Lack of Greek Pension, Tax Reform Seen Blocking Deal

Christine Lagarde, managing director of the International Monetary Fund, speaks with Wolfgang Schäuble and George Osborne, the finance ministers of Germany and the United Kingdom, in Washington DC, April 16
Christine Lagarde, managing director of the International Monetary Fund, speaks with Wolfgang Schäuble and George Osborne, the finance ministers of Germany and the United Kingdom, in Washington DC, April 16 (IMF/Stephen Jaffe)

Hopes of a last-minute deal to save Greece from bankruptcy started to evaporate again on Wednesday when it emerged that the Balkan nation’s creditors had rejected its latest proposals for pension and tax reform.

Another meeting of European finance ministers broke up without an agreement, deferring the matter — once again — to a European Council of government leaders that was due to reconvene on Thursday.

According to documents obtained by the Financial Times, the International Monetary Fund — which jointly administers Greece’s €240 billion bailout with the European Union — wanted Greece to raise the retirement age faster and phase out a “solidarity grant” for the poorest pensioners.

Originally, the far-left government that came to power in Athens earlier this year ruled out any pension cutbacks. Instead, it proposed to reinstall a thirteen month of pension payments, something it could not possibly afford.

When it became clear the creditors would not pay out the final €7.2 billion tranche of Greece’s bailout if it walked back on previous commitments to make the pension system more affordable, the country suggested raising the retirement age to 67 by 2036. It later proposed 2025. The IMF insists on 2022 as a deadline.

The fund also called for a quicker phasing out of the “solidarity grant” and rejected a Greek proposal to raise employer contributions to the main pension plan almost 4 percent, likely fearing that the added tax burden on companies would do little to lift Greece out of recession.

Greece returned to negative growth after it voted Syriza into office in January, a far-left party that campaigned on tearing up the bailout that has kept Greece from going bankrupt for the last five years.

The IMF previously raised doubts about Syriza’s commitment to economic reforms in February. But rather than submit more credible proposals, the party wasted the next four months haggling with its creditors over the terms of another loan and debt relief — both of which eurozone governments and the IMF consistently ruled out if Greece would not comply with the conditions of its original support program.

Pension reform is long overdue. In the years leading up to Greece’s near-default in 2010, government spending on pensions rose from 12 to 17 percent of annual economic output, reaching the highest rate in the eurozone.

Last year, the Greek Finance Ministry revealed that three out of four workers benefit from early retirement rules that allow them to stop working before they even reach the age of 61.

Greek prime minister Alexis Tsipras, who was elected on promises to end austerity, unexpectedly flew to Brussels for crisis talk on Wednesday after suggesting the creditors were negotiating in bad faith. “This curious stance may conceal one of two possibilities: either they don’t want an agreement or they are serving specific interest groups in Greece,” he told reporters.

The IMF also rejected Tsipras’ proposal for a one-off 12 percent tax on all corporate profits over €500 million that was supposed to raise €1.3 billion this year.

But the creditors backed down on their demand to include electricity in the highest, 23 percent sales tax rate and said they would allow Greece to create a new 6 percent discount sales tax for books and medicine.

Time is running out for Greece. Without the last bailout tranche, it could probably not pay off a €1.5 billion loan from the IMF by the end of the month. It may also have to default on €3.5 billion in bond redemptions that are due in the middle of July.

Tsipras’ insistence on relief from the austerity measures to which Greece’s financial support is tied has so far stopped the eurozone from finding a way to prevent one of its members from defaulting on its debt obligations for the first time.

The Greek leader is stuck between creditors who insist on liberal economic reforms and spending cuts and an inexperienced, radical party that is resistant to any compromise with institutions it blames for impoverishing the country.

Greece Submits Reforms for Bailout Extension, IMF Critical

Christine Lagarde, managing director of the International Monetary Fund, speaks at the Council on Foreign Relations in Washington DC, January 15
Christine Lagarde, managing director of the International Monetary Fund, speaks at the Council on Foreign Relations in Washington DC, January 15 (IMF)

European finance ministers agreed to give Greece a four-month extension of its bailout on Tuesday, even as the International Monetary Fund criticized the Syriza-led government in Athens lacking specificity in its plans.

