The Greek patient

“I hope and want Greece to remain in the eurozone,” German Chancellor Angela Merkel said during her visit to Athens last week, before suggesting that everything – from the next bailout instalment to any possible initiatives to pull the country out of its economic tailspin – were dependant on the content of the soon-to-be published report by the troika.

It was hardly an unqualified endorsement of Greece but was absolutely in keeping with the piecemeal approach Europe’s key decision makers have adopted during this crisis. They’ve hooked Greece up to the IV while they try to find a cure for the illness ailing the whole of the eurozone. As the days roll on, the next drip – the troika review – takes on paramount importance. It has become a matter of life and death. So, it should be of urgent concern to all those involved that at this crucial juncture, the troika’s medical credentials are in serious doubt.

A few hours before Merkel touched down in Athens, the IMF published its regular World Economic Outlook. With much of the world’s attention on the German chancellor’s unexpected visit, a small section of the 250-page report went largely unnoticed. Tucked away on page 41 of the report in box 1.1, the IMF’s chief economist, Olivier Blanchard, and his colleague Daniel Leigh admitted that the Fund was responsible for a massive policy failure. The admitted that IMF experts had been wildly off target in calculating the recessionary impact of austerity.

“The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2 [percent of GDP], depending on the forecast source and the specifics of the estimation approach,” wrote the pair. “Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.”

Blanchard and Leigh accepted that the negative impact of spending cuts and tax hikes on economic growth were about 100 to 300 percent greater than the IMF thought when it helped design programs in Greece and other crisis-hit eurozone countries. Or, as Ann Cahill of the Irish Examiner – one of the few journalists to pounce on this information immediately – put it: “The report says the IMF believed that for every 100 euros of austerity through higher taxes and spending cuts, the effect on economic growth and unemployment would be the equivalent of 50 euro. But in reality the effect has been between double and three times that — stripping the economy of 90 euros to 150 euros for every 100 euros taken out in budgets agreed with the troika.”

In Greece, which has implemented the largest austerity package in the developed world over the past few years, the IMF, which was meant to provide the experience and know-how in the troika, certainly got its forecasts woefully wrong.

It is worth remembering that the troika predicted the Greek economy would contract by 4 percent in 2010 but it actually shrank by 4.9 percent. For 2011, the troika initially predicted a contraction of 2.6 percent, which it then revised halfway through the year to 3.5 percent. In fact, the Greek economy shrank by 7.1 percent. This year, the GDP will likely plummet by 6.5 percent. In its original program, the troika had expected growth of 1.1 percent this year. Then in September last year, the IMF said in its World Economic Outlook that the Greek economy would shrink by 2 percent.

It is no wonder, therefore, that the troika is now unwilling to accept the Greek government’s forecast of a contraction of 3.8 percent for next year and insists that it will be higher, at 5 percent. Also, it is no surprise that the IMF’s managing director, Christine Lagarde, is now openly questioning the tactic of making quick and deep cuts in a depressed economy like Greece’s.

“Instead of frontloading heavily it is sometimes better, given the circumstances and the fact that many countries at the same time go through that same set of policies with the view of reducing their deficits, it is sometimes better to have a bit more time,” Lagarde told journalists in Tokyo last week.

Given that this is exactly the opposite of what’s happened in the Greek program and that the troika is demanding that 9 billion euros worth of measures from a total of 13.5 billion in the new two-year austerity package be implemented next year, Greeks could be forgiven for feeling their the victim of an elaborate practical joke. You won’t find many people laughing, though.

Greece has been responsible for plenty of comical moments of incompetence itself. Accounts of how successive governments have failed to implement some of the structural reforms demanded would comfortably fill a stand-up routine. However, the shortcomings on the Greek side have been – and continue to be – well documented. The IMF’s admission is the first public acceptance by a member of the troika that those who supposedly came to Greece’s aid also failed in a spectacular manner.

The other two thirds of the troika, the European Commission and the European Central Bank, have been less forthcoming in admitting what has gone wrong.

