How the Greek crisis broke the Troika
The ongoing Greek bailout saga looks set to reach its climax on Sunday as the public head to the polls to vote in a referendum that many see as deciding whether the country will remain within the single currency.
Yet with all the proposals, counter-proposals and counter-counter-proposals of recent weeks, I think one narrative of the current stand-off has been significantly underplayed — the increasingly fractious relationships between the institutions-formerly-known-as-the-Troika.
Looking back at the build up to the first bailout deal in 2010 signs that the European Commission, the ECB and the IMF were going to make uncomfortable bedfellows should have been obvious.
Firstly, the IMF were called in by the Germans with Chancellor Angela Merkel allegedly unsure of the Commission’s ability to design and oversee a complex economic reform programme that would go hand in hand with any bailout. In practice, however, the IMF was being brought in as a junior partner to the Commission and the ECB — something that had only happened once before in its history in the 2008 Latvian bailout.
The problem for the fund was that being a junior partner meant that it did not have the clout that it usually enjoys in such circumstances. This includes the ability to insist on a recipient state imposing haircuts or bail-ins on existing private sector creditors before handing over any financing in order to meet the Fund’s supposedly stringent debt sustainability analysis.
And yet here, in the words of the Fund itself in a 2013 report on the Greek rescue, is what happened in 2010:
“Given the danger of contagion, the report judges the program
to have been a necessity, even though the Fund had misgivings about debt
sustainability. There was, however, a tension between the need to support
Greece and the concern that debt was not sustainable with high probability (a
condition for exceptional access). In
response, the exceptional access criterion was amended to lower the bar for
debt sustainability in systemic cases. The baseline still showed debt to be
sustainable, as is required for all Fund programs. In the event, macro outcomes
were far below the baseline and while some of this was due to exogenous
factors, the baseline macro projections can also be criticized for being too
So the fund didn’t so much break its own rules on Greece, it simply changed them to suit the circumstances. Unfortunately, that meant that the programme began life incredibly vulnerable to unforeseen events such as the projected recovery in private sector activity failing to materialise or if the spending cuts or tax hikes called for under the programme had a more negative impact on the Greek economy than expected.
In the event, of course, these “unforeseen events” did indeed materialise and made a mockery of the “optimistic” initial assessment of debt sustainability by the Fund.
Yet the Fund noted that up-front debt restructuring had been considered in 2010. More than that, the IMF concluded that it “would have been better for Greece” and, indeed, for eurozone taxpayers as a whole as the two years it took for the Troika to finally accept the necessity of a restructuring “provided a window for private creditors to reduce exposures and shift debt into official hands”.
According to an account of the negotiations by Paul Blustein, released in April this year, it was the European side that scuppered any discussion of debt relief in 2010. In particular, then-ECB president Jean-Claude Trichet is reported to have been a key figure in preventing the idea from even being considered.
“The ECB president “blew up,” according to one attendee. “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!’” this person recalled. “He was shouting.”
The cost to Greece was high as the initial programme had, in effect, to have more front-loaded austerity measures than would otherwise have been necessary if there had been some form of debt restructuring at the time. Moreover, the damage that those policies did to the Greek economy meant that by 2012 even “the largest debt restructuring in the history of sovereign defaults” that saw around €100 billion wiped off Greece’s total debts of around €350 billion was insufficient to pull the country out of its nosedive.
And so we get to the latest round of negotiations. Prior to them, most commentators agreed that creditors could be persuaded to lower the primary surplus target that Greece’s government was expected to hit under the programme. This was indeed included in the creditors’ offer with the medium term target of a 4.5% surplus by 2018 reduced to “new fiscal path is premised on a primary surplus target of 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018”.
However, that is about as close as the institutions have come to renegotiation. And given the damage done to the Greek economy with the collapse in confidence and the rising pace of deposit outflows since negotiations began in January (and yes, SYRIZA’s playground tactics have been a significant causal factor for the deterioration) downgrading the surplus target may simply be a reflection of current reality than any real ceding of ground.
Moreover, despite Jean-Claude Juncker’s denials that the new proposals contain any wage and pension cuts the Commission’s offer does include the phasing out of Greece’s solidarity grant to pensioners (EKAS) by December 2019, which will hit some of the country’s poorest retirees.
It also includes proposals to liberalise Greece’s labour market with a commitment to “review the existing frameworks of collective dismissals, industrial action, and collective bargaining”.
These areas have clearly been red-lines for the SYRIZA-led government in Athens, with Prime Minister Alexis Tsipras having said that he would be unable to get such measures through parliament even if he was minded to sign off on them.
For SYRIZA to get a programme through parliament it has to meet two conditions: a) any further reforms must be targeted primarily at those who can more easily afford it; and b) debt relief, or the promise of substantive discussions of debt restructuring, must be formally on the table.
Yet a bailout package that looks too soft on Greece would equally struggle to get through the parliaments of other eurozone members — not to mention antagonise the governments of euro countries that have undergone their own painful experiences with austerity and are fighting off political threats from the far left.
Unfortunately, without consensus on the debt relief it has proven very difficult for the institutions to agree on an easing of the reform schedule. That is, once again the institutions are split between the European politicians worried about the political contagion of debt relief and the technocrats who are worried about the prospect of an outright default.
The ECB under Mario Draghi had (until it froze its ELA cap) been doing its upmost to keep its hands out of the political sphere this time extending emergency liquidity to Greece’s banks while negotiations continued. But it is now under huge pressure to act with capital controls now imposed and default on the IMF looming.
“On the one hand, the Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms…On the other hand, the European creditors would have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability. We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.”
Without debt relief, the IMF are inclined to resist “recessionary measures” such as increased corporate tax rates and instead push for further spending cuts and pension reforms in order to keep Greece’s debt sustainability narrowly on the right side of the line and allow the Fund to continue its participation in the programme.
That rescheduling, however, does not appear on Juncker’s draft proposal — the one that he wants the Greek voters to make their decision on this Sunday.
So in effect you have an intra-Troika impasse, as well as one between the creditors and Greece. Increasingly it is the former, not the latter, that is defining the shape of the talks.
At the end of the day, the IMF’s responsibility is to get its money back. A politician's concern is first and foremost to get re-elected.
Today (in what may be considered the thousandth 11th hour of this crisis) Juncker has floated the prospect of talks on debt rescheduling in October if Tsipras formally accepts his terms. Meanwhile, the Greek government have also submitted their own proposal of a new two-year bailout through the European Stability Mechanism that includes a requirement of debt restructuring.
Both of these, however, may have come too late to materially change the trajectory of events.
If the narrow thread on which Greece’s membership of the monetary union is currently hanging is allowed to break against the will of the Greek people, I would consider it more the consequence of the political weaknesses of the single currency than its structural failings (of which there are many).