AN IRREVERENT official at the International Monetary Fund recently installed a jarring ringtone on his mobile phone. It is the sound of cans being kicked down a road. That, alas, is what Europe’s politicians and the IMF look set to do with their latest rescue plan for Greece. Though the details are still being hammered out, it is already clear that the package—likely to involve an extra €85 billion ($125 billion) or so—goes only part way, at best, towards dealing with Greece’s economic woes.
Those problems are by now painfully well known. First, Greece’s moribund economy is hopelessly uncompetitive. Since membership of the euro rules out the fillip of a cheaper currency, the country’s only route to growth is through deep reforms that slash costs and boost productivity. Second, the government is bust. Despite the austerity of the past year, introduced as part of Greece’s first rescue package, its primary budget (ie, even before debt payments) is still deeply in deficit. Under any realistic assumptions for future growth and interest rates, its stock of debt, at 150% of GDP and rising, is unpayable.
Dealing decisively with the Greek mess means addressing both the lack of competitiveness and the insolvency. The new rescue plan makes progress on the former, but does little on the latter. As a result, even if the Greeks do everything that is asked of them (itself a big if), another crisis will loom before long.
Under pressure, Greece’s government has cut spending and raised taxes worth some 7% of GDP. It has taken an axe to the country’s absurdly generous pension system and started to free up the economy, for instance by easing entry into some 150 restricted professions. That is good, as far as it goes. But the reform momentum has been lost in recent months, something that the new rescue package seeks to address.
In return for more outside help, Greece’s government has agreed to more fiscal austerity and yet bolder reforms, including privatisation. By 2015 it plans to raise €50 billion (the equivalent of around 20% of GDP) from selling government-owned land and stakes in firms, especially in infrastructure and utilities. This is politically controversial in Athens, but well-designed state sell-offs can both boost an economy’s efficiency and raise funds. Nor is Greece’s ambition unprecedented: between 1985 and 1999 nine countries, including Portugal, sold state assets worth more than 20% of their GDP—though none did so as quickly as Greece plans to. So a poorly prepared sale could backfire but the thrust is correct.
It’s broke, fix it
The case for much tougher fiscal austerity is less clear. Greece plainly needs to move to a primary budget surplus. At issue is what size and how fast. More austerity, at least in the short term, means a weaker economy—and without growth Greece cannot put its crisis behind it. In asking the Greeks to do a lot more, quickly, there is a danger that the rescuers will go too far. No wonder, then, that getting the Greek parliament to approve the deal may not be easy.
The new plan’s biggest shortcoming, however, is its attitude to Greece’s debt. The original rescue plan assumed that, starting in 2012, Greece would issue new bonds to pay off maturing ones. With such market access now out of the question, the new bail-out envisages more loans from the EU and IMF, along with some “voluntary” participation by private bondholders. Germany would like the maturities of all Greek bonds to be stretched by seven years. The European Central Bank has long resisted any such debt “reprofiling”, though it seems to be warming towards an informal promise by some creditors, such as Greek banks, to buy more government bonds when their existing ones mature.
The practicality of such an informal promise is doubtful. And it won’t solve the debt problem. When the new plan ends Greece will still owe more than it can possibly pay. More of that debt will be to official creditors, especially if the private bondholders play only a token role now. Restructuring at that point will be more costly for other governments and the IMF.
The rescuers think buying time reduces the risk of contagion from a Greek debt restructuring to other euro-zone countries. But the pall of an unsolved Greek mess will continue to hang over the euro zone, just as it has done for the past year. A half-baked “voluntary” participation by creditors today may make a restructuring tomorrow more, not less, complicated. And the domestic politics of savage austerity and ever-rising debt are poisonous. It would be far better to recognise reality and start an orderly restructuring of Greek debt now. That remains the only solution. Greece’s alleged rescuers would do well to remember that if you kick a can down the road for long enough, it dents and eventually breaks.
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