By Vassilis Kostoulas
Greece's testing of the markets must adhere closely with the current program's objectives and targets, as the Greek side still has a "full agenda" of reforms before it, IMF mission chief for Greece, Delia Velculescu, told "N" this week.
In an exclusive interview published a day after the Greek state's first foray into the sovereign debt market since 2014 netted three billion euros in a bond sale, Velculescu emphasized that whatever financing is drained from the markets should not increase the country's debt. Rather, she stressed, the goal of new paper should be to smooth over "debt repayments due after the program period."
At the same time, she warned that a reliance on high tax rates is hindering investments in the capital-starved country.
Along those lines, Velculescu echoed the standing IMF "formula" for jump-starting the Greek economy: expand the tax base, and reduce spending on pensions in favor of lowering tax rates.
Moreover, she also underlined the IMF's insistence on lowering primary budget surplus targets, as a percentage of GDP, to around 1.5 percent "as soon as possible". A demand by European creditors - especially Germany - for high Greek fiscal targets has met with the IMF's dogged opposition. Although Athens acquiesced to high primary budget surplus targets, its position on this issue is more aligned with the Fund.
Conversely, Velculescu rejected the Greek government's assertion that the fiscal result for 2016 was due to structural reforms, pointing instead to an "exceptional compression of spending", even greater than what was budgeted, and often by employing ad hoc measures.
In terms of priorities for concluding the upcoming third review of the Greek bailout program, she pointed to pending issues dealing with temporary contract workers in the country's cavernous public sector as well as a clearance framework for arrears owed by the state to the private sector. Other priorities for the third review, due in the autumn, are better management of the Olympus-sized "mountain" of non-performing loans in the country, along with ensuring systemic banks' "adequate" capitalization and still imposed capital controls - a leftover from the turbulent summer of 2015.
She also mentioned another two thorny issues that the Fund has long considered "landmarks" in efforts to liberalize Greece's economy and to curb the state's control, i.e. rolling back prohibitions on Sunday retail shopping and opening up so-called "closed occupations".
In reference to Greece's social security system, Velculescu detailed the IMF's position of an unsustainable model, saying contributions by working generations cannot sustain current pension rates. In fact, she reminded that the social security deficit in the country is nearly four times the Euro zone average.
Asked about the Greek debt, a highly politicized issue that was in the media spotlight for much of the past month, Velculescu said the problem lies in the long-term outlook, essentially after Greece ceases borrowing with the ESM's favorable terms and starts relying on money lent with the markets' decidedly higher interest rates.
Finally, asked about the ECB's Quantitative Easing asset-purchasing program and Athens' standing desire to rejoin the stimulus mechanism, she said, among others, that "...it is not essential in order for Greece to sustainably return to markets."
What is the IMF analysis, that Greece's public debt is unsustainable, based on? Is it the amount of the nominal value or the annual service cost that mainly determines the sustainability of the debt? Note that Greece is again facing a practical problem with debt payments from 2022.
IMF mission chief for Greece
The IMF’s views on the sustainability of Greece’s debt are well known. Our analysis focuses primarily on Greece’s gross financing needs—that is, the amount that Greece needs to borrow every year to cover its financial obligations after it has drawn on its internal resources. Greece’s obligations in this sense are its debt repayments plus the interest it owes on its debt, while its resources are its primary surpluses and its privatization receipts. This is similar to the concept of “annual service cost” that you mention. But we also monitor the evolution of the stock of debt relative to GDP, which influences the cost of financing: everything else being equal, the higher the stock of debt relative to GDP the more expensive it is to finance it.
According to our projections, debt service costs will increase to unsustainable levels in the long run. This is because while at present much of Greece’s debt is official financing that is provided at highly concessional interest rates, over time this debt will need to be repaid and replaced with new debt at more expensive, market rates. It is in this sense that we assess that Greece’s debt is unsustainable. This is why we have been calling for aditional debt relief from Greece’s European partners to reduce Greece’s debt service costs further and restore Greece’s debt sustainability.
Which measures do you focus on, in view of the third review of the program and why? In passing, do you think it will be an easier task compared to the second review?
Greece’s adjustment program involves a series of reforms to be implemented over time, in line with a timetable set by the authorites and agreed with program partners. Program reviews are an opportunity to take stock periodically of progress with policy implementation, review the economic situation, and check whether any changes to the program strategy are warranted.
The next review will thus assesss macroeconomic and policy developments, with a focus on the implementation of recent and upcoming reforms:
- In the fiscal area, we would be reviewing fiscal outcomes relative to targets and follow up on plans to reform the public administration by tightening temporary employment rules, as well as on the assessment of the arrears clearance framework, among other matters.
