IMF: austerity measures would still leave Greece with
unsustainable debt
Secret documents show creditors’
baseline estimate puts debt at 118% of GDP in 2030, even if it signs up to all
tax and spending reforms demanded by troika
The
word OXI (No) is written on a wall in front of the Greek Academy in Athens,
Greece. Photograph: Simela Pantzartzi/EPA
Tuesday 30 June 2015 17.17 BSTLast modified
on Tuesday 30 June
Greece would
face an unsustainable level of debt by 2030 even if it signs up to the full
package of tax and spending reforms demanded of it, according to unpublished
documents compiled by its three main creditors.
The
documents, drawn up by the so-called troika of lenders, support Greece’s
argument that it needs substantial debt relief for a lasting economic recovery.
They show that, even after 15 years of sustained strong growth, the country
would face a level of debt that the International Monetary Fund deems
unsustainable.
The
documents show that the IMF’s baseline estimate – the most likely outcome – is
that Greece’s debt would still be 118% of GDP in 2030, even if it signs up to
the package of tax and spending reforms demanded. That is well above the 110%
which the IMF regards as sustainable given Greece’s debt profile, a level set
in 2012. The country’s debt level is currently 175% and likely to go higher
because of its recent slide back into recession.
The
documents admit that under the baseline scenario “significant concessions” are
necessary to improve Greece’s chances of ridding itself permanently of its debt
financing woes.
Even
under the best case scenario, which includes growth of 4% a year for the next
five years, Greece’s debt levels will drop to only 124%, by 2022. The best case
also anticipates €15bn (£10bn) in proceeds from privatisations, five times the
estimate in the most likely scenario.
But
under all the scenarios, which all assume a third bailout programme, looked at
by the troika – the European commission, the European Central Bank and the IMF
– Greece has no chance of meeting the target of reducing its debt to “well
below 110% of GDP by 2022” set by the Eurogroup of finance ministers in
November 2012.
In
the creditors own words: “It is clear that the policy slippages and
uncertainties of the last months have made the achievement of the 2012 targets
impossible under any scenario”.
These
projections are from the report Preliminary Debt Sustainability Analysis for
Greece, one of six documents that are part of the full set of materials that
comprise the “final” proposal sent to Greece by its creditors last Friday.
These,
which the Guardian has seen, were obtained by Süddeutsche
Zeitung after they were sent to all German MPs with the
expectation that the deal would need to be approved by the country’s parliament.
A
woman passes by a graffiti in Athens reading ‘No’ in German. Photograph: Simela
Pantzartzi/EPA
A
vote in the Bundestag never took place as the Greek prime minister, Alexis
Tsipras, rejected the plans and called a referendum on whether to accept the
creditors’ demands.
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While
the analysis underlines the fact that Greece has already benefited from a
number of debt-reducing measures - maturities have been extended, interest
payments are similar to those of less indebted nations and the public sector
intervention in 2012 cut debt by about €100bn - the document also admits that
under the baseline scenario “significant concessions” would improve sustainability.
But
despite the lenders’ admission that Greece cannot thrive without debt relief
the documents provide no clarity about what such a package might look like, nor
does it provide any detail of a third bailout programme despite assuming one
would exist. They promise only a more detailed debt sustainability analysis in
due course.
The
documents also throw light on the €35bn investment package which several
governments, including Germany’s, have this week pointed out was offered to
Greece last week.
The second document in the pack of six, titled Reforms for the completion
of the current programme and beyond, show there was less to this offer than
suggested by Commission president Jean-Claude Juncker and Germany’s
vice-chancellor Sigmar Gabriel. The cash on offer is not an ad hoc investment
but is actually an EU grant that is regularly available to all member states.
And, as Süddeutsche Zeitung points out, accessing
the cash requires a 15% co-financing in Greece’s case, which it cannot afford.
Because of this, Greece has unspent sums from its €38bn 2007-2013 pot of
available grants.
A third document outlines
the “financing needs and draft disbursement schedule linked to the completion
of the fifth review”, spelling out how Greece would have received €15bn to meet
its obligations until the end of November. The cash would have been handed over
in five tranches starting in June (as soon as the Greek parliament approved the
proposals) to cover Greece’s financing needs. However, 93% of the funds would
have gone straight to cover the cost of maturing debt for the duration of the
extension.
The
remaining documents cover the nuts and bolts of the actions that were expected
to be taken by Greece in consultation with the EC/ECB/IMF. One of these papers was also published by the European Commission over
the weekend.
The
plan is premised on a primary surplus target of 1%, 2%, 3%, and 3.5% of GDP in
2015, 2016, 2017 and 2018 respectively (both sides agree on these targets). It is
anchored on VAT changes producing additional revenue of 1% of GDP and a reform
of the pension system that leads to savings of 1% of GDP in 2016.
On
VAT reforms, the proposal suggests broadening the tax base at a standard rate
of 23%, and would include restaurants, and catering. There will be a reduced
rate of 13% to cover a limited set of goods, that includes energy, basic foods,
hotels and water (excluding sewage).
There
was also to be a super-reduced rate of 6% on pharmaceuticals, books and theatres,
an increase on tax on insurance and the elimination of tax exemptions on
certain islands. The creditors had originally wanted only a two-tier VAT
system.
In
terms of pensions, which have been the stickiest point in the negotiations, the plan
demands reforms to:
- Create
strong disincentives to early retirement, including changes to early
retirement penalties
- Adopt
legislation so that withdrawals from the social insurance fund will incur
an annual penalty, for those affected by the extension of the retirement
age period, equivalent to 10% on top of the current penalty of 6%
- Ensure
that all supplementary pension funds are only financed by own
contributions
- Gradually
phase out the solidarity grant (EKAS) for all pensioners by end-December
2019. This shall start immediately for the top 20% of beneficiaries with
the details of the phase-out to be agreed with the institutions
- Freeze
monthly guaranteed contributory pension limits in nominal terms until 2021
- Provide to
people retiring after 30 June 2015 the basic, guaranteed contributory, and
means-tested pensions only at statutory normal retirement age, currently
67 years
- Increase
the relatively low health contributions for pensioners from 4% to 6% on
average and extend it to supplementary pensions
On
Monday Juncker insisted - incorrectly - that these measures did not amount to a
cut in pensions. However, the creditors were correct in saying that they had
compromised and the plans had some flexibility. They also suggested that Greece
could provide alternative proposals as long as they are “sufficiently concrete
and quantifiable”.
The
creditors’ proposals also suggested that corporation tax rise only from 26% to
28%. Greece wanted the rate set at 29%.
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