Will Greece survive economic crisis?


The International Monetary Fund walks a delicate line in crafting an economic bailout for Greece that can restore the country’s fiscal credibility without stirring old resentments over tough loan conditions.

Past IMF efforts in other regions, including Latin America and Asia, were often seen as heavy-handed and tone-deaf to the privations forced on ordinary citizens.

To some extent, the jury is still out in Greece as well.

Protests in Athens that continued blasted an alleged “IMF junta,” threatened broader strikes and said IMF conditions will result in “asphyxiation” of the Greek people.

Certainly the IMF’s 30-billion-euro (about $40 billion) contribution comes with strings, as will 80 billion euros the rest of the European Union will put up over three years. But analysts note there are signs of generosity in it too.

For example, the aid is approaching 40 times the size of Greece’s quota at the IMF, an unprecedented level of access to the IMF’s resources and evidence of the global lender’s seriousness about helping the debt-stricken country.

“The IMF clearly recognises that a Greek debt default could have ripple effects on other vulnerable economies in the region and has the potential to spread to other regions as well,” said Eswar Prasad, a senior fellow at Brookings Institution.

One problem the IMF faces is limited room for maneuver -currency devaluation to spur trade is not an option since Greece is a member of the single-currency euro zone and much public spending has been cut.

That’s why the IMF that fiscal adjustment “must be the cornerstone of the programme.”

Simon Johnson, former IMF chief economist, said the Fund is in a tough position. “You don’t make yourself popular by calling for or implementing big fiscal adjustments, but if you don’t do so in this case, then Greece will simply collapse.”

The public sector is heavily targeted for more reductions, including for wages and entitlements like pensions. Military spending also will fall, but Johnson and other analysts said the IMF had little choice except to call for the cuts.

He blamed European foot-dragging for making the problem more severe and forcing a much larger bailout than might have been required if the European Union had stepped up with a rescue package for its fellow member three months ago.

“The EU has shown itself bankrupt morally and politically and now also economically, at least on the periphery, and so a day of reckoning has appeared,” Johnson said.

Prasad similarly called it regrettable that Greece’s crisis was allowed to drag on to the point that financial markets lost confidence in the country’s ability to handle its finances and forced borrowing costs steeply higher.

“What has happened now is that the IMF has bought Greece about one year of breathing space,” Prasad said. But he added that forcing an extra 11 percent of fiscal tightening on top of 5 percent already initiated will cause “enormous pain.”

Michael Mussa, a senior fellow at the Peterson Institute for International Economics and an IMF veteran, said getting Greece back to a point where it can once again borrow privately will be a protracted task.

“Once the situation lingered to the point that confidence was lost, it became necessary to have an official financing program that lets them roll over their debt for the next two to three years without accessing private markets,” he said.

Mussa added that it was far from clear whether Greece can return to markets without having to restructure its current debt load — making investors suffer losses. “It’s going to be a very near thing. The margin is not going to be large.”

Domenico Lombardi, a senior fellow at the Brookings Institution, noted that the IMF did incorporate lessons from past Asian bailout programmes in its Greek effort, notably by saying that spending on social safety net programs should not be unduly cut.

He too said the IMF had been dealt a poor hand by Europe.

“The European countries should have taken ownership of the Greek crisis and not externalized the cost of it to the international community as it effectively has done by involving the IMF,” Lombardi said.

The IMF said that in its efforts to design a support programme for Greece, the issue of restructuring its debt was never discussed. But Lombardi and others expressed skepticism that it will not eventually be put on the agenda.

“I believe that restructuring will be an option on the table as Greeks come to grips with just how painful it is going to be to implement fiscal discipline in a deflationary economic environment,” Lombardi said.