Greece's Debt Relief Bill Rises To €100 Billion And The IMF Ain't Helping

AUG 5, 2015 @ 7:27 PM 1,536 VIEWS

Tim Worstall

CONTRIBUTOR

http://www.forbes.com/sites/timworstall/2015/08/05/greeces-debt-relief-bill-rises-to-e100-billion-and-the-imf-aint-helping/

After we all thought that the Greek debt crisis was over we’re seeing disturbing signs that it isn’t, not at all, quite over as yet. It’s not just the absence of the fat lady in the horned helmet signing as yet that indicates it either. We have two rather different processes going on, both of them leading to the possibility that the solution just isn’t going to be found and that exit from the euro and default will follow. The first is that the IMF is now doing what it always should have done, which was obey its own charter. This means it should not fund any deal which is not sustainable: something it clearly ignored in funding the last deal. The second is that the Greek economy has deteriorated even more than anyone thought it had meaning that the necessary debt relief bill is even higher. Quite possibly to the point where no one’s willing to bear it.

That analysis of the Greek economy comes from a British outfit:

One potential stumbling block to an agreement is the insistence of the IMF that it will not take part in a third bail out unless Greece’s debt is cut by 30%.

The NIESR report said that an even bigger cut of 55% was needed to give Greece a chance of reducing its debt to 120% of GDP by 2020. It warned that continuing to insist on “unrealistic fiscal targets” will ensure that the Greek economy will “remain in depression”. The report said: “According to our modelling, restoring debt sustainability requires a debt write-off equivalent to at least 55% of GDP, higher than the IMF’s estimate of 30%.”

As another report has it:

Greece needs a debt write-down of almost €100bn (£70bn) if the country is to stand a chance of clawing its way out of a “prolonged and severe depression”, according to a leading think-tank.

In a stark analysis, the National Institute of Economic and Social Research (NIESR) laid bare the impact of VAT hikes and strict budget targets that it said could become “self-defeating”.

This isn’t because they’re using a different model or even different economics than everyone else. It’s just that they’re taking into account the effects of a near month long close down of the banks, the crumbling of the Greek economy as a result of that.

And this, of course, sets us all up for another set of arguments. On the German, and therefore at least part of the EU side, there’s an insistence that there cannot be a haircut on the Greek debt. It’s true, the treaty does say something along those lines but the important point is that if that does happen then that’s Germany funding another EU state. And Germany knows very well what will happen if that does: Germany ends up funding a plethora of EU states over time.

There’s also another section of the EU side which insists that the IMF must be involved in whatever rescue does happen. On the grounds that they want someone around being a responsible adult. And then the IMF refuses to take part in a further deal which is not sustainable: which, to them, means cuts in that headline amount of debt. It’s not possible to craft a deal that pleases them all. Thus, there’s a possibility that we won’t in fact get a deal.

Subsequently, the IMF has said it will not participate unless Greek debts are written down and unless Greece can prove itself more committed than in previous bail-out programmes to actually carrying through with reforms. That effectively means the IMF will not take part at all. There is little to no chance of the main eurozone creditors such as Germany agreeing to further write-downs of Greek debt – especially not in a context in which they are supposed to agree to provide it with a lot more.

Shrug, well, it’s their bed, they made it, sweet dreams and all that. I’m on the outside of this, insisting that firstly Greece should never have joined and secondly, that once the crisis hit they should have defaulted and left the euro. Should still do that now.

There is one economic point that’s being made in the US. One that’s entirely true too, as far as it goes. Which is that the losses from Grexit and default will be higher (well, maybe they will, I have my doubts but still) than whatever new amount of money needs to be put in. So, put up and shut up in order to save money.

Except that’s not actually how the politics of this works. Almost all of the Greek debt is owed to other eurozone governments (a bit to the IMF, a tiny sliver to private actors, but most to eurozone governments through the EFSF, direct loans and the ECB). OK, that’s fine, so they could write it off. In fact, they have written a lot of it off by allowing the interest rates to be very low and repayment terms very long indeed. So, economically, they’ve already lost the money. Might as well just admit it and then tell everyone that the new money going in is less than will be lost without it.

Except the reason for those low interest rates and long maturities is so that they can insist to their domestic electorates that the money hasn’t been lost. And they’ve been swearing themselves blue in the face that this is so: Greece will pay it all back even though everyone knows that some 50% of it is already lost and gone through those loan terms. So there isn’t actually any political room for those eurozone governments to turn around and admit that the money’s already lost. Simply because they’ve been lying about it for so long.

As I say, it’s not obvious that there’s going to be a solution to this. Other than the one that should have happened 5 years ago: Grexit and default.