- In the financial sector, we would reassess the overall supervisory strategy to deal with nonperforming loans and ensure adequate bank capitalization. In this context, we will also take a close look at the effectiveness of recent financial reforms (e.g. out-of- court workout law, electronic auctions, etc.) which are critical to facilitating debt restructuring; check on upcoming planned ammendments to the Code of Civil Procedures to protect secured creditors and foster credit growth; and review progress with the strategy to relax capital controls.
- Finally, in the structural area, we will be assessing the effectiveness of recent reforms (e.g. the liberalization of Sunday trade, simplification of investment licensing, and opening up of closed professions) and following up on planned changes to rules governing how workers can authorize strikes and on the implementation of remaining OECD recommendations, among other things.
In sum, the authorities still have a full agenda ahead of them. Steadfast policy implementation will be critical to the success of the program and the return of confidence, growth, and access to market financing.
IMF links the reduction of the non-taxable income to tax cuts. However, the reduction of the non-taxable income is certain, in contrast to the uncertain reduction of tax rates. When should somebody expect tax cuts in Greece, so that economic activity can be revived?
Rebalancing the budget toward more growth-friendly policies—inlcuding lower tax rates and higher spending on well-targeted social programs and public investment—is essential for the sustainability of the public finances and Greece’s ability to grow over the medium run. We have advocated lowering Greece’s primary surplus targets to around 1.5 percent of GDP as soon as posible, as a lower target would help create fiscal space for such growth-friendly policies. Greece and its European parters have agreed on higher surpluses until 2022. We expect that after 2022, the surplus target would be lowered to facilitate the implementation of these beneficial policies.
The IMF estimates that Greece cannot maintain primary surpluses above 1.5% of GDP in the medium term. In this sense, how do you assess the 2016 result, which was eight times higher than the original target? It is important to note, that the Greek government considers that 2.9% out of the 4% was a structural result.
We have said many times that Greece cannot sustain primary surpluses above 1.5 percent of GDP for a prolonged period. This view is based on Greece’s own historical track record, and on the broader international experience, which shows that periods of sustained very large surpluses are rare, and depend on highly favorable initial economic conditions. We did recognize, however, that Greece could temporarily reach higher surpluses, through exceptional compression of spending or other one-off measures. This is what happened in 2016, when a reduction in spending beyond what was budgeted, together with temporary factors, such as tax offsets related to arrears clearance with ESM funds, helped to support a much-higher-than-targeted primary surplus. What is important in the long run is that fiscal targets are underpinned by permanent structural reforms and do not depend on an unsustainable compression of spending or ad-hoc measures.
How does the IMF document the need for a further cutback in spending on pensions in Greece, and how should this cutback be shared? Horizontally or on the basis of the contributions paid by the beneficiary, for example?
Despite several rounds of reforms, Greece’s pension system remains unsustainable and unaffordable, as contributions levied on working generations are far from sufficient to pay current pensions. As a result, the pension system deficit is almost four times as high as the euro-area average. The recently-legislated pension measures help to curb pension spending over the medium run. Importantly, they help share the adjustment between current and future retirees, while protecting those with low pension incomes. The reform thus promotes fairness both between and within generations.
One criticism on the institutions is that, to the extent that they influence the conduct of economic policy in Greece, they do not focus as much on the spending and the efficiency of public administration. On the contrary, they "allow" the Greek political system to choose the easy solution of taxes. What is your opinion;
The current program focuses on broadening tax bases and reducing pension spending to facilitate a reduction in tax rates—which have now reached levels that are hindering investment—and a reallocation of spending toward well-targetted social programs. Moreover, the authorities will review and tighten rules for temporary employment in the public administration to ensure that the hard-achieved gains from attrition rules can be protected. Over the medium run, the authorities should seek to folllow up on these reforms with additional efforts to modernize the public administration and improve its efficiency.
Will Greece be able to return to the markets in 2018? The Greek government is trying the waters in the markets earlier. Is it a good idea?
One of the key objectives of the program is to facilitate Greece’s return to market financing on a sustainable basis by the end of the program. In this regard, testing the markets earlier can be beneficial, provided any new financing remains in line with program targets and debt sustainability objectives, including by not increasing debt further, but rather focusing on smoothing debt repayments due after the program period.
Do you consider that the exclusion from the QE is a significant loss for Greece or does it constitute a parameter which does not particularly hinder the sustainable return of the country to the markets?
Access to QE is a matter for the ECB to determine. In the case of Greece, while access to QE could be beneficial to strengthen confidence, it is not essential in order for Greece to sustainably return to markets. Ultimately, what is critical to sustaining market access is steadfast policy implementation and official debt relief from Greece’s European partners to restore debt sustainability.