The eurozone countries had agreed in principle to extend Greece’s loans before the weekend but conditioned final approval on a letter listening the policies Greece plans to enact during the remainder of the bailout period.

Greece needed more money to stave off the prospect of a sovereign default and possible exit from the euro when its aid package expires by the end of the month.

In the letter, submitted in the early hours on Tuesday, Greece promises not to enact any more unilateral policy changes and ensure that measures designed to alleviate what Prime Minister Alexis Tsipras has called the country’s “humanitarian crisis” will be budget neutral.

A European Commission source said the list was “sufficiently comprehensive to be a valid starting point for a successful conclusion of the review.”

But the International Monetary Fund, which jointly administers Greece’s bailout with European countries, was underwhelmed by the promises. The fund’s chief, Christine Lagarde, wrote to the Netherlands’ Jeroen Dijsselbloem, who chairs the meetings of eurozone finance ministers, that the latest Greek pledges did not convey “clear assurances that the government intends to undertake the reforms envisaged.”

We note in particular that there are neither clear commitments to design and implement the envisaged comprehensive pension and VAT policy reforms, not unequivocal undertakings to continue already-agreed policies for opening up closed sectors, for administrative reforms, for privatization and for labor market reforms.

The Financial Times reports that Greece has made many of the same promises before — which put them at odds with the new government’s stated opposition to austerity and liberal economic reform.

Tsipras’ far-left Syriza party won the election last month on promises to reverse the reforms Greece has undertaken since 2010 in order to qualify for a total of €240 billion in financial support.

Immediately after taking office, Tsipras canceled the privatization of Greece’s largest seaport and its public power utility. His new energy minister, Panagiotis Lafazanis, said privatizations were “over.”

But in the letter, Greece commits to not reversing privatizations and “respecting the legal process” in the case of tenders already launched.

On labor reform, the government also seems to walk back its earlier promises to raise the minimum wage and restore collective bargaining. In the letter, it promises a “smart” approach to collective bargaining “that balances the needs for flexibility with fairness.”

This includes the ambition to streamline and over time raise minimum wages in a manner that safeguards competiveness and employment prospects.

The letter also vows to consult European partners and the IMF before changing the minimum wage which was cut from €876 to €683 per month in 2012 — still higher than it is in Portugal and Eastern European countries.

The letter made no mention of Syriza’s campaign promise to restore pension bonuses. Rather, it reiterates Greece’s commitment to streamlining the pension regime and eliminating “loopholes and incentives that give rise to an excessive rate of early retirements.”

In the years leading up to the crisis, Greek public spending on pensions rose from 11.8 to 13 percent of economic output. Last year, the Finance Ministry revealed that three out of four Greek workers benefit from early retirement rules that allow them to stop working before they reach the age of 61.

Egypt Stalls on International Aid, Financial Crisis Looms

Cairo, Egypt, January 6, 2012
Cairo, Egypt, January 6, 2012 (Ville Miettinen)

Egypt is stalling on the terms of a $4.8 billion loan from International Monetary Fund even as the country faces food and fuel shortages that could destabilize it before parliamentary elections are due to start in October.

One Western diplomat told the Reuters news agency that the Arab nation’s Islamist government is under less financial pressure to finalize negotiations with the IMF after receiving $5 billion in aid from Libya and Qatar last week. “You can imagine them reaching that conclusion, that they have reached a short-term fix, it means they are not that beholden to the IMF,” he said.

Yet Egypt might need all of Libya’s and Qatar’s money to pay oil companies which it owes $5 billion.

Moreover, with a $32 billion annualized trade deficit, the aid from fellow Arab nations can give Egypt no more than a couple of months of breathing room. Support from the IMF would only last Egypt several more weeks.

The country has experienced a spiraling economic crisis since the 2011 uprisings that toppled longtime ruler Hosni Mubarak led to the Muslim Brotherhood usurping power. Investment and tourism have dwindled while the budget deficit has risen to 11 percent of gross domestic product. Foreign currency reserves have shrunk to be able to cover less than three months of imports.

