Another round in the Grexit sagaGreece’s creditors are now the main impediment to solving the country’s woes

The Economist The Economist

 

The biggest difference is now between the IMF and the Europeans

IF HISTORY repeats itself first as tragedy and then as farce, it continues thereafter as endless iterations of Greek debt dramas. The script is wearyingly familiar. Greece’s European creditors are trying to close the second review of its third bail-out, which was signed in August 2015. That would enable them to lend Greece the funds it needs to meet €6.3bn ($6.7bn) of bond repayments due in July. But talks have run aground ahead of a meeting of euro-zone finance ministers in Brussels on February 20th. Bond yields have spiked, German ministers are issuing barbed comments, and dust is being blown off the Grexit files.

The review covers everything from health care to military wages. But thanks to pressure from the IMF—which has not yet joined the bail-out, as it did the previous two—Greece faces more pressing demands: to pass tax and pension reforms worth 2.5% of GDP, to kick in after the bail-out expires. Alexis Tsipras’s hard-left Syriza government will struggle to get these measures through parliament, but the alternative is to call elections that Syriza would probably lose to New Democracy, a centre-right party. Thousands of farmers wielding their produce took to the streets in Athens in outrage at more austerity (see picture). Unions are pondering further protests.

Greece has become a bystander to its own tragedy. The conditions attached to the bail-outs drastically reduce the government’s control over economic policy. For many Greeks, this makes politics itself pointless: 17% do not know a party they support (or will not say), while 15% will not vote at all. What sets today’s drama apart is the dispute among Greece’s creditors. These date back to the complex architecture of euro-zone bail-outs, jerry-built in haste in 2010. But today the debate is more public, and potentially more serious.

The biggest difference is between the IMF and the Europeans. Burned by experience, the fund is jealously guarding its credibility. Having seen Greece consistently fail to meet previous bail-out targets (see chart), it thinks the European Commission’s forecasts are too rosy, and that, without relief, Greece’s debt will balloon after 2030, as cheap euro-zone loans are replaced by private finance. It has two conditions for joining the bail-out: stricter (and pre-legislated) reforms from Greece, and a credible promise from euro-zone governments to relieve Greece’s debt burden when the bail-out expires, via guarantees of long-term cheap finance.

European governments do not believe that Greece needs debt relief. But they insist on IMF participation in the bail-out because they do not trust the commission to oversee the Greeks. The Germans and Dutch will not approve further disbursements without the fund. That gives the IMF an effective veto. But it has its own problems. Its board, which must approve participation, is split; shareholders from non-European countries do not see why they should stump up again. Most IMF staff are sick of Greece. “If the fund agrees to something on the basis of a hazy promise of future debt relief…then all this fancy talk about standing up to the Germans at the board would once again be an empty show,” says Ashoka Mody, a former IMF official now at Princeton University.

Greece’s fiscal path is a particular point of contention. The IMF believes that the country cannot sustain the primary-surplus (ie, before interest) target of 3.5% of GDP demanded in the bail-out by 2018, and that the austerity such goals imply will delay the recovery. The Europeans insist Greece is on track: last year’s surplus target of 0.5% will be exceeded, and the commission forecasts growth of 2.7% this year. Relations have become poisonous; one European official says the IMF is deploying “Trump University statistics”.

Some formula will probably be found to allow to Greece to avoid default, though not in time for Monday’s meeting. But that will do little to alleviate Greece’s misery. GDP has shrunk by over one quarter since 2008, and the recovery has been dismal by historical standards. Nearly a quarter of the workforce is jobless, and over a third of children are poor or nearly poor. Young, ambitious Greeks have been forced abroad. Banks are clogged with non-performing loans, and tax-collection rates have actually fallen. Like its predecessors, Syriza has learned the art of complying with bail-out targets without owning them. The current delays will hurt the economy and make it harder for Greece to return to the markets next summer. A fourth bail-out looms.

Locked inside the euro, unable to devalue, and confronted with German fears over a “transfer union”, Greece has been forced down the road of internal devaluation and austerity. The government has met current expenditures (bar interest payments on debt) from revenues since 2014; today’s arguments are largely about shuffling money from one public creditor to another. Even if the July deadline is met, further cliff-edges lie ahead, meaning more summitry and more market jitters. Northern Europeans will grow more, not less, hostile to debt forgiveness, even if it comes in disguise. The deadlock this time may not be as serious as in 2015, when Greece came close to ejection from the euro. Yet it shows the problem of a bail-out architecture that is unfit for purpose but from which neither creditors nor Greeks can work out how to extricate themselves.