Monday, June 10, 2013


June 2013, International Monetary Fund
IMF Country Report No. 13/156


The primary objective of Greece’s May 2010 program supported by a Stand-By Arrangement (SBA) was to restore market confidence and lay the foundations for sound medium-term growth through strong and sustained fiscal consolidation and deep structural reforms, while safeguarding financial sector stability and reducing the risk of international systemic spillovers. Greece was to stay in the euro area and an estimated 20-30 percent competitiveness gap would be addressed through wage adjustment and productivity gains.

There were notable successes during the SBA-supported program (May 2010–March 2012). Strong fiscal consolidation was achieved and the pension system was put on a viable footing. Greece remained in the euro area, which was its stated political preference. Spillovers that might have had a severe effect on the global economy were relatively well-contained, aided by multilateral efforts to build firewalls.

However, there were also notable failures. Market confidence was not restored, the banking system lost 30 percent of its deposits, and the economy encountered a much-deeper-than-expected recession with exceptionally high unemployment. Public debt remained too high and eventually had to be restructured, with collateral damage for bank balance sheets that were also weakened by the recession. Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.

Given the danger of contagion, the report judges the program to have been a necessity, even though the Fund had misgivings about debt sustainability. There was, however, a tension between the need to support Greece and the concern that debt was not sustainable with high probability (a condition for exceptional access). In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases. The baseline still showed debt to be sustainable, as is required for all Fund programs. In the event, macro outcomes were far below the baseline and while some of this was due to exogenous factors, the baseline macro projections can also be criticized for being too optimistic.

The report considers the broad thrust of policies under the program to have been appropriate. Rapid fiscal adjustment was unavoidable given that the Greece had lost market access and official financing was as large as politically feasible. Competiveness-boosting measures were also essential, as were fiscal structural reforms to support deficit reduction. However, the depth of ownership of the program and the capacity to implement structural reforms were overestimated.

Greece’s SBA suggests the need to explore the case for refining the Fund’s lending policies and framework to better accommodate the circumstances of monetary unions. A particular challenge is to find ways to translate promises of conditional assistance from partner countries into formal program agreements.

There are also political economy lessons to be learned. Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program. The obstacles encountered in implementing reforms also illustrate the critical importance of ownership of a program, a lesson that is common to the findings of many previous EPEs.

Other lessons drawn concern the need to find ways to streamline the Troika process in the future and for Fund staff to be more skeptical about official data during regular surveillance. The detailed nature of the structural fiscal conditionality in the Greek program also bears scrutiny given the premium attached to parsimony in Fund conditionality.  (...Full report)

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