The red ink told its own story. Greece’s creditors looked at the plan submitted by Alexis Tsipras to end his country’s debt crisis and found it wanting. Like a teacher dealing with an obtuse pupil, the message in the revised document sent back to the Greeks was simple: this is a shoddy piece of work. Do it again.

Without question, this makes life tough for the Greek prime minister, who thought the concessions offered on Monday were as much as he could deliver politically. Tsipras bridled at the demands from the troika to cross all his red lines and that means the crisis is back on again.

Athens should not have been entirely surprised by the response given that the International Monetary Fund – one third of the troika – thinks a repair job on the public finances should be structured so that 80% of the improvement comes through spending cuts and 20% from tax increases.

The plan put forward by Tsipras was skewed in the other direction. Of the €7.9bn (£5.6bn) that the Greek government said the plan would raise, 92% came from tax increases.

In the unlikely event that the extra revenues were collected in full, the IMF believes the one-off levy on bigger businesses coupled with the increases in corporation tax would hinder growth. It thinks the Greek plan will only add up if there are immediate cuts in pensions and higher VAT on restaurants and medical supplies.

Olivier Blanchard, the IMF’s chief economist, explained its reasoning earlier this month. Greece’s creditors, he said, were prepared to accept that the state of the economy meant it was now impossible to meet the target of running a 3% primary budget surplus (revenues minus spending, excluding debt interest payments) in 2015, and that a lower 1% goal would now be acceptable to creditors.



Facebook Twitter Pinterest Greece’s creditors are in the mood for a rewrite. Photograph: Skai.gr

“We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the VAT – involving a widening of its base – and a further adjustment of pensions”, Blanchard said in a blogpost.



“Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment.”

The response from the Greek government is that the Fund’s sums don’t add up either, and won’t add up unless budget savings are accompanied by a hefty dollop of debt relief. Analysis by the London-based consultancy Capital Economics suggests that Tsipras is right.



When the IMF reviewed its programme in Greece in July 2014 it assumed that Greek debt would fall from its current 175% of GDP to 120% of GDP by 2020, a level considered sustainable. For that to happen, though, the Greek economy would need to grow by 3% this year and at similar level for the rest of the decade, inflation would have to average between 1% and 2% a year, and Athens would need to run a primary budget surplus of 4% a year.

None of these assumptions looks remotely plausible. Greece’s economy will contract this year; it has deflation, not inflation; and it can only run primary surpluses of 4% a year by keeping the economy in permanent recession. Using a different – perhaps more realistic – set of assumptions (1% average growth, 0.5% inflation, 2% primary budget surplus), Greece’s debt to GDP ratio would continue rising.

Debt relief would help square the circle. It would limit the need for further austerity, and it would be less politically toxic in Greece. The IMF knows this and has been pressing for it.

But debt relief is being resisted by Greece’s European partners, who think it would mean their taxpayers paying for a writedown. Nor do they want anti-austerity parties in Spain and Portugal to be emboldened. So they have left Tsipras with a choice: surrender unconditionally or walk.