Free Lunch: Greece and economic reality

Δημοσιεύθηκε: 6 Μαΐου 2015 - 12:05

An alert reader noted an ambiguity in yesterday's Free Lunch on UK health spending. To be clear, the growth in NHS resources in the 2000s was 7 per cent per year.

Self-inflicted obscurantism

Of Greece's three creditors formerly known as the troika, the IMF has long had the best grip on reality in its analysis of the Greek economic problem. That's admittedly a low bar to clear. The IMF got its forecasts, on which many of the troika's policy demands were based, terribly wrong. It has had the grace to admit its mistakes and revisit its assumptions, which is more than can be said for the European Commission and the European Central Bank. But the test for the fund is whether it takes on board the lessons it says it has learnt.

At the eurogroup meeting in Riga last month, it seems to have done the grown-up thing and broached the topic of another debt restructuring for Athens. Or perhaps not. The grown-up thing would have been to point out that the debt is unsustainable partly because the economy has shrunk so much under the troika's own policy prescriptions. The chart below shows how much of accumulated debt since 2008 is due to the nominal GDP contraction (most!):

It would be a rare, and welcome, addition of realism among Athens creditors to accept that more of the debt will be paid back if it is alleviated than if they insist on it being paid back in full and on time. But it emerges that the IMF was trying to make a somewhat different point. Fund officials told eurozone leaders that if they were going to let Greece get away with a smaller primary surplus than the 3 per cent originally planned, the IMF wants them to grant Athens debt relief so that the remaining debt (an even larger share of which would then be owed to the fund) becomes sustainable again. The IMF's reaction to FT reports on this was what journalists know as a non-denial denial. It did not "push" for debt relief, the IMF says, it merely "pointed to the trade-off" between compromising with the Greeks and getting all the money back as currently scheduled.

With a bit of good will, there are two positive pieces of news that can be pulled out of this kerfuffle.

The first is that the IMF may be cottoning on to the point Free Lunch made recently, that it has the whip hand over the Europeans and particularly over the ECB. Virtually all the money left over in the current rescue programme consists of IMF funds. If it pulls out, the first payments Athens will not be able to make are on bonds held by the ECB. The IMF can use this to pressure the eurozone into some sort of debt rescheduling.

Having the strongest negotiating hand will not help if you are not negotiating for the right deal, however. So it is worrying that the IMF's team on the ground keeps demanding of Greece the same things it always does, regardless of the fund's own research questioning the merit of both the scale of fiscal cuts and of structural reforms.

But second, there are signs that reality is imposing itself. The commission's latest forecasts were published this week. Brussels has upped its estimate of Greece's debt-to-GDP ratio this year from 170 per cent to 180 per cent. That's a big jump, of which only a quarter can be explained by Brussels' lowering of the primary surplus forecast (see table 38) from 4.8 to 2.1 per cent. Most of the rest, presumably, is the lower forecast for GDP and inflation, which have a greater effect on the debt-to-GDP ratio the higher the ratio already is. The jump in the ratio should be a wake-up call for Greece's creditors. Their own forecast revisions demonstrate that the sustainability of a debt burden the size of Greece's depends much more on boosting economic growth than on increasing the primary surplus. It should be a short step from there to realising that demanding more fiscal consolidation now is not just bad for Greece but for the creditors themselves.