Butchers wait for clients in a meat market in central Athens. Capital controls and bank closures have damaged the Greek economy far more than thought, a leaked IMF report states. Photograph: Emilio Morenatti/AP
by Larry Elliott, and Helena Smith in Athens
published at The Guardian on Tuesday 14 July 2015
The International Monetary Fund has warned that Greece will require far more generous debt relief than is currently on offer from its creditors, as MPs in Athens prepare for a crucial vote on Wednesday on a new bailout plan. An IMF report leaked to Reuters shows that Greece’s public debt is likely to peak at 200% of its national income within the next two years, with the risk that the actual outcome could be even worse.
The debt sustainability analysis comes on the eve of a crucial vote in the Greek parliament, when the prime minister, Alexis Tsipras, will seek approval for the fresh austerity measures demanded by the eurozone in return for a three-year rescue package worth up to €86bn (£61bn).
The report highlights the IMF’s scepticism about Greece’s ability to meet the ultra-tough budget targets insisted upon by its European creditors, and suggests that Athens should receive a 30-year grace period before it has to start paying off its debts.
Putting into question the fund’s involvement in the bailout, the report paints a far darker picture of Greece’s public finances than that contained in the blueprint released at the end of the marathon eurozone leaders’ summit on Monday. “The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” the IMF said, referring to the European stability mechanism bailout fund, which will be used to bankroll the Greek bailout.
The IMF last issued an update on Greece two weeks ago, but its new assessment comes after a period when cash withdrawals from banks have been limited to €60 a day and businesses have been starved of working capital.
The closure of banks and the introduction of capital controls were “extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected in our recently published DSA,” the IMF said.
Two weeks ago, the fund estimated that Greek debt would peak at 177% of GDP and fall to 142% by 2022. It now believes the debt ratio will still be 170% in 2022 after hitting a peak of 200%.
The IMF has consistently urged deeper debt relief throughout the Greek crisis, but has met resistance from European finance ministers, who have been unwilling to make their taxpayers pay the cost of a write down. Tsipras has also insisted that debt relief must form an important part of the package, but a statement by Eurozone leaders on Monday said only that further measures might be taken provided Greece adhered in full to the reforms demanded by its creditors.
Analysis Athens parliament: where do MPs stand over the Greek bailout deal?
The Greek prime minister, Alexis Tsipras, must rely on the support of parties outside his coalition if the measures are to be approved by the house
In the leaked report, the IMF says that Greece’s debts threaten to be unsustainable for decades, and that its financing needs will rise so that they are above the 15% of national income level deemed safe. The IMF adds that unless European creditors agree to an extended grace period, they face the choice of either annual transfers to the Greek budget, or “deep upfront haircuts”, the term for the cancellation of part of the debt. IMF sources confirmed that an updated debt sustainability analysis had been prepared by staff and would be discussed by the organisation’s executive board.
Unless the IMF can convince itself that Greece’s debts are sustainable, it would be forbidden by its own rules to put money into a new bailout. The assumption has been that the fund would provide €16.4bn – around 25% of the total – with the rest coming from the ESM.
The European commission, one of Greece’s three creditors alongside the IMF and the European Central Bank, sought to play down the report. A commission spokeswoman said that the IMF and the commission had together signed off on a different debt sustainability document. This was the paper sent to eurozone finance ministers on Saturday and formed the basis for the bailout agreement signed off by eurozone leaders on Monday morning, she said.
Reports of renewed IMF concerns came as Tsipras tried to convince dissident MPs in his own Syriza party to back another round of austerity. Ahead of the make-or-break vote in Athens’s parliament, Tsipras held back-to-back meetings as he attempted to rally support for measures at total variance with the rationale of his radical left party. Creditors have given the Greek government until Wednesday to push controversial reforms, including sales tax increases and pension reforms, through parliament.
Appalled by Tsipras’s volte-face, an estimated 35 Syriza MPs signalled on Tuesday night that they would vote against the measures, arguing that the “recessionary policies” will only worsen the record levels of poverty and unemployment Greece has already suffered. Panagiotis Lafazanis, the energy minister who heads Syriza’s Left Platform, implored the prime minister to turn down the terms. He called the proposals the work of “economic murderers” intent on destroying Greece.
Even if it was endorsed by the 300-seat House with the help of opposition parties – as seems likely – “it will never be passed by the people who effectively will eradicate it with their unity and struggles,” Lafazanis said.
With Tsipras’ own position looking increasingly vulnerable, the country appears headed for fresh political tumult. On Tuesday night government insiders insisted the prime minister had no intention of standing down, saying he would probably attempt to clear the political terrain with a cabinet reshuffle on Thursday.
Tsipras told public television last night: “The worst thing a captain could do while he is steering a ship during a storm, as difficult as it is, would be to abandon the helm.”
But if losses are heavy, and he loses his parliamentary majority, the young leader might also be forced to from a cross-party government of national unity.
“Political developments inside Syriza will be rapid and dramatic,” said professor Dimitris Keridis who teaches political science at Athens’ Panteion University.
“But we will see a realignment in Greek parliamentary politics in support of the deal which, hopefully, will be cathartic and provide stability,” he said. “Tsipras is being asked to pay for the sins of a previous political class. The great irony is a radical leftist will now have to impose all the reforms that were never passed before, neo-liberal measures that he has always opposed.”
The neo-Nazi Golden Dawn party quickly sought to capitalise on the popular anger that the deal is bound to unleash. “Golden Dawn will resist the new memorandum that the government of the left will sign with the complete support of New Democracy, To Potami and Pasok,” said the organisation’s leader Nikos Michaloliakos, referring to the opposition parties. “An avalanche of taxes is coming. New annihilating measures that will mainly affect the country’s youth, that will increase unemployment and hit farmers who are the soul of the nation, are coming. From every place in this land the battle will continue … so that the plans of foreign rule are not passed.”