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The Role of International Monetary Fund in the 2015 Greece

Bailout

Arnab Sharma

Contemporary Marketing Management

GMAY16CM57

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Table of Contents

1. Introduction………………………………………………………………………………………………………………………….3

2. Bailout proposals and packages ................................................................................................. 4

3. What would the IMF like to see to resolve the situation .......................................................... 5

4. What happens to Greece because of the failure to make a repayment when due? .............. 5

5. Is there a grace period?............................................................................................................. 6

6. 2015 Bailout Packages…..………………………………………………………………….....6

7. Impact of the economic reforms on the Greek citizens…………………………......………....7

8. Conclusion……………………………………………………………………………………..9

9. References…………………………………………………………………………………….10

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Introduction

Modern Greece began its history in the early 19th century and has recouped from pernicious courses

of events ever since. Greece witnessed developing industrial activity in the 20th century catalysed by

the World War from 1918 to 1922. Several other industries such as textiles, ammunition and boot

making cropped up to support the military. However in 1922, unable to secure any more loans from

abroad to finance the war with Turkey, Finance Minister Petros Protopapadakis declared the

dichotomization of the Greek drachma. Under this policy, half of the value of the drachma would be

kept by the owner, and the other half would be surrendered by the government in exchange for a 20-

year 6.5% loan. As Greece was hit by the Great Depression in 1932, the Bank of Greece adopted several

deflationary policies to stave off the crises, but to no use. The Drachma was also pegged against the

US dollar which ended up being unsustainable given the large budget and trade deficits and bad loans.

This led to Greece’s foreign reserves being almost totally wiped out in 1932; the country however

adopted the protectionist policy leading to a surge in various industries within the economy, thereby

leading to an increase in industrial output to about 179%. Greece suffered heavily due to the second

World War though due to various factors, its complete reliance on imports being one of them. Greece

joined the European Commission, referred to as the Eurozone by economists in 1981 and adopted the

Euro as its currency in 2001; over the next 7 years the country's GDP per capita nearly tripled, from

$12,400 in 2001 to $31,700 in 2008. Post the recession in 2008, the Greek economy suffered heavily

and as of July 2015, was recuperating from the losses.

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Greek’s Debt to GDP ratio over the last few years

Greece became the centre of Europe’s debt crisis post the recession in 2008 after Wall Street

imploded. It announced about the soundness of its economic instability in 2009 and considering the

situation that it was, failed to receive help from almost all financial institutions. It was then that the

‘troika’- the International Monetary Fund, the European Central bank and the European Commission-

joined hands to sanction first of the 2 bailout packages, which eventually summed up to more than

240 billion euros.

Bailout Proposals and Packages

In May 2010, the IMF approved €30 billion in financial assistance for Greece under a Stand-By

arrangement to support the country’s economic reform program. In March 2012, the IMF approved

€28 billion (or $36.7 billion) in financial assistance for Greece under an extended arrangement to

support the country’s economic reform program. To date, Greece has €21.2 billion in outstanding

obligations to the IMF.

A repayment of about €1.5 billion was due to the IMF under the stand-by arrangement on June 30,

2015. That repayment was not made when due. A repayment of about €456 million was due on July

13, 2015. That repayment was also not made on the due date.

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According to a four-page “strictly confidential” summary released by one of the leading news journals,

IMF negotiators agreed to “participate in policy discussions” to ensure that the Eurozone’s new bailout

“was consistent with what the Fund had in mind”.

But they refused to “reach staff level agreement.” The Fund would only decide whether to

participate during a “stage two” after Greece had “agreed on a comprehensive set of reforms” and,

crucially, after Eurozone bailout lenders had “agreed on debt relief”.

What would the IMF like to see happen to resolve the situation?

The International Monetary Fund was committed to help out the Greek economy and its people fight

through the terrible crises and the economic turmoil. A safe haven would be an adoption of a balanced

approach as mentioned by the Chief Economist of the IMF in one of the blogs. As stated by the IMF

Chief Christine Lagarde, the IMF stood solid on helping grounds and following the approach suggest

by the chief economist.

It was accommodating and co-operative in terms of providing the space the economy needed to thrive

and for the various austere economic policies and reforms the government had adopted to set things

right.

What happens to Greece because of the failure to make a repayment when due?

On account of a payment default or a delinquency to the IMF, the economy or the country is

refrained from seeking any financial help from the IMF unless all previous arrears or debts are

cleared off in time. This is standard procedure in accordance with the IMF guidelines and protocols.

Greece would remain a member of the Fund though, with voting rights and representation on its

Executive Board. Greece would also be eligible for IMF technical assistance — that is, access to IMF

expertise on a range of economic issues, including tax administration and financial sector policies.

A default in payment to the IMF is not counted as a legitimate default by credit rating agencies,

thereby preventing the credit histories of the economies from having a lasting negative impact.

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Is there a grace period?

As per the IMF guidelines, there is no grace period in terms of repayment. When a member nation

fails to repay its dues, the Managing Director gets is touch with the Executive Board representing the

country or the economy at the IMF. Considering the gravity of the situation wrt Greece, the IMF

chief sent out a personal handout immediately.

2015 Bailout Packages

Back in August 2013, the German Finance Minister Wolfgang Schauble speculated a third bailout

programme for Greece and opined that the country might require another bailout strategy to meet

its short term financing operations. This was however met with great scepticism and scrutiny,

although the Eurogroup President Jean Claude Juncker was of a similar opinion. In order for Greece

to remain a part of the Eurozone and prevent an impending ‘GREXIT’, it was crucial for the

government to pump in about 86 billion euros into the economy. A ‘GREXIT’ would have been

severely debilitating for the German economy and would have sent shocks across the global financial

vertical. The IMF was sceptical about issuing another loan because of the country’s history of

defaults at repaying the loans and without the IMF’s involvement, Greece’s eurozone partners

would have had to find more funds to meet Athens’ short-term financing needs.

