Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

The IMF On Greek Debt – Redefining Chutzpah?

Andrew Watt 31st May 2016

Andrew Watt round

Andrew Watt

A definition of chutzpah is murdering your parents and then claiming social benefits as an orphan. It is not widely recognised, but the IMF illustrates similar brazenness in the current debate on Greece’s debt burden.

While not exactly pretending to be an orphan, the IMF is currently getting a lot of sympathy for its position: it has come out increasingly strongly in favour of debt relief for Greece. On realistic assumptions the debt burden is unsustainable. The country can only recover if there is substantial debt relief. Its most recent debt sustainability analysis claims it was forced to provide loans when the euro crisis broke, alongside European institutions, against its better judgement, but now only massive debt relief will work.

Its realism has been welcomed, and contrasted favourably with the EU (and its German paymasters), which against all reason are insisting on more-or-less full repayment of past loans. In so doing the IMF has been feted by Greek commentators, the many EU citizens/taxpayers sympathetic to the plight of Greek citizens, and much informed economics commentary.

One certainly does not need to think of the IMF as a murderer. But one should be aware of three things.  First the IMF was not simply an innocent victim of European pressure. It got its economic forecasts badly wrong and vastly underestimated the size of the multiplier (the negative impact austerity has on output and thus fiscal outcomes). What the IMF deserves credit for is having publicly recognised this.

Second, Greece owes money to the  EU institutions (primarily the ECB and the ESM) and a much smaller amount to the IMF.  Yet when the IMF calls for debt relief, it is referring only to the credits given by EU institutions. The IMF loans, you see, are “senior”, that is they must be paid back first and in full. Because? Well, because they are from the IMF.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Thirdly, the EU institutions accorded substantial debt relief to Greece in 2012 and, belatedly, substantially reduced the rate of interest due on the loans. Loans from the ESM now cost just 0.8%. The interest rate on IMF loans , however, is very substantially higher (up to 5% and averaging over 3%); here. The most important parameter determining whether (public) debt is sustainable in the longer run is the gap between the interest rate on the debt and the nominal growth rate of the economy; the mechanism is explained here even if the numbers are now outdated. If the interest rate is lower than the rate of nominal output growth (i.e. the sum of inflation and real growth) then the debt-to-GDP ratio falls, provided the country achieves a primary balance. No primary fiscal surplus is necessary. And this is true no matter how high the initial debt-to-GDP ratio is; indeed the fall is faster the higher the initial ratio. Thus by charging such a high rate of interest – in a zero-interest world – the IMF is actively undermining Greek debt sustainability, which it wants to see achieved by a haircut on European loans. I think that qualifies as chutzpah.

More important than the IMF’s image, of course, is the question of the right policy direction. What Greece needs most of all is continued very low interest rates (implying the willingness to roll over any capital payments due). In the current interest-rate environment, this is no hardship. It needs a European Central Bank living up to its mandate of delivering 2% inflation at Euro area level, to raise the rate of nominal GDP growth. (That the central bank has failed in its mandate is hardly the Greeks’ fault.) And it needs domestic structural reforms and an EU-backed investment program – perhaps combined with needed support for dealing with the refugee crisis – to raise the rate of real economic growth. The cases of Spain and Ireland suggest that, once austerity is lifted, real economic growth can be rapid while the unemployed are reintegrated into production. With such conditions in place even a primary balance (before interest) of zero – less demanding than the IMF, never mind the Europeans – would suffice to see sharp declines in debt-to-GDP.

Yes, the EU institutions and Member State governments deserve blame for not putting these elements in place. But that doesn’t mean we have to buy the IMF’s chutzpah.

This post originally appeared on the author’s blog.

Andrew Watt

Andrew Watt is head of the European economic policy unit at the Macroeconomic Policy Institute (Institut für Makroökonomie und Konjunkturforschung) in the Hans Böckler Stiftung.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Home ・ Economy ・ The IMF On Greek Debt – Redefining Chutzpah?

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Sakharov,nuclear,Khrushchev Unhappy birthday, Andrei SakharovNina L Khrushcheva
Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube