The International Monetary Fund must hold firm to its stated position in support of debt relief for Greece in meetings of finance ministers that will take place in Washington this week, writes William Rhodes.
William Rhodes is president and CEO of William R. Rhodes Global Advisors, LLC and author of “Banker to the World: lessons from the Front Lines of Global Finance”.
In 2016, after years of agreeing with the austerity demands of its Troika partners of the European Commission and the European Central Bank, the Fund publicly acknowledged that servicing the debt is unsustainable – Greece owes its official creditors approximately $365 billion. Now, the Fund must push resolutely for decisions by the Troika that finally give Greece a chance to a find a road to real economic growth.
I have long argued that debt relief is essential and that the “Troika’s” approach is not working. I have been involved in many sovereign debt negotiations and in every case my aims were to secure a deal that would lead to sustained growth, avoid humiliating the debtor government, and never resort to interim agreements that, in effect, just kick the can down the road.
Greece’s official creditors have been guilty of failing on every front. Now, once again they may just seek a short-term deal and provide Greece with €6bn to tide it over to the next round of negotiations in 2018 without giving the Greek people any sense of hope.
Many of the reforms called for by the creditors are essential, yet the timeframes demanded for actions were wrong, as was the insistence that the government secure a budget surplus. Prospects for a return to economic growth have been smashed, and without a growth outlook Greece will not be able to attract the foreign investment it vitally needs to secure a brighter future. Tourism has revived, but this alone is insufficient.
Today, Greece is the only eurozone country not to have recovered from the 2008/09 financial crisis. It remains in recession. It was the only EU country to experience negative growth at the end of 2016 with final quarter GDP down by 1.1% compared with the last quarter of 2015.
Greece has the highest unemployment rates in the EU: the most recent data puts the overall rate at 23%, youth unemployment at 45% and Greece also tops the EU league when it comes to female unemployment at 27%. The Cologne Institute of Economic Research reports that poverty in Greece increased by 40% from 2008 to 2015.
My Greek friends tell me that the downward spiral of the economy over the last eight years has decimated the Greek middle class. Moreover, this small country of 11 million people has seen an estimated 300,000 of its best-educated young people leave to find work in other countries. This is a brain-drain Greece cannot afford.
The Greek banking system has been in danger of collapse for years and is indeed the “Achilles Heel” of the economy.
Bank of Greece data shows that bank deposits continue to decline and are now at their lowest level since October 2001. The rate of non-performing loans at the biggest banks is upwards of 40%. Repeated liquidity support from the ECB is the essential lifeline and a major reason why Greece needs to remain in the eurozone.
Greece pays about 2% interest on its debts and if it left the eurozone this would almost certainly rise, so adding to the nation’s budget problems.
Nevertheless, there are significant pressures on the Greek government to exit the Eurozone and walk away from the austerity demands that ceaselessly come from Brussels. These pressures are bound to increase if the creditors fail to include debt relief in their next deal with the Greek authorities.
Debt relief really means softening the terms on interest rate payments on the outstanding debt as the Greeks have no requirement for many years to come to start repaying principle.
The problem is that the IMF’s basic charter does not enable the Fund itself to give debt relief and the Eurogroup, driven to no small degree by German finance minister Walter Schäuble, opposes all forms of debt relief on ideological grounds, as well as on the cold calculation that explaining this to the German electorate before elections this year may be tricky.
However, the creditors meeting in Washington need to recognise that the Greek people have suffered enough – and that continued recession in Greece may well have social and political consequences that add profoundly to the many challenges that the European Union currently confronts. A crucial step right now is for the IMF to secure an agreement on debt relief.