The IMF urged the Greek government to restructure its tax regime, narrow its tax evasion policies,

pass several austerity budgets to meet the minimum funds required to clear off the debts, make the

country conducive enough to carry out business and adopt several economic reforms to boost the

economy. The Greek government amidst its controversial elections did somehow manage to comply

by the terms and conditions subjected by the IMF and other financial bodies.

Amidst immense negotiation, speculation, scepticism and confirmation, a final bailout package of

about 86 billion euros was sanctioned which was decided to be handed over to Greece gradually

from 2015 until 2018. This included a buffer of up to € 25 billion for the banking sector in order to

address potential bank recapitalisation and resolution costs. Greece received the first disbursement

of the initial tranche of up to € 26 billion. A first sub-tranche of € 10 billion was made available

immediately, but in a segregated account at the ESM, destined for bank recapitalisation and

resolution purposes.

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Greece’s debt-to-GDP ratio had shot up to 175%, from the 120% level when it first received a bailout

from the “troika” of the IMF, the European Central Bank and the European commission in 2010. The

IMF’s role in the Eurozone bailouts has been controversial since the first rescue of Greece in 2010.

However, the European commission and the ECB felt the credibility of the bailouts was boosted by

the presence of the IMF, due to the tough conditions the fund attaches to financial aid. The IMF

though stands reluctant at signing off the payment towards the next instalment unless the Eurozone

creditors reach ‘explicit and concrete’ agreement.

Impact of the Economic Reforms on the Greek citizens

Greece, post the recession has seen the darkest of days and still continues to recuperate from the

repercussions of the financial apocalypse. The aftermath has been gruelling and has taken a serious

toll on the finances of the Greek citizens. The plight of the people and the recession in the economy

seems inevitable with the government fighting back hard to get the economy back on its feet and the

people hoping to look for a silver lining.

However, due to economic and political motivations and for the benefit of the citizens of the country,

the government had adopted several stringent austerity budgets to ensure that the country recouped

from the financial obligation it had been overpowered by for years. There was widespread unrest

across the country, with people taking the streets with placards, protesting and chanting slogans

against the Tsipras government and burning effigies. The salaries of all government employees were

frozen, with bonuses slashed by as much as 10 percent, pensions being frozen and likewise.

An increase in the VAT from 19% to 21% was initiated, heavy duties and taxes were imposed on

commodities such as cigarettes, alcohol and fuel, and large duties were levied on luxury items and

imported goods. Greece was struck by countrywide riots with people hauling petrol bombs on

governmental institutions such as banks and a 48-hour nationwide strike was called out by the citizens

in retaliation to the ongoing stringent economic reforms; Greece had turned violent.

The tax regime was completely revamped thereby inflicting colossal pressure on the citizens, the

retirement age for women was raised from 60 to 65, 1000 new bank branches were opened to allow

pensioners withdraw about 120 euros for a week and the Greek stock exchange remained closed for

an indefinite time period. Banks remained closed for indefinite time periods too and when the stock

exchange did open, the market crashed by about 16 percent. Greece was overshadowed by a cloud

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of tumultuous economic crises coupled with both political upheavals as well as financial instability.

Standard and poor’s downgraded the Greece credit rating to a Junk Bond status.

According to the latest reports from one of the leading business journals, Greece needs a generous

100-billion-euro debt haircut in order to be able to come out of a perpetual financial slump. As per

the latest Telegraph reports, “since Europe has ruled out a nominal debt haircut, NIESR’s analysis

would imply a sizeable extension on debt repayments that would take the bailout program “a long

way” into the future.”

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Conclusion

Greece’s public debt has become highly unsustainable. 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. There are several

options. If Europe prefers to again provide debt relief through maturity extension, there would have

to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European

debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate

back onto the balance sheet of the private sector at interest rates close to the current AAA rates before

debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near

term will bring about an unsustainable debt dynamic for the next several decades. Other options

include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between

the various options is for Greece and its European partners to decide.

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References

1. Charles Forelle, P. (2016). Greece’s Debt Due: What Greece Owes When. WSJ. Retrieved 14

June 2016, from http://graphics.wsj.com/greece-debt-timeline/

2. Ben Wright,. (2016). IMF could back away from Greek bailout if debt deal is not agreed. The

Telegraph. Retrieved 14 June 2016, from

http://www.telegraph.co.uk/business/2016/04/15/imf-could-back-away-from-greek-

bailout-if-debt-deal-is-not-agree/

3. Nardelli, A. (2015). The IMF position on Greece – explained. the Guardian. Retrieved 14 June

2016, from http://www.theguardian.com/news/datablog/2015/jul/15/the-imf-position-on-

greece-explained

4. Nine Key Questions on Greece. (2016). Imf.org. Retrieved 14 June 2016, from

http://www.imf.org/external/country/grc/greecefaq.htm

5. Moody's downgrades Greece. (2009). Telegraph.co.uk. Retrieved 14 June 2016, from

http://www.telegraph.co.uk/finance/economics/6864878/Moodys-downgrades-

Greece.html

6. Greece and the IMF -- Page 3 of 25. (2016). Imf.org. Retrieved 14 June 2016, from

http://www.imf.org/external/country/GRC/index.htm?pn=3

7. Greece bailout: Eurozone ministers set tough conditions - BBC News. (2016). BBC

News. Retrieved 14 June 2016, from http://www.bbc.com/news/world-europe-

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