ATHENS – Even as Greece breathes a sigh of relief that it is getting a second bailout – this one for $172 billion, and a $134 billion write-down in debt – comes a warning from one of its international lenders, the International Monetary Fund, that when the loans run out in two years the country will still have a shortfall of between $42.4-$88.9 billion, and no way to close to the gap, except for more borrowing and more debt, but not from the private markets which have been burned by Greece’s insistence it take big losses on its investments.
The Wall Street Journal reported that, according to an IMF report, Greece is not out of the woods yet and lenders may have to lessen their demands that the country move more quickly with reforms to go along with austerity measures that have created a deep recession of 21 percent unemployment, led to the closing of more than 111,000 businesses, and left more than 500,000 people without any income at all because their benefits have expired. That means, the IMF warned, that Greece, after its loans run out in 2014, may need a third bailout. The country is surviving on a first series of $152 billion in rescue loans from the Troika of the European Union-IMF-European Central Bank (EU-IMF-ECB) while awaiting disbursement of the second bailout. “Prospects for a return to the markets are becoming ever less certain,” the IMF report says.
European officials have estimated that after the completion of the new program for Greece, Athens would be able to return to the markets, at least with short-term bonds of high risk as the country’s record in the market will initially run counter to the issue of long-term bonds. That may actually entail a dependence on official creditors as Greece has been effectively squeezed out of the private markets because it stiffed investors for 74 percent of their loans and won’t pay them back for 30 years. The short-term relief has come with a long-term cost, tying the hands of a new government when it is elected after elections later this spring to replace a hybrid government of PASOK Socialists and their bitter rival New Democracy Conservatives who are sharing power under interim Prime Minister Lucas Papademos, a former ECB Vice-President. The IMF said Greece may not be able to borrow any more money after 2014 except from the ECB.
While the Troika has been demanding Greece proceed with more pay cuts, tax hikes, slashed pensions and the firing 150,000 public workers over the next three years, to go along with its acquiescence to cut the minimum wage 22-32 percent and phase out collective bargaining rights, and push ahead with privatization, the report suggested the reforms may have to come more slowly than expected as Greece has been overwhelmed. If Greece is given more time to implement reforms, the IMF said that its debt ratio to Gross Domestic Product (GDP), a key indicator for the economy, would still be 171 percent in 2014 instead of 160 percent, and 146 percent in 2020 instead of the 117 percent originally estimated, which means it could take generations for the economy to recover, too late to help pensioners, or the young who are fleeing the country to find work and a new life in other countries.
While the bailouts and debt write-down have staved off default for now, the report indicates it’s still a possibility as the economy is not competitive. The only other alternative is for Greece to go back into the private market but pay exorbitant interest rates, which could re-ignite the cycle which helped cause the crisis, along with political parties packing public payrolls with unneeded hiring in return for votes, which has happened for more than 35 years.
High debt levels, most of which is owed to the IMF and Troika, “would initially discourage large issuances and imply continued reliance on official financing,” IMF staff said in their loan report published last week. With IMF loan exposure to Europe and Greece near its maximum, the fund assumes additional financing would come “as committed by euro area member states.”
The Journal reported, however, that the IMF staff is wary about whether Greece can fully implement the program on schedule, characterizing the risks as “exceptionally high.” With a mountain of debt and severe austerity having a dramatic impact on the economy, many economists question whether Athens has already reached the strained limits of reform fatigue. Considering those risks, the IMF outlined an alternative scenario based on a potential three-year delay in completing the required fiscal reforms and state assets selling at a slower pace than originally projected. “It may take Greece much more time than assumed to identify and implement the necessary structural fiscal reforms to improve the primary balance,” staff warned. Also, asset sales may be deferred, “due to market-related constraints, encumbrances on assets or political hurdles.” The report added that, “Prospects for a return to the market become even less certain.”
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