He is now on a shorter leash than ever, forced to take the lead role in carrying out a stricter Troika reform program than the one initially proposed to him back in February.
As I’ve been explaining since late January when Tsipras first came to power, Greece is trapped by simple economic reality. The Greek government had zero primary surplus in 2014, which means that even if it defaulted on all its debts, including to Greek banks, it would still have no room to fund fiscal stimulus.
The only way Greece could get such room would be to quit the euro and accept a large devaluation of all Greek financial assets, including deposits in Greek banks. That’s a political non-starter in Greece: only a minority of Tsipras’ Syriza coalition and a couple small far-right parties are willing to go there.
It will be interesting to see how long Tsipras can last in this situation. He appears to be under no near-term threat in parliament. An accommodation appears to have been reached for now in which the centrist opposition will support the reform program while the farthest-left and far-right corners of Tsipras’ ruling coalition will cast symbolic protest votes against reforms but not do anything to bring down Tsipras or his government. The farthest-left factions lost minister and deputy minister positions. The far right kept the defense ministry.
Tsipras’ resounding victory in the July 5 referendum has proven that he is skilled at channeling the public mood into support for himself. The fact that he won the referendum completely dishonestly, by urging Greeks to vote for an anti-austerity option that he knew didn’t exist, doesn’t seem to have cost him much in Greek domestic politics, at least not yet.
Meanwhile European political leaders are hurriedly working on rolling over Greece’s €2b of overdue debts to the IMF and another €3.8b of principal and interest due mainly to Euro Area central banks on Monday. The European Central Bank’s governing council has reportedly added €900m to Greece’s “emergency liquidity assistance” allowance, the lifeline that was keeping Greek banks liquid until the council stopped approving increases in late June. Greek banks are expected to open on Monday, though I don’t think €900m is nearly enough to enable the Greek government to lift all of the protections it has granted to Greek banks from their depositors.
Understanding the meaning of “debt relief” in IMFese
As I wrote back on July 2 when the IMF first published its report saying Greece needs “debt relief,” the meaning of those words is being widely misunderstood. Gradually more and more journalists have been figuring it out, but there’s still a lot of confusion around, so it’s worth clarifying this point a little further.
The IMF was not saying that Greece needed a write-down. What the IMF said was that Greece needed extensions of the maturities of its official debts that fall due after 2018, plus another €52b of official loans. That breaks down to: €30b to roll over the debts that fall due by the end of 2018; €20b to clear arrears, rebuild run-down cash balances, and replace bank bailout reserves that the EU seized in February after Greece threatened to default; and €2b to roll a portion of interest due before 2019 into more long-term official debt. The crucial point to understand here is that the IMF considers new official lending to be a kind of debt relief, because it’s long-term and low-interest.
With all that, the IMF opined, Greece could probably sustain its debts without any more official lending after 2018. That was a very optimistic projection. Few people really believe Greece won’t need another EU-IMF lending program in 2018, to continue rolling over its various other kinds of debts as they come due into long-term, low-interest official debts.
But the IMF’s rules say that before it lends it must ensure that the recipient country will be able to sustain its debts after the lending stops. And there is no political will right now to commit to lending to Greece past 2018. So the IMF needed to meet a high standard of sustainability that assumes Greece won’t have any more access to official lending after 2018.
The need for €52b of new lending and maturity extensions of official debt due after 2018 was the IMF’s opinion three weeks ago (the report was written a week before it was published). On July 14 the IMF published an update dramatically increasing its estimate of Greece’s financing needs from €52b to €85b, and saying Greece needed either maturity extension with “a very dramatic extension with grace periods [of deferred interest] of, say, 30 years on the entire stock of European debt, including new assistance” or “explicit annual transfers to the Greek budget or deep upfront haircuts.”
The latter two options are obviously politically unpalatable. So the IMF is really calling for the first of those options: extensions of maturities and grace periods of deferred interest on Greece’s debts to the EU.