“The eurozone would never stoop to the mea culpa offered by the IMF in its latest World Economic Outlook, which admits to underestimating badly the effect of austerity in reducing economic output,” writes Charlemagne in last week’s Economist. “The eurozone can, after all, always blame the indolence of earlier Greek governments.”

The day after Merkel visited Athens, the European Commission published its “Overview of competitiveness in 27 member states”. It placed Greece, whose manufacturing productivity increased by more than the EU average between 2006 and 2011, in the middle group of “uneven performers”. Whereas, Greece is in line with the EU average in areas such as labor productivity and employees with high education, it is rock bottom when it comes to the business environment and bank lending for SMEs.

In its report, Brussels acknowledges that “an effort has been made to simplify procedures and to boost competitiveness” but adds that “the implementation of these measures has been slow and further reform of the Greek public administration remains a major challenge.” The report’s assessment is spot on and the European Commission has played a significant role in trying to overcome these problems through the deployment of the EU Task Force in Greece.

But the report also highlights the damaging effect that the lack of liquidity is having on the Greek economy. “Greek companies face serious problems in obtaining access to finance due to the severe recession and the difficult situation for the banking sector which has seen outflows of deposits and a rise in non-performing loans,” it says.

Yet, this is the same European Commission that is part of a troika that has withheld Athens’s loan tranches over the past few months and has yet to agree with Greece a method for recapitalizing its banks. Both of these decisions have exacerbated the liquidity problem that the EC so accurately describes.

This also the European Commission that does not cite in its report labor laws or the size of wages as factors hampering Greek competitiveness, yet it is part of a troika that is demanding further interventions in the labor market from the Greek government through the reduction of notice periods and compensation for sacked workers. This, despite the fact that at the behest of the troika, Greece already has one of the lowest minimum wages in the eurozone and perhaps the most lax labor laws.

Then, there is the European Central Bank, which steadfastly refuses to consider rolling over or restructuring some 45 billion euros of Greek bonds that it holds. Its president, Mario Draghi, and numerous other central bank officials insist that this would be monetary financing of a member state, which the ECB is not allowed to do. But this is the same ECB that has bought these bonds at a discount on the secondary market and is set to make a profit of 10-15 billion euros on these purchases when they mature. The ECB’s charter, it seems, doesn’t say anything about profiting from a bankrupt member state.

The IMF’s admission of a dramatic miscalculation gives the opportunity to the others in the troika to also accept they got it wrong. The direction that talks between the Greek government and the troika have taken over the last few days suggest that none of the parties involved are prepared to back down. Unless there is a general acceptance of failure, the troika is destined to stand over the Greek patient hoping and wanting her to survive but persisting with decisions that will ensure survival is out of the question.

Nick Malkoutzis


10 responses to “The Greek patient

  1. -what about the structural reforms?
    -what about the liberalisation of closed professions?
    -what about the privatisation?
    -what about the public sector? …where almost 70% of the employees there do nothing(except to drink Frappe) and where not a small part of these 300bil euro were spent as well..
    “In Greece, which has implemented the largest austerity package in the developed world over the past few years”…..We have to say also that Greece has and the largest debt among the devloped world..dbt/person

    About the high educated people in Greece…the salary of a architect(entry level) is less than the salary of a waiter in Santorini…..

    In Greece is a common thing people to talk more than to act(since 2009 we got only empty promises)…
    More action,less talk=success

  2. Well said Nick.

    Just to add that IMF Lagarde has repeatedly supported IMF mission in Greece stressing that “there is no inconsistency between what the IMF mission does on the ground and what I said in front of you”. Thus, IMF is fully aware of what IMF representative in the troika delegation in Greece is demading.

    Furthermore, IMF latest forecasts call for a 4% GDP contraction in 2013 from an estimated 6% in 2012. More details are provided on the following link

  3. The biggest mistake was to go for history’s greatest austerity program without initiating at the same time growth measures. Considering the amount of money (mis)spent so far, a low double-digit billion amount for growth projects would have almost been peanuts.

