“There should be no doubt that exit from the Euro would be extremely costly for Greece and its creditors,” said the International Monetary Fund’s (IMF) Chief Economist Olivier Blanchard, writing in his blog on imfdirect , the Fund’s global economy forum.
Underlining the Fund’s commitment to providing assistance, Mr. Blanchard ruled out further IMF funding for Greece until old arrears are cleared. Greece defaulted on a loan repayment of €1.55 billion due to the IMF on June 30. Greece owes a total of €6.95 billion to its creditors in July alone, of which €452 million is owed to the IMF.
Taking on the main critiques of the 2010 bail-out programme for Greece, Mr. Blanchard said he wanted to clarify points of contention and support a way forward.
Refuting the claim that the 2010 programme only raised debt levels and demanded excessive fiscal adjustment, Mr. Blanchard argued that without assistance, Greece would have had to make fiscal cuts of between 20-25 per cent of GDP, leading to more severe adjustments and higher social costs than under the five-year bail-out programme. 'Mr. Blanchard also countered the criticism that finance provided to Greece was simply used to pay back foreign banks, saying that while it was correct to say that Greece’s debt was not restructured for two years, it was due to fears of contagion risk — the risk that macro-economic shocks in once country are transmitted through price-level changes, for example, to other countries.
“Whether these reasons were good enough can be argued one way or the other,” he said, adding, “In real time, the risks were perceived to be too high to proceed with restructuring.”
A portion of the bail-out funds were allocated to paying off short-term creditors – so households and individual depositors were paid back in addition to foreign banks, Mr. Blanchard argued.
Responding to the widely held view that growth-destroying structural reforms and fiscal austerity have caused economic depression, Mr. Blanchard said the “dismal productivity record” of Greece required reforms — including in tax administration, collective bargaining, the judicial system, pensions and reducing barriers to entry for professions, and these were not undertaken to a sufficient degree.
Fiscal consolidation only explained a fraction of the output decline, according to the economist. “Output above potential to start, political crises, inconsistent policies, insufficient reforms, Grexit fears, low business confidence, weak banks, all contributed to the outcome,” he said.
Greece’s Prime Minister, Alex Tsipras, drew up a new bail-out plan which he shared with the “Troika” — the IMF, the European Commission (EC) and the European Central Bank (ECB) — by the creditors’ deadline of Thursday night.
The new proposal has many similarities to the old proposal, and includes increases in value-added tax, increases in retirement age, dismantling tax breaks for most Greece islands, defence spending cuts of €300 million, and phasing out ‘solidarity grants’ for retires. “The room for agreement is extremely narrow, and time is of the essence,” Mr. Blanchard said. The Greek parliament will vote on the new proposal later Thursday evening.
