Resolving Greece’s Debt Crisis: Efforts By IMF And ECB

Background on Greece’s economic crisis

Question:

What have been the main roles performed by the International Monetary Fund (IMF) and the European Central Bank (ECB) in resolving the financial crisis experienced by Greece in recent years?
 

The major economic systems in the world are going through a phase of turmoil with rising debt crisis. The economy of Greece has been experiencing crisis since the year 2009 which had affected the government debt sustainability which has increased from 103% of GDP to soaring over 170% of GDP, contracting the economy by 25% , raising unemployment to 25%, making the banking system unstable. (Bulmer, 2014)The Eurozone governments, International Monetary Fund(IMF) and European Central Bank (ECB) has adopted and implied policies alongside measures to end the crisis. The crisis in Greece has affected other member states in the Eurozone as they share a common currency, monetary policy, controls fiscal and banking policies. (Blanchard, 2014)

The report is a comprehensive reflection of the various endeavors that are being undertaken by International Monetary Fund (IMF) and European Central Bank (ECB) in resolving the financial crisis that Greece is experiencing in the recent period. IMF has 189 participating countries from around the world whereas ECB consists of the European countries that have agreed to the Eurozone agreement. The report deals with the financial assistance and mentoring help that IMF and ECB extended to Greece for a creating a stable economic ambience, to emerge out of its crisis period.  The crisis in Greece started to grow since the 1990s when the government of the country adopted Euro as its national currency which resulted in lower borrowing costs. (Mitsopoulos, 2011)As Greece’s policies are controlled by European Central Bank (ECB) rules and regulations, investors trusted the economy and started lending money. The majority of the funds have been utilized in the past, primarily for serving government spending, compensate for lower tax earnings. IMF and ECB have extended several financial assistance packages to the country to offset its current debt situation as discussed below. (Abboushi, 2011) 

Greece crisis was revealed in 2009 when the newly elected government extended the budgetary deficits of the country, which distanced the country from capital markets as investors started growing uncertain regarding Greece’s financial position. Greece’s financial position impacted European countries in the Eurozone as investors were hesitant regarding the sustainability of their public finances. Threatening the European banking system as a whole with slowed economic progress and increased unemployment, International Monetary Fund and European Central Bank extended benefits in the light of the crisis. (Matsaganis, Social policy in hard times: The case of Greece. Critical Social Policy, 2012)

In 2010 and 2012 IMF and other Eurozone government extended two financial packages totaling to Euro 240billion. Greece utilized the fund for fiscal and structural adjustments that changed budget deficit from 9.9% of GDP to a surplus of 1.5% in 2014. (De Grauwe, What kind of governance for the eurozone?. , 2010)

ECB responded to the Greece crisis by purchasing or pledging to purchase bonds in the secondary market through Securities Market Program (SMP) and the Outright Monetary Transactions program (OMT). ECB had forwarded Euro 1 trillion through three-year, low cost loans or long-term refinancing operations (LTRO) into 800 banks in Eurozone. ECBs contributions have been greatly considered important in stabilizing Eurozone especially financial markets and in reducing crisis. ECB extended several purchases through the money market instruments available and also extended mentoring of the financial situation to help Greece bailout of its current economic crisis. However, Germany was opposed to the idea of extending help to Greece. Greece, a member of Eurozone was feared to spread its crisis to the other European countries. IMF major shareholder being the USA supported Greece and extended financial assistance package and also regular mentoring to help Greece bailout of its current situation. (Roubini, 2010)

IMF and ECB’s financial assistance and mentoring

Greece upon receiving the first financial assistance failed to adopt economic reforms related to taxes, fiscal targets, pensions and debt levels. The government highlighted that the first assistance is utilized in paying off most of the past debt payments, upon being deferring payments to creditors. The country called for disbursing the awaited financial assistance Euro 7.2 billion as it altered on its payments to the IMF in 2015 Euro 1.5 billion. Hence, IMF along with other Eurozone countries agreed on extending the third financial assistance package. IMF hence provided a Euro 30 billion under Stand-By-Arrangement(SBA) through its standard lending instruments. (De Santis, 2012) Greece had several governments change during the period of crisis which led to inappropriate applications of required reforms in the country. (Stuckler, 2012)

The agreement that IMF and ECB made to finance Greece with Euro 110 Billion financial package along with certain reforms that the country had to make. IMF will analyze the progress of Greece on its assistance on the quarterly basis. The following reforms are demanded from Greece in exchange for the assistance. (Bohn, The 2010 euro crisis stand-off between France and Germany: leadership styles and political culture., 2011) 

