The IMF and the Greek Crisis: myths and realities #LSEGreece - PowerPoint PPT Presentation

The IMF and the Greek Crisis: myths and realities #LSEGreece Welcome: Louis Loizou Chairman of the Hellenic Bankers Association UK. Poul Thomsen Director of the European Department at the International Monetary Fund. Chair: Professor Kevin Featherstone Eleftherios Venizelos Professor in Contemporary Greek Studies and Professor in European Politics and the Director of the Hellenic Observatory Hosted by the Hellenic Observatory and Hellenic Bankers Association-UK

The IM IMF and the Greek Cri risis: Myt yths and Realities Hellenic Observatory London School of Economics September 30, 2019 Poul l M. . Th Thomsen Director, European Department International Monetary Fund

Growth projections have been too optimistic and the length of a recovery unprecedented Real GDP per Capita (Index, pre-crisis peak = 100 1/) 110 Asian crisis 2/ Greece (2010 projection) 2031 100 U.S. Great Depression 90 Other EA crisis 3/ Greece (EC projection) 80 Greece (actual) 70 t t+3 t+6 t+9 t+12 t+15 t+18 t+21 t+24 Sources: European Commission; Eurostat; Haver Analytics; and IMF staff projections. 1/ Pre-crisis peaks are: 1929 for Great Depression; 1997 for Asian crisis; 2007 for Greece, Ireland, and Spain; 2008 for Cyprus and Portugal. 2/ Indonesia, Republic of Korea, and Thailand.

Public pension and income tax reforms remain critical for growth- friendly rebalancing of public finances State Transfers to the Public Pension System Personal Income Tax-Free Thresholds in the Euro Area (2016, percent of GDP) (Percent of 2018 average wages and salaries per employment) 120 12 10 100 8 80 6 60 4 40 2 20 0 -2 0 FRA EA PRT EST ESP GRC GRC'18 ITA AUT CYP FIN DEU MLT SVN NLD SVK IRL LVA LTU LUX LUX LVA SVN BEL IRL ESP DEU PRT FRA AUT SVK EA LTU ITA EST FIN GRC 1/ GRC CYP Sources: Deloitte; Eurostat; the Greek authorities; KPMG; OECD; and IMF staff calculations Sources: 2018 Aging Report; and IMF staff calculations. 1/ Income tax reform pre-legislated in 2017, though subsequently cancelled. Note: State transfer is defined as a difference between pension spending and actual Note: national accounts concept of wages and salaries is used. The euro area average employer and employee pension contributions as defined in the Aging Report, excludes Greece. excluding third-party revenues and non-contributory state transfers.

Political crises led to confidence shocks that halved deposits and collapsed investment Greece: 10-Year Bond Yield Spread Private Sector Bank Deposits Halved and the Share of (Percentage points; against German bond) Investment Declined by a Third During the Crisis 35 240 20 Share of investment Grexit I Grexit II 18 (percent of GDP; rhs) 30 220 Private sector deposit 16 (billions of euros) 25 200 14 12 20 180 10 15 160 8 6 10 140 4 5 120 2 Grexit I Grexit II 0 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Bloomberg Financial L.P.; and IMF staff calculations. Sources: Bank of Greece; ELSTAT; and IMF staff calculations.

Unbalanced structural reforms undermined credibility and broader support by imposing an excessive burden on labor Wage Flexibility vs. Price Rigidity (Index, 2003=100; seasonally adjusted) 125 120 115 HICP (constant taxes) 110 Performance under the ESM Program 105 Labor cost 100 95 90 85 2003 2005 2007 2009 2011 2013 2015 2017 2019 Sources: ELSTAT; Eurostat; Haver Analytics; and IMF staff calculations.

Unprecedented PSI in 2012 as systemic concerns began to fade PSI – Previous Bond Exchanges 90 80 70 60 Haircut (percent) Greece 50 (2012) 40 30 20 10 0 0 20 40 60 80 100 120 Restructured debt (percent of GDP) Source: Zettelmeyer, Trebesch and Gulati (2013)

PSI and OSI significantly lowered the debt burden Interest Payments and Debt Maturity General Government Average Effective Interest Rate (Percent; 2018) 25 20 3.5 General government interest payments (billions of euros; rhs) Central government average debt maturity (years, weighted average) 3.0 20 16 2.5 15 12 2.0 1.5 10 8 1.0 5 4 0.5 0 0 0.0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 EST FIN DEU LUX NLD FRA GRC LVA BEL AUT CYP IRL ESP LTU SVK ITA SVN PRT MLT Sources: Eurostat and Public Debt Management Agency (PDMA). Sources: Eurostat; and IMF staff calculations.

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