With there being strong question marks hanging over the draw-down of the fifth tranche of Greece’s EU/IMF bailout funding and a consequential default, there are some object lessons on offer that are relevant to our own circumstances. This entry examines them.
Greece has thus far received four tranches of bailout funding totalling €53bn, of the €110bn IMF/EU bailout which was agreed in May 2010. The fifth tranche totalling €12bn was due for draw-down in June 2011 but this is now in jeopardy as the creditors express doubts in Greece’s ability to comply with the bailout terms, and as infighting breaks out between the IMF and EU.
Last week, the troika of the IMF, EU and ECB abruptly departed from Greece and abandoned their review mission claiming there was no point in pursuing the mission when Greece was not engaging with the bailout terms. Although doubts in Greece’s ability to manage itself through the current crisis have hung heavily since last year and in recent weeks have intensified, it was still quite shocking to see the creditors walking away last week. Since last Thursday, the Greek government has redoubled its efforts to demonstrate its bona fides and yesterday approved quite a specific programme of privatisations and additional austerity measures. And the troika returned today and is now scheduled to remain until 6th June after which it will report on whether there is sufficient compliance by Greece with the bailout agreement to enable the release of the next €12bn. If Greece doesn’t get that €12bn, then it will be unable to roll-over some €13bn of debt maturing in June 2011 and there will be a messy default. And just to complicate matters, the IMF is demanding an assurance from the EU that the EU will provide funding to Greece to enable ALL debt maturing in 2011 to be rolled-over. The EU seems to be remaining tight-lipped in not providing any public response.
So Greece is in the wars. We have known that for some time, and we have watched from the sidelines. Greece’s bailout in May 2010 didn’t prevent a bailout here in November or in Portugal in April. Nor did the handling of the Greek crisis prevent the interest rate on our borrowings becoming unsustainable. We did observe Greece getting a 1-2% reduction in the interest rate on its bailout funding in March but have thus far been unable to replicate Greece’s success. So what lessons can we possibly learn at this juncture?
(1) Don’t wait until your coffers have run bare before deciding to try a managed default.Greece needs roll-over €13bn of debt next month and without that next tranche of €12bn from the IMF/EU, there is going to be a very messy default that could potentially see Greece exit the euro and renege on its sovereign debt.
(2) Don’t dilly-dally with implementing cuts and revenue raising measures, or state sell-offs. The IMF and EU will not be impressed with commitments given in the bailout agreement that are not then backed up with real action. This government is getting off to a very slow start and need to get a move-on with enacting new legislation in everything from bank resolution to personal bankruptcy.
(3) Permitting deficits is dangerous. Greece’s default is going to be really messy for its own people because Greece still has a stonking great deficit, projected to be 9.5% of GDP in 2011 (equating to over €20bn). And if Greece defaults and no-one will lend it money then it either needs to balance its budget immediately or exit the euro. Okay, the Morgan Kelly immediate balancing of the books might be unfeasible here, but remember the only difference between Morgan Kelly and the IMF’s official projections is six years and 15.5% compound growth in GDP. Yes the 15.5% growth will cushion the shock slightly but there’s still going to be a whole lot of cutting and taxing before we balance our budget, and bluster about “lethal injections” won’t change that central fact.
(4) Get your statistics and forecasting right. Greece has been plagued with revisions to statistics affecting its financial standing, that have been consistently negative. It is hard not to conclude that there has been more than incompetence at play. In Ireland’s case, the consensus now is that our growth projections in 2011 at Budget 2011 were too optimistic. And yet the Department of Finance in its April 2011 Stability Programme Update acknowledged that growth in 2011 might be just 0.8% but it is sticking to robust growth over the following four years and a 2.8% deficit:GDP in 2015. Unrealistic projections are not helpful.
(5) Face up to what is and what isn’t sustainable debt. The Greeks are buckling under debt of 150% of GDP. We’re not there yet and based on present projections will peak with debt at under 120% of GDP. Some say that our debt is sustainable, others that it isn’t. Regardless of who is right, we need to understand what is sustainable for our society, and if we are going to break that limit, then better to manage any default well in advance, rather than risk what seems now inevitable in Greece. Yes, we need to maintain as much confidence in our finances and creditworthiness as possible, but we also need a Plan B, even if it is kept under wraps until it is needed.
(6) Build bridges with Europe and elsewhere. Greece looks increasingly isolated in Europe, friendless at both the core and the periphery. Where is that charm offensive that Tanaiste Gilmore talked about in April? Seeking out friends inEurope at present might be too ambitious a challenge but we can certainly seek partners, communicate our position and seek better understanding of our partners’ positions. And as yesterday reminded us, we have friends elsewhere in the world. In theUS they mightn’t look kindly on bailing this small country out, but theUS has tremendous pull at the IMF which increasingly seems to appreciate our circumstances.
Greece might pull through these current difficulties and may get another few months of breathing space before default gets back up close and personal again. The interest rates demanded on its bonds suggest we are nearing a default. And we can breathe a sigh of relief that there but for the grace of God go we. But remember we have tended to follow Greece’s footsteps closely throughout this crisis.