• Reduce Debt: Greece was continuously unable to repay its loans to IMF and ECB, there needed to be reforms made in its policy. The allocation of the funds of the financial assistance has to be applied appropriately for repaying back its loans in time. The agreement is made in the light that Greece would be able to tackle its debts and start a growth trajectory within the country. IMF and ECB were deeply interested in seeing the procedure Greece embraced budgetary cuts, freezing wages and pension for three consecutive years and increase the overall tax structure. (Blanchard, 2014)These measures would directly address Greece’s fiscal and debt issues and will enable the economy to utilize the financial assistance for reforms to strengthen the economy and put it back on growth tracks. The Greek Prime Minister George Papandreou as well as the European Union Economic and Monetary Affairs Commissioner Olli Rehn and IMF Managing Director Dominique Strauss-Kahn agreed that aggressive measures were adopted to prevent further crisis and gain control over Greece’s public finances which will eventually modernize the Greek economy. IMF extended these measures as a means for Greece to overcome its current crisis levels. Greece could only reduce its burden of debt by repaying off its previous loans with the proper financial planning of its fiscals.(Janssen, 2010)

To make Greece’s government sustainable and reducing its fiscal deficits the debt to GDP ratio needs to be on a downward trending. The wages and social benefits are 75 % of total public spending in Greece. The government will curtail any programs that extend social security benefits but will continue to provide benefit to the vulnerable. (MLA, 2011)

The pension program will discourage early retirement and encourage working for more number of years. (Matsaganis, The welfare state and the crisis: the case of Greece, 2011).The government also proposed to curb military expenditure in the period. 

• To improve current business climate: IMF and ECB implied that Greece adopting the measures suggested by them in the international front would not only allow the economy recover from the past but also improve its overall business climate. Though IMF recognizes that the initial period will be stressful for Greece, but the fiscal measures reforms would help make the economy more dynamic and robust.(Lattemann, 2008) The measures suggested by IMF and ECB will help Greece be on a growth trajectory, create more jobs and an environment for future sustainability. IMF further suggested that Greece adopts steps to reform its current labor market and labor market policies that will enable it to generate better incomes, will attract investment in state enterprises improving the overall business environment. Foreign investors have become hesitant about investing in Greece companies and state control enterprises but adopting suitable reforms and lowering overall salaries in the labor market will attract those investors. (Mitsopoulos, 2011)These increased numbers of businesses in the country will generate jobs and pay taxes which will create earnings for the government. The government of Greece was also instructed by IMF and ECB to reform policies in regards to waste as that would impact utility from products and reduce wastes. (Matsaganis, Social policy in hard times: The case of Greece. Critical Social Policy, 2012) Greece needed also to adopt stringent measures to fight corruption by elimination non-transparent procuring practices. IMF along with ECB wanted Greece to improve the existing business environment including political, technological, social changes in the country. (Mamadouh, 2011)IMF and ECB indicated that the environment for conducting business in Greece was not appropriate as people tend to retire early and enjoy pension benefits also the bodies aimed to curb the several benefits the governments extends to the people in summer, Christmas, Easter bonuses . This social reform was meant to encourage people to work more and several foreign companies to set up their facilities in Greece. (Douzinas)
• Accept Measures: Greece would adopt any process that IMF Managing Director and European countries extend. According to the direction given by IMF and ECB Greek, governmental authorities started consolidate fiscal measures to 5% of GDP and accepted legislative actions (De Santis, 2012). Emphasis was made to provide fair means within the economy that included protection of the most vulnerable. The measured stress of IMF is put on tackling “twin issues” within Greece of debt and competitiveness(Visvizi, 2012). IMF and ECB identified through their constant monitoring of the Greece economy that the impounding debt and financial crisis in Greece is majorly allocated to its inability to accept measures laid down by them and incapability within its economy to accept modernized measures. IMF and ECB both proposed at modernization of the Greece economy in the light of the crisis that was overhauling its economy. But earlier governments had failed to assess the graveness of the situation and the results that could come from Greece not reforming its policies. Earlier government had used the recurring financial help to repay off its existing debts, interests and to fund government expenditures. In the final assistance package extended by IMF, it was agreed that Greece will have to accept the remedial measures as suggested on its current economic status and accept the necessary implications that arise from applying such measures.  

