IMF-EU Deal with Greece

Greece has agreed a deal with the IMF and the EU involving the provision of funds of €110 billion over the next three years. This IMF website has links to the various statements. It summarises the deal as follows:

Negotiators over the weekend wrapped up details of the package, involving budget cuts, a freeze in wages and pensions for three years, and tax increases to address Greece’s fiscal and debt problems, along with deep reforms designed to strengthen Greece’s competitiveness and revive stalled economic growth.

Whether this deal really avoids a Greek default will ultimately depend on whether the fiscal adjustments that are undertaken can, in fact, alter the underlying arithmetic to the point where the Greek debt burden becomes sustainable. Whether the existence of this deal eases further pressure on other European countries with debt problems is, as of yet, unclear.

16 replies on “IMF-EU Deal with Greece”

Regardless of the maths, war has been declared.
Those who would profit from our loss, or Greek loss, should at a minimum be identified.

“In a study done last year, the OECD described government-run Greek hospitals as deeply corrupt. It concluded that we could save 30 percent of the costs, which is enormous….In Germany, a stent for heart operations costs about €500. In Greece it costs €2,000 to €2,500. The fault lies with corruption,” Greek PM Papandreou in interview with Der Spiegel, Feb 2010.

While a debt restructuring may be required at the end of the 3-year period, Greece is likely to be better governed; the European banking system would be in better shape and hopefully reforms of the fiscal shortcomings of the EMU will be in progress. We may even have a common European bond.

The latest to treat Germany as the piñata of the crisis is David McWilliams in the SBP: “Greece is the symptom of this crisis, but Germany is the cause…It is only right that Germany pays for the Greek problem, because Germany is the reason for the crisis.”

This audacious claim ignores the role of France which has the greatest exposure to Greek debt; two French banks – Crédit Agricole and Société Générale – control Greek banks and the claim that Germany is an outlier because it “prefers to save than spend or invest” also does not stand up. OECD data shows that from 1994, the French household savings rate has consistently been above the German level.

France isn’t singled out because it has a current account deficit but critics appear to want German companies, who are operating in world markets, to become less competitive.

Bundesbank president, Prof. Axel Weber, has acknowledged that German enterprises will naturally have to focus more on the domestic market than before the crisis and he said in March that Germany’s export success was based on companies embarking on a “painful, but eventually successful, restructuring process, including innovation, outsourcing, wage moderation as well as a balance sheet cleanup.” He said it should “be noted these were market-based adjustments, neither initiated nor managed by policy makers.”

Either way, peripheral countries have to get their economies in better shape; the biggest challenges are from beyond Europe.

It is easier to identify a problem than propose a credible solution. Germany was prudently governed and undergoing reform when it was partytime for Ireland and other misgoverned countries. These countries squandered billions of euros in German financed EU funding.

In 2003, Prof. Hans-Werner Sinn of the Ifo institute, had a book published: Ist Deutschland noch zu retten? (Can Germany Be Saved?) – – Its blurb read: “Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. It’s growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe. “

In Ireland, Mary Harney disdainfully spoke of being closer to Boston than Berlin and today, German success is the cause of the woes in Ireland, Greece and so on!!!

The admirable thing about George Papandreou is that he readily acknowledges where the principal responsibility for Greece’s woes lay.

Getting the money agreed was the easy (!) part. And of course, that’s not even ‘over the line’ yet. Legislation still needs to be enacted.

Getting the Greek reforms in place…… well…. I suspect that we’ve only seen the tip of the electorate’s reaction so far. What happens in 3 months time (or less) when it’s pretty obvious that they aren’t going to get the necessary austerity measures in place and Athens is looking like a battlefield? Will the EU simply stop sending the agreed bailout money?

Many powerful banks and bondholders around the world, potentially exposed to huge losses should Greece default, are hardly going to encourage the EU governments to ‘get tough’ with them (while they’e waiting for the rollover date) to the point that may force Greece into eventual default anyway, even after an aid package has been put together (and who would bet against it – this looks like putting the problem on the long finger again – buying time – waiting for that ‘recovery’ we keep hearing so much about to save the situation).

Once again, it looks as though everything is being done in the interests of banks and bondholders – I presume this €110 billion is coming from the taxpayers (ultimately) in the various countries. I guess the game is that debt will be repaid to bondholders when it gets to the point of ‘rollover’ and that debt will then become the property of the taxpayers and not the bondholders any more. The implied threat is that if default happens, the consequences would be so dire that we don’t even want to go there. What would actually happen if that bluff were called and the only people who actually lost money were said bondholders? Maybe this is just a big game of bluff. Although when the people with money are bluffing they usually back it up with police forces, militia and other nasties to beat the people into submission.

It’s laughable that a country like Ireland is putting up €1.3 billion towards this situation. Or is it ‘ironic’?

