece, the IMF and the Troika

By Costas Lapavitsas and Daniel Munevar

The bailout has already failed

The latest political upheaval in Greece cause by the Wikileaks transcript could be explained only with one vital precondition. That is, Greece cannot meet the terms of the third bailout agreement struck in July 2015. The bailout has already failed and all parties involved are aware of it, even if they are not openly admitting it.

It suffices to mention that the agreement requires Greece to ensure a primary surplus of 3.5% of GDP in 2018. The Greek economy returned to recession in the last quarter of 2015 and available indicators since December 2015 have ranged from bad to appalling: industrial turnover in December was down 13.5%, retail turnover in January was down 3.8%, unemployment in the last quarter of 2015 was up to 24.4%, job vacancies for the whole of the economy in the last quarter of 2015 stood at a pitiful 3119, and the banking system currently has perhaps 115bn of non-performing exposure, roughly 50% of its loan book.

Once the austerity measures of the bailout agreement kick in, substantially reducing aggregate demand for 2016-17 via tax increases and lower pensions, the recession will become deeper. There is no way that this ruined economy could generate a 3.5% primary surplus in 2018.

The IMF

The IMF has been badly caught out by the Greek disaster, after masterminding two failed bailouts in 2010 and 2012. Its projections of growth have been wrong, its assessment of the multipliers was notoriously mistaken, its judgement of how Greece is positioned relative to the world markets has been wide of the mark. On any dispassionate assessment of the situation, the role of the Fund has been disastrous. The loss of credibility has been substantial, its exposure to Greece is large, and the internal ructions caused by continuing with evidently hopeless policies are far from negligible. Given the failure of the third bailout, the IMF is again in danger of being proven calamitously wrong.

Consequently, the Fund, without changing its basic approach, has been pushing for significant debt relief for Greece to rescue something out of the bailout agreement. For the IMF, this must go hand-in-hand with credible and tougher short-term measures to achieve a primary surplus target of 1.5% of GDP. Even though this certainly does not represent a departure from austerity policies, the difference between the previous and the new targets does imply a significant relaxation on the fiscal position of the country over time. This is true, even after accounting for the differences in the assessment of the size of fiscal gap between the IMF and the EU Commission. Furthermore, the debt relief required to ensure consistency between fiscal targets and debt sustainability would be quite substantial. According to the assessment conducted by the IMF in July 2015, any scenario in which the primary surplus for Greece was allowed to drop below 2.5% of GDP would require stretching debt repayments decades into the future as well as “a significant haircut of debt”.

The IMF is thus presenting two options to European leaders: either they keep kicking the can down the road based on make-believe projections, which means the IMF would be out of the programme. Or, they accept the conditions of the IMF for fiscal targets and debt relief, to keep the Fund in the programme. This choice implies a crisis somewhere down the line.

What is likely to happen?

It would seem, then, that the outcome of the negotiations hinges on yet another political gamble currently made by Tsipras. Implicit in his government’s attacks at the IMF is the consideration that, for all its power, the Fund is still junior to European lenders. Thus, even if Greece would deliver on the measures requested by the IMF, the promise of debt relief would remain uncertain. After all, the IMF can do no more than threaten to abandon the programme in order to force a haircut. When the showdown with the European creditors comes, it is possible that Germany would keep Greece in the Eurozone, leaving the IMF behind. This would take the issue of significant debt relief off the table. Greece then would continue receiving bailout funds to keep it afloat, while pretending to follow the prescriptions coming from Brussels. The SYRIZA government would gain some more of the time it craves. The Greek people, meanwhile, will continue subsisting in a netherworld of stagnation and poverty.

But it is also possible that Angela Merkel will find it politically impossible to exclude the IMF from the programme. In that case stand prepared for yet another Eurozone crisis. The Tsipras government will have a knife put to its throat to accept tougher terms in the short run, while some measure of debt relief will be put on the agenda to make the third bailout workable. Whatever the outcome, it is unlikely that there will be a fourth bailout for Greece.