The International Monetary Fund and the European Union six months ago patched together a $146-billion bailout package for Greece, which was on the verge of bankruptcy while struggling with its worst recession in years.
Bankruptcy was averted, but default fears remain. Greece needs a lot of cash. The country hopes to cut a budget deficit that reached more than 15% of its gross domestic product in 2009 to less than 3% by the end of 2012.
To get there, it needs to stick to a brutal austerity budget that includes cuts in pay and pensions for some workers and reductions in services. Greece also must increase revenue and speed up reforms in money-losing state enterprises.
Poul Thomsen, the IMF’s mission chief in Greece recently sat down for a rare interview, offering a look at Greece’s big challenges ahead.
In its first review in September, the IMF said Greece was making impressive progress. Are critics correct in saying the country is slacking off now?
I think this is a misjudgment of what’s going on. I think what people are doubting is whether some very serious structural reforms within state agencies, tax collection authorities, the labor market and money-losing state companies can happen. The Greeks have started but they need to continue.
So if you were an investor would you hedge your bet on Greece? The end-of-year target deficit was 8.1% of GDP, but it looks as though the deficit will remain at about 9.4%.
No, definitely not. I would be impressed by the fact that they [the Greeks] are reaffirming their target commitments for 2011, as we agreed last May [under the bailout plan]. The fact alone that the deficit was adjusted by 6% of the GDP [from 15.4% to 9.4%] in an economy contracting by 4% should give people confidence.
But if Greece is off its year-end targets for 2010, is it reasonable to believe that it will meet even tougher targets in 2011? The budget deficit goal for 2011 is 7.5% of GDP.
That’s the question. The Greeks will only meet these targets if they carry out underlining structural reforms. As the program proceeds, there will be less and less fat to cut. So to get further revenue, true structural reform is needed, like restructuring the transportation and health sector and getting an efficient non-corrupt tax system in place.
And if these reforms do not pick up pace and succeed?
That will mean cutting wages and pensions again and we do not think this is socially possible and justifiable.
Have you recommended public sector layoffs? There are 760,000 public sector employees.
It’s clear that the public sector is just too big, and over time you have to reduce employment there. We have the five-in-one rule in place: one replacement for five retirements. And that’s gradually bringing down the level of employment. State enterprises are also subject to restructuring, now … and that won’t be able to happen without reducing employment. The good news is that a lot of people are choosing to retire, many more than we expected.
Representatives of the European Union, European Central Bank and IMF — known as the troika mission — review Greece’s progress every three months, drafting an assessment report ahead of quarterly disbursements of the bailout loan. So the next few months will be crucial?
The next couple of reviews are very, very critical because these reforms that are on the way are technically very complicated. Take the health system: We’re talking about 120 hospitals that are completely uncoordinated, that have no records, no accounting. [Consolidating them is] very, very complicated.
Isn’t this austerity budget killing all hope of attracting foreign investment?
No. What people are seeing is that Greece is coming to grips with its fiscal problems; that it’s balancing its budget; that it’s liberalizing the labor market, making it easier to hire and fire. This is so much more important than a period of temporary high taxes to bring down the deficit. I have no doubt in my mind that what is happening now is going to make Greece so much more attractive to foreign investment. It’s all about creating the conditions for Greece to create new jobs and to compete within the Eurozone.
If Greece is on track and doing so well, then why the talk of helping it pay back the $146-billion loan?
Because a lot of it comes due soon after the program comes to an end, and that creates a hump of maturing debt. So, we can provide the rest of the money over a longer period of time, 10 or 11 years. Or, we can provide a new loan to roll over. So far we think Greece will return to the market by early 2012.
Even if Greece emerges from its crisis, it will be saddled with a debt of 154% of the GDP. How does it cope with such a debt?
Debt will be uncomfortably high but it will be on a downward trajectory. So we will be on a sustainable path.
Carassava is a special correspondent.