• Making Greece economy competitive: Greece would adopt procedures to reform its policies to these waste reductions, reduce tax evasion and provide protection to the vulnerable. IMF proposed that Greece needed to make its economy more competitive to make it pro-growth which implied that policies and reforms that were traditional in nature had to be modernized. (De Grauwe, What kind of governance for the eurozone?. , 2010)Modernization of the Greek economy will open up opportunities for all, ethnic as well as foreign investors. Competitiveness measures as indicated by IMF directed at cost controlling and reduction of inflation such that Greece could regain control over prices and ensure price competitiveness. (Knight, 2015)

Greece was at a budgetary deficit of 13.6% of GDP with public debt amounting to 115% of GDP in 2009. The Greece government in response to IMF indications aimed to consolidate fiscal deficits to 11% of GDP and designed adjustments such that general deficit rounds of to 3% by 2014 as against 13.6% in the year 2011. (Wyplosz, 2012)Greece economy was functioning at the tail end of Eurozone countries before its crisis period. These several factors made the crisis financially and economically to settle in Greece easily. (Chamley, 2011) 

The governmental spending measures will be targeted to yield savings of 51/4% of GDP throughout 2013. The government also aimed to freeze pension and wages for three years and abolish payment during Christmas, Easter and summer bonuses while accommodating the lowest income group. (Matsaganis, Social policy in hard times: The case of Greece. Critical Social Policy, 2012) The financial markets in Greece especially the debt market major restructuring. Lenders and international investors were weary regarding Greece markets capability to deliver. IMF and ECB wanted Greece to increase its ratings in financial markets such that it could attract investments. (Mantanika, 2011) 

The major governmental revenues rose through the value-added tax, taxes on luxury items, tobacco, alcohol and so on will increase 4% of GDP in 2013 alone. The government will administer a stringent measure to collect taxes from individuals especially those susceptible to evasion. (De Santis, 2012) The tax system was also meant to safeguard revenue from large taxpayers. The budgetary controls were also regarded as an important step in controlling deficits and reduce burdens of debt. The net gain from administering structural reforms was expected to be 1.8% of GDP during the program period. (Lapavitsas, 2012)

Impact of Greece’s debt crisis on Eurozone

A Financial Stability Fund has been created from the external sources of financing received to ensure proper bank equity and avoid misappropriation of funds. Previous governments at the beginning of the crisis period had misappropriated the funds meant for the country bailing out of the crisis period. These several incidents led apprehension in the mind of ECB as well as IMF in regards to its capabilities to repay off dents. Hence, IMF on its quarterly monitoring indicated that the country devises a mechanism whereby the financial assistances can be redirected to yield much better results for the country. (Bohn, The 2010 euro crisis stand-off between France and Germany: leadership styles and political culture. , 2011). 

3.0 Conclusions 

Greece has been gradually recovering from its state of crisis with the several aids that it has received. The financial relief that has been forwarded by IMF and ECB in times of economic breakdown helped the economy regain back its economy and keep the basics functioning. However, the most valuable input to the country had been the policies and propositions that IMF along with ECB suggested helping restructure its economy. (De Santis, 2012)Though the majority of the steps came at considerable costs and raised speculations regarding the economies stability and viability. The country has been able to bail out of its extreme crisis but is yet to get back on its growth trajectory. (De Grauwe, Greece is solvent but illiquid: What should the ECB do? (No. 10694), 2015)

The IMF fears while forwarding financial assistance to Greece had been related to the country’s capability in accepting and adopting the major economic reforms. The Eurozone had feared that the country’s crisis could spread to other countries in the Europe that extended help. As Eurozone is bounded by common currency, monetary, banking and fiscal policies, they were apprehensive that extending help to Greece could easily have an effect on the Euro currency rates and raise levels of inflation. The role of IMF had been significant when considering the totality of the situation in which Greece was entangled and from where the country has recovered. (Stuckler, 2012)The IMF major shareholder USA had been very positive about Greece gaining back but was countered several times as Greece failed initially to adopt the measures suggested by IMF Director. The Greece economy is a major economy in the Eurozone, but Germany had severely opposed to IMF endeavors to help Greece. IMF had failed to assess the debt sustainability of Greece as most of its loans gets extended. Though the costs of financial assistance from IMF is quite high yet it has overlooked all Greece’s fallouts and extended loan repayments till 2040 until which Greece gets time to reform and deliver. (Bohn, The 2010 euro crisis stand-off between France and Germany: leadership styles and political culture. , 2011). 

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