I wonder whether the EU has now ‘managed’ this threat and prevented the potential contagion? Do we think that those who have made a small fortune out of the Greek situation are going to sit on their hands now?

I suspect it’s going to be a long summer.

sounds like the usual IMF approach to me. Lets blackmail a country into a right wing fundamentalist economic policy. There is no democratic mandate for the so called ‘austerity’ measures, I was under the impression that the greeks elected a socialist government I dont think this was the outcome voters had in mind.

Can learned economist on this site explain why this following proposal would not work to a financial neophyte like me? These economists hail from the Chartalist or NMT school also represented by the excellent New Economic Perspective from Kansas City Blogsite. If all the answers using the conventional paradigms offer only unacceptable solutions, maybe it is time to change the economic paradigm?

Mosler and Auerbach on a potential solution for Greece that might also work for Ireland when the time comes…

“Greece can successfully issue and place new debt at low interest rates. The trick is to insert a provision stating that in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are ‘money good’ and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region…

..The ability of Greece to use the funds from the rescue package as a means to extinguish Greek state liabilities would improve their financial ratios and stave off financial collapse, at least on a short term basis, with the side effect of a downward spiral in output and employment, while the sovereign risk concerns are concurrently transmitted to Spain, Portugal, Ireland, Italy, and beyond. Those sovereign difficulties also morph into a full-scale private banking crisis which can quickly extend to bank runs at the branch level.
Our suggestion will rescue Greece and the entire euro zone from the dangers of national government insolvencies, and turn the euro zone policy maker’s attention 180 degrees, back to their traditional role of containing the potential moral hazard issue of excessive deficit spending by the national governments through the Stability and Growth Pact. If the member states ultimately decide that the Stability and Growth Pact ratios need to be changed, that’s their decision. But the SGP represents the euro zone’s “national budget”, precisely designed to prevent the hyperinflationary outcome that the “race to the bottom” could potentially create. At the very least, our proposal will mitigate the deflationary impact of markets disciplining credit sensitive national governments and halting the potential spread of global financial contagion, without being inflationary.


“Whether this deal really avoids a Greek default will ultimately depend on whether the fiscal adjustments that are undertaken can, in fact, alter the underlying arithmetic to the point where the Greek debt burden becomes sustainable”

I might be pointing out the obvious, but I see the outcome of this situation being increasingly less determined by fiscal or economic factors and increasingly more by political and social factors. The return to fiscal sustainability will for a great deal be decided by the Greek government’s ability to stay in power amidst increasing social unrest. Also, don’t forget the limited willingness of the German people to stand for this too. This is going to be election-changing stuff.

Furthermore, one can not forget the huge Euro-political smell this bail-out has, it’s only for a part an economic decision.


You’re completely correct. Some commentators compare Germany’s role in the European economy to that of China in the world economy. This is ofcourse a wrong comparison because of China’s currency devaluation policy. Germany plays the same deck of cards as we do and we can hardly blame them for gaining competitiveness through prudency and increasing productivity.

“Lets blackmail a country into a right wing fundamentalist economic policy.”

Out of interest, which specific right wing fundamentalist economic policies are the IMF forcing Greece to adopt?

@southofdub – I like Carmen Reinhart’s idea of a ‘benign restructuring’.

I guess that’s one where people aren’t banging their fists on the table 🙂

@ Smart Taxes

Without pretensions to be “a learned economist”, your point raises a number of issues.

Given the rise of indebtedness during the crisis, investors in sovereign debt are spoilt for choice.

Small economies like Ireland and Greece have to rely on foreign buyers to fund the bulk of their debt.

The ratio is about 70% for Greece and about 80% for Ireland.

At the other end of the scale is Japan where 96% of its huge debt is funded locally and 10-year Japanese debt is only 1.30% compared with its counterpart at 3% in Germany and over 9% last week in Greece and over 5% for Ireland. (Japan derives significant income from its overseas investments but interest payments on its low rate debt takes 18% of tax revenues).

Apart from having similarities with past shenanigans such as the Goldman Sachs arrangement to hide debt, the cost of ensuring Greek debt would still have a risk factor and there would have to be a market in tax vouchers which would likely have to be issued in the first place at a discount.

Bottom line: no free lunch.

I wouldn’t expect Eurostat to be impressed with such a scheme.

Michael et alia

There are many ways to make debt attractive, like illegal drugs, it can be made very desirable, but like drugs, eventually there is a price to pay. Debt got us into this mess. Debt will only make it worse. Reform is the key. Laws that are obeyed. Radical, huh! Laws that are pared down so that they do not protect those who steal from us? Too radical, huh? Guess we need a real crisis for that?

Greece and Spain won’t pay back. This was a calculated Risk, and a Lesson for the Banking System. The only thing Germans can do is:
REPOSSESS 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
U.S.A must REPOSSESS 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

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