Economy

IMF Calls for More Greek Debt Restructuring

Jon C. Ogg

Greece is back in the news. The good news about Greece is that they are not back in the news on the verge of an impending default, nor is Greece being accused of being the verge of being ejected from the Euro. The bad news, at least from the view of an outsider, is that Greece hasn’t left the news for a need for more financial help.

A report from the International Monetary Fund, from May 23, 2016, is still suggesting that Greece needs further debt restructuring. The IMF’s warning is that Greece continues to face daunting fiscal consolidation challenges.

The report for May shows that Greece has faced seven years of recession, managing to achieve only a small primary surplus in 2015. With a structural adjustment of 16% of GDP, Greece’s small surplus was due to sizeable one-off factors.

Additional data from the IMF is suggesting that Greece is still far away from its ambitious medium-term primary surplus target of 3.5% of GDP. Reaching this target still requires measures of 4.5 of GDP. Low-hanging fruit have been exhausted, and the scope for new significant measures is limited.

Some of the further points were that Europe must give Greece unconditional debt relief as it is critical to any bailout program. The IMF also lowered its growth assumptions for Greece down to 1.25%, noting that Greece’s gross financing needs must be kept under 10% of GDP until around 204, rising to 20% by 2060. Another cautionary view is that Greece’s debt dynamics remain sensitive to economic or policy shocks, and that is even if the IMF’s debt relief proposals are accepted.

The news was of course good for the Global X MSCI Greece ETF (NYSEMKT: GREK). Its shares were up 4% at $9.03, but that is after the Greek ETF’s shares closed up 3.7% at $8.68 on Friday. After all, the term “unconditional debt relief” is huge – imagine if that were to happen for one of the major global economies. The last time the Greek ETF closed above $9.00 was back in November of 2015.

Some IMF notes for a history of this were listed as follows:

  • Debt was deemed sustainable, but not with high probability, when the first program was adopted in May 2010.
  • The much deeper-than-expected recession necessitated significant debt relief in 2011-12 to maintain the prospect of restoring sustainability.
  • Serious implementation problems caused a sharp deterioration in sustainability, raising fresh doubts about the realism of policy assumptions, especially from mid–2014.
  • Developments since last summer suggest that a realignment of critical policy and DSA assumptions can no longer be deferred if the DSA is to remain credible.