The Financial Times reported on Thursday that the country will be three to four million tons of wheat imports short this year. The fall of the Egyptian pound’s exchange rate to just 60 percent of its 2012 value against the dollar has priced everything but bread out of the reach of the poorer half of the population which lives on $2 per day or less.

IMF negotiators urge Egypt to rein in oil sales and subsidies which account for a fifth of its state budget or 12 percent of GDP and raise taxes but the Muslim Brotherhood is reluctant to for fear or losing seats in October’s elections.

Fuel subsidies benefit wealthier Egyptians more than the poor, few of whom own cars. “Estimates show that the richest 20 percent of the population in Egypt receives more than half of the spending on fuel subsidies,” according to Caroline Freund, the World Bank’s chief economist for the Middle East and North Africa. Yet many poor Egyptians also depend on subsidized LPG to cook food while millions of Egyptian farmers rely on cheap diesel to fuel their irrigation pumps.

Once it has burned through its remaining foreign reserves, Egypt will have little choice but to further devalue its currency unless it continues to rack up debts. Devaluation would raise the price of imported goods further and could cause higher inflation across the board.

IMF Urges Germany to Give Up More Money

International pressure on Germany to surrender its commitment to austerity is mounting. The International Monetary Fund warned this week that if there isn’t a more interventionist economic policy in Europe, its debt crisis could undermine growth globally.

According to the Fund’s managing director, Christine Lagarde, “Resorting to across the board, across the continent, without differentiation, budgetary cuts will only add to recessionary pressures.”

The leaders of France and Italy agree that Europe needs less budget cuts and a bigger bailout fund — i.e., more German money — as well as joint bond issuance to stave off the specter of the currency union’s collapse.

“With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track,” the IMF’s chief economist said on Tuesday. “These measures can be taken, need to be taken, and need to be taken urgently.”

What are those measures? “Sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation,” according to the organization’s latest World Economic Outlook report. In layman’s terms, that’s fiscal stimulus, bank bailouts and printing money.

None of those is particularly popular in Germany nor in the other Northern European Union member states, including Finland and the Netherlands, which, probably not coincidentally, are also the only eurozone countries whose creditworthiness is still rated AAA by all three major American rating agencies.

In these countries, there is mounting public opposition to “transfer union,” the notion that the peripheral euro countries should be bailed out, permanently, by the stronger core.

Where Europe’s weaker economies would rather avoid painful economic reforms and inflate their way out of debt, in the north, there is a belief that only improved competitiveness and balanced budgets will allow the continent to grow out of the crisis.

Such high levels of debt as were amassed in the years preceding the downturn may require a contraction and bank deleveraging to restore business confidence. If austerity is to succeed, banks which loaned endlessly to bankrupt countries like Greece and Italy will have to write off part of their outstanding loans and especially public-sector workers in Europe’s periphery would need to accept further pay and pension cuts.

Neither is willing to take their losses. The notion that they won’t have to is perpetuated by political leaders and the IMF when they insist that a recession isn’t necessary to level the investment distortions that were caused by artificially low interest rates and the assumption that if a eurozone country were ever to teeter on the brink of default, Germany would bail it out.

Throughout the crisis, Germany has been extremely reluctant to save the highly indebted nations in the south from default. Perhaps the only reason it has is because German banks, too, are exposed to Greek debt. The coming weeks could prove a test for German resolve if Greece once again faces bankruptcy while markedly little progress toward fiscal consolidations has been made. The question is how much longer Germany is willing to pay before it can’t anymore?

IMF to Save Italy, Spain from Default?

An International Monetary Fund spokesperson denied reports that had surfaced in Italian news media on Monday of an international rescue mission preparing to aid Italy with up to €600 billion.

Contact between IMF officials and Rome had reportedly intensified nevertheless as Northern European countries, including Germany, are opposed to enabling the European Central Bank to purchase Italian sovereign debt indefinitely.

