Beyond A Bailout: Greece Needs Debt Relief, IMF Says

Jul 15, 2015
Originally published on July 16, 2015 5:03 pm

Whatever comes of the latest bailout plan for Greece, it may not be enough to save the country's economy, a new report from the International Monetary Fund says.

The IMF says Greece is so saddled with debt that it probably can't turn its economy around for years — even if it does everything its creditors want. The IMF wants European officials to grant some kind of debt relief to Greece, but such a move has been strongly opposed by Germany.

Before this year, Greece's troubled economy had been slowly getting back on its feet. But the bank shutdowns and debt default of the past few weeks have erased many of its gains, Harvard economist Ken Rogoff says.

"They're in free fall at the moment," he says. "You still can't get money out of the ATMs; it's really hard to get bank loans. So in the very near term, this situation's extremely grim — likely to get worse before it gets better."

If Greece is ever to recover, it needs investment dollars. But the current uncertainty and turmoil are scaring investors away, says Nicolas Veron, visiting fellow at the Peterson Institute for International Economics.

"There is also the constant threat of an exit from the eurozone, and very plainly there are a number of people in Germany who have made it known that they thought it remained a good idea and this acts as a constant drag on investment in Greece," he says.

Even if Greece complies with all the economic reforms that its European creditors want — and that's a very big if — IMF officials say it still faces very tough going. Though many factors can play a role, some economists say a country is in trouble if its debt levels exceed about 90 percent of its annual gross domestic product. The IMF says Greece's debt load is well above that and rising fast.

"The IMF forecast is that debt-to-GDP ratio in Greece will go to 200 percent in 2017 if all those measures are implemented, and that's far beyond any capacity to pay it back," says Aidan Regan, a lecturer at University College Dublin.

Regan says that as a country that exports very little, Greece has no real chance of growing fast enough to pay off its debt anytime soon. In that sense, he says, the debt load has become unsustainable.

The IMF passed on a chance to write down Greece's private sector debt in 2010, in what it later acknowledged was a big mistake.

Domenico Lombardi of the Center for International Governance Innovation says the situation "is really getting out of hand. The IMF wants to raise this issue more strongly and with greater determination."

A lot of economists agree with the IMF that without debt relief Greece's fate is essentially sealed. European officials have already had to extend the deadline for Greece to pay what it owes.

Veron, of the Peterson institute, says as a result Greece's condition isn't as dire as some people believe. "Because repayment is so much into the future and the interest rates are pretty low, there is not a big burden on the Greek economy from the repayment of that debt," he says.

But Lombardi says Europe needs to go further. "What is required is really a more fundamental and more radical approach rather than kicking the can down the road as it has been done so far," he says.

Any debt relief will have to get the approval of Germany, and German officials have repeatedly made clear they're unwilling to write down Greece's debt — something that would be hugely unpopular in Germany. They have left open the possibility of extending the terms of Greece's loans again, but even then it will take many years for Greece to pay off what it owes.

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Transcript

ROBERT SIEGEL, HOST:

Whatever comes of the latest bailout plan, it may not be enough to save Greece's economy. That's according to a report released yesterday by the International Monetary Fund. The IMF says Greece is so saddled with debt that it probably cannot turn its economy around for years, even if it does everything its creditors want it to do. The IMF wants European officials to grant some kind of debt relief to Greece. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: Before this year, Greece's troubled economy had been slowly getting back on its feet. But the bank shutdowns and debt defaults of the past few weeks have erased much of its gains, says Harvard economist Ken Rogoff.

KEN ROGOFF: They're in freefall at the moment. You still can't get money out of the ATM. It's really hard to get bank loans. So in the very near term, this situation's extremely grim - likely to get worse before it gets better.

ZARROLI: If Greece is ever to recover, it needs investment dollars. But the current uncertainty and turmoil is scaring investors away, says Nicholas Veron, visiting fellow at the Peterson Institute for International Economics.

NICHOLAS VERON: There is also the constant threat of an exit from the eurozone. And very plainly, there are a number of people in Germany who have made it known that they thought that remained a good idea, and this acts as a constant drag on investment in Greece.

ZARROLI: Even if Greece complies with all of the economic reforms that its European creditors want - and that's a very big if - IMF officials say it still faces very tough going. Economists generally think that a country is in trouble if its debt levels exceed about 90 percent of its annual gross domestic product. The IMF says Greece's debt load is well above that and rising fast. Aidan Regan is a lecturer at University College Dublin.

AIDAN REGAN: The IMF forecast is that debt-to-GDP ratio in Greece will go to 200 percent in 2017 if all those measures are implemented, and that's far, far beyond any capacity to pay it back.

ZARROLI: Regan says that as a country that exports very little, Greece has no real chance of growing fast enough to pay off its debt anytime soon. In that sense, he says the debt load has become unsustainable. The IMF passed on a chance to write down Greece's private sector debt in 2010 in what it later acknowledged was a big mistake. Domenico Lombardi is with the Center for International Governance Innovation.

DOMENICO LOMBARDI: But I think now that the situation is really getting out of hand, the IMF wants to raise these issues more strongly and with greater determination.

ZARROLI: A lot of economists agree with the IMF that without debt relief, Greece's fate is essentially sealed. European officials have already had to extend the deadline for Greece to pay what it owes. And Nicholas Veron, for one, says as a result, Greece's condition isn't as dire as some people believe.

VERON: Because repayment is so much into the future and the interest rates are pretty low, there is not a big burden on the Greek economy from the repayment of that debt.

ZARROLI: But Domenico Lombardi says Europe needs to go further.

LOMBARDI: What is required is really a more fundamentally, a more radical approach rather than kicking the can down the road as it has been done so far.

ZARROLI: Any debt relief would have to get the approval of Germany, and German officials have repeatedly made clear they're unwilling to write down Greece's debt, something that would be hugely unpopular at home. They have left open the possibility of extending the terms of Greece's loans again, but even then, it will take many years for Greece to pay off what it owes. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.