    I am reminded of corporate restucturings. There are those restructurings (usually the larger ones) where large, money-market oriented banks are involved. You can tell them because they send to the meetings their restructuring experts (who have never in their lives dealt with a customer; who have no feeling for a customer relationship), sometimes accompanied by lawyers. They have one focus: how to get the money back and/or how to minimize credit losses. There is no way that they can return from a meeting and tell their seniors that they have agreed to spend a little Fresh Money here or there to stimulate the company’s business. Their seniors would consider that as a give-away of shareholders’ equity. In most cases, the former account managers of the company are not even allowed to attend those meetings out of fear that they might think too much of the customers’ interests.

    And then there are those restructurings where no capital markets players are involved. Typically, at those meetings there are never any lawyers and the bankers attending are not completely new faces for the customer. There may be some business consultants. The first decision the banks make is to agree on a standstill, i. e. no cash flows back to any bank until the situation is under control. Then the banks make sure that liquidity is in place throughout the restructuring. They look at cost-cutting measures like any restructuring expert would do but they also look at business plans and investment options to make sure that the patient doesn’t die while they successfully operate on him.

    The only way to get money back from a borrower in trouble is to make the borrower strong again (unless one find’s a dumb third party, like tax payers, to pay one out). That was irresponsibly neglected in the case of Greece. It still is even today. But it is never too late.

  4. That factor used in predictions is based on past observations and not at all reliable for forecasts. Cutting government expenses in Greece affected many government employees and retired persons who were forced to live on a minimum and thus made the economy shrink more than in countries where cuts affect investments etc.
    > “Greece has been responsible for plenty of comical moments of incompetence itself.”
    That is the truly big tragedy of the country. And at least looking from abroad I can not see the reforms being implemented. Tell me how it should all happen without chaos or a military dictatorship?

  5. Dear Nick,
    There is one point on my opinion that you had overlooked, and this point is beautifully treated by Gillian Tett in the FT of today, that is the coping mechanism that a country has . All the projections of the IMF and the troika underestimated the fact that the reaction of the Greek people to what they perceived as an humiliation was to press the button “self destruct”, contrarily to the Irish who reacted with gallows humor. This explain the size of the contraction much better than any other “economic” explanation that can be given or the “fault” of the politicians that where only reflecting the local culture.

  6. I agree with Estevao: My impression (from Germany) was, that Greece, unlike Ireland, but also unlike Portugal, Spain or Italy, did not try to get on their feet. Instead they seemed trying to blackmail: “Europe and/or Germany will continue giving us lots of money, otherwise we are making riots and revolution, call you Nazi and commit suicide.”
    That simply couldn’t be allowed to work, otherwise the blackmailing for money would go on and on.
    The other problem was, that the german public didn’t knwo whom to trust, that more money wouldt be used to fix greece:
    – Karamanlis and the “nea democratia” have been shown to cheat anyone in Europe. And for long time Samaras did not make the impression to change that way.
    – Papandreu promised a lot, but realized only a little – so the trust in him got lost.
    – Unions and other left parties: seemed to force riots, maybe dreaming of revolutions.
    – the orthodox church – seemed to think to their own money only
    – Goverment – seemed to be chaotic and totally blocked.
    I think the main problem was the lack of trust for greece leaders and institutions, for the greece elites.
    If Europe and Germany would have found more people and institutions to trust on (and feel the trust was qualified), they would have been much more open, much more willing to invest more money and not only demand cuts. That was the main difference of Greece to Ireland, Portugal, Spain and Italy.
    And it still is. If Merkel would not want to help Greece, she would not visit it. What was the sense of making riots when she comes for visit? Shall she learn to better to stay home and let greece going totally broke?
    Button “self destruct”, thats it

  7. Pingback: The Greek Patient « TK In Colorado

  8. “In what could have been a Freudian slip, the German chancellor Angela Merkel said that the bank supervisor won’t be ready until 2030, before clarifying that she meant 2013”

  9. Well before the Greek elits is the german elites that cannot be trusted and the banking system alltogether .If corruption is starting to show in Greece then we will find a lot about the backround and many people wont be happy about it

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