How could Greece’s financing needs have grown by €33b in three weeks, you ask? The IMF says, “the events of the past two weeks — the closure of banks and imposition of capital controls — are extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability.”
The IMF probably also took an opportunity to climb down from over-optimistic nominal growth forecasts built in to the three-week-old report. The experience of not being paid on time tends to push creditors to revisit such things. The IMF is undoubtedly maintaining the high hurdle that Greece’s debts must be plausibly sustainable without any further official lending after 2018.
The IMF is also apparently not taking into account the new reform program’s section on privatization, which calls for Greece to raise €50b and put half of it towards repaying debt. That would imply €25b less financing needs, though the program document doesn’t say how soon Greece would raise so much money. Anyway €50b is a wistful fantasy, which could only come true if things go so well in Greece that it won’t need the money.
A clarification of Greece’s fiscal position
Most media covering Greece have reported that the new reform program represents a deepening of fiscal austerity. Dan Davies has written a popular blog post arguing the opposite, that actually Greece is being given room for fiscal stimulus. So who’s right?
The mainstream view here is much closer to being correct. The deal is fiscally austere. Greece had zero primary surplus last year, and the new program calls for that to tighten to 1% of GDP this year and to 3.5% of GDP from 2018 on. Unless you believe there are growth forces at work in Greece that will greatly improve the fiscal position without any change in tax or spending policy, that is a big fiscal tightening.
On the other hand the deal is not any more fiscally austere than the one offered to Greece in June. When I say the new program is much stricter, I mean its regimen of supply-side reforms. The fiscal numbers are exactly the same. And they’re much easier than the fiscal path Greece committed to under its 2012-2015 bailout program. The latter called for Greece to tighten to a 4.5% of GDP primary surplus from 2016 on.
What the media have missed is that Greece has actually already severely tightened its fiscal position in the first half of 2015. Remember that Greece kept current on its debts until the last day of June, and its repayment schedule is not light. Greece hasn’t been able to raise any new private financing since last year, and has only been able to roll over debts owed to Greek banks and other captive local creditors.
The only way Greece could make its debt payments was by sharply tightening its fiscal position. And it did so in a completely ad hoc manner, by running up arrears or just not making budgeted expenditures. As the table below shows, Greece’s state budget (the core central government) ran a primary surplus of 3.1% of GDP in the first half of 2015. That’s probably about equal to an overall primary surplus of 2.6% of GDP, judging from the fact that Greece’s core central government ran an 0.5% of GDP primary surplus in 2014 while the IMF calculated a zero overall primary surplus.
Note that my calculations rely on Greek government data, but I don’t use the Greek government’s own count of its state budget primary surplus, which wrongly counts privatization receipts and refunds of previously paid interest as primary income. The IMF consolidates all central and local government entities and makes other adjustments.
So this is the valid point that Davies could have made: relative to the severe austerity that has prevailed so far this year, a 1% of GDP primary surplus target for this year does represent something like a fiscal stimulus. It means Greece is allowed to run a primary deficit of around 0.6% of GDP in the second half. Actually Greece is likely to endure another couple months of severe austerity and then enjoy a rush of public spending in the fourth quarter.
But Davies’ actual argument is all wrong. He thinks Greece will enjoy fiscal stimulus because the primary surplus of 1% of GDP minus interest costs he estimates at 3% to 4% of GDP leaves an overall deficit of at least 2% of GDP. But fiscal stimulus is a negative change in the fiscal position, not a negative level. For fiscal stimulus Greece would need to be able to spend more and/or collect less revenue than it did last year. And no one is offering to lend Greece enough money to do that.
Besides, Greece’s actual interest costs are around 2.5% of GDP, net of expected refunds but including deferred interest, and about 1.6% of GDP in terms of cash paid net of refunds. And payment of interest to foreigners, in cash or not, is never a fiscal stimulus.
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