The central bankers in Frankfurt have spent several tens of billions buying peripheral bonds since this late this summer but are worried that if they continue their effort for much longer, it will discourage the governments involved from enacting the necessary economic reforms.

Despite the controversial central bank intervention, Italy’s borrowing costs have risen to rates that are deemed unsustainable in the long term.

Spain, Europe’s fourth largest economy, is similarly struggling to finance its deficit spending. It may be offered access to IMF credit to prevent its predicament from worsening.

Both countries have seen political upheaval in recent weeks with Italy’s Silvio Berlusconi forced to resign as prime minister to make way for a caretaker government and the opposition conservatives winning the parliamentary elections in Spain. Mariano Rajoy is expected to replace the socialist José Luis Zapatero as prime minister in December and announce additional austerity measures to shore up the nation’s finances.

In Italy, Mario Monti is set to unveil his economic reform agenda next month as well which could include an accelerated increase in the pension age, a rise in sales taxes and a revamped housing tax.

IMF inspectors will monitor Italy’s fiscal consolidation. Its €1.8 trillion economy is too big to bail out for other European countries, even if the €440 billion European Financial Stability Facility is expanded.

Heavily indebted euro nations and the European Commission advocate an activist role for the central bank and the issuance of eurobonds respectively which would effectively make Germany and its austerity allies the paymasters of the currency union.

The Dutch finance minister, who was in Berlin on Friday to consult with his Finnish and German counterparts, rejected both proposals. “There is a lot of pressure about eurobonds or European Central Bank financing, and we said ‘no’, we have something else, and that is an increased role for the IMF.”

Scandal Threatens European Influence at IMF

Dominique Strauss-Kahn resigned his position as managing director of the International Monetary Fund (IMF) on Thursday after he was arrested and detained on sexual assault charges in New York this week. His departure could upset the traditional balance of power within one of the world’s most powerful financial institutions where emerging countries are demanding a greater say.

Strauss-Kahn, a former French finance minister, enjoyed both the experience and the connections to head the IMF during a period of economic upheaval unprecedented in the organization’s history. He managed to prevent the Fund from losing influence to the more ad hoc convention of the world’s major economies in the G20. Rather as a result of Europe’s debt crises, the IMF arguably gained in power.

Because the IMF is heavily involved in the financial rescue operations of Greece, Ireland and Portugal, European politicians and central bankers argue that the Fund’s next managing director should once again be a European. The continent has traditionally claimed the position whereas an American always heads the World Bank.

French finance minister Christine Lagarde is considered the frontrunner. She has played a major role in the G20, especially as the group is chaired by France this year. Although Lagarde enjoys support from German chancellor Angela Merkel, former Bundesbank president Axel Weber may also be a contender.

Former Prime Minister Gordon Brown is reportedly campaigning for himself but it seems unlikely that Britain’s conservative government would endorse him. Italian central banker Mario Draghi is mentioned though he is more likely to succeed Jean-Claude Trichet as head of the European Central Bank.

Trichet, whose tenure at the ECB ends in October of this year, was mentioned as a possible candidate by Dutch central banker Nout Wellink on Wednesday because of his intimate knowledge of Europe’s financial predicament.

Because of Strauss-Kahn’s premature departure, it may be more difficult for the Europeans to maneuver one of their own into the managing directorship of the IMF this time around. The question of his succession coincides with a lingering frustration in emerging markets about the generosity and scale of the Fund’s recent rescue packages for eurozone member states. Similar operations in Latin America and East Asia during the 1980s and 1990s respectively typically came with far more stringent reform requirements for the receiving nations. Although countries as Brazil, China, India and Turkey acquired more power in the IMF last year, an Asian candidate may seem appropriate as the economic balance in the world is shifting.

Probably the most viable non-Western contender is former Turkish finance minister Kemal Derviş who shepherded his country through an IMF rescue operation in 2001 and administered the United Nations Development Program between 2005 and 2009. Derviş may not enjoy staunch support from the Turkish government however as he is a member of the leftist opposition.

Stanley Fischer, a renowned economist who was both vice president at the World Bank and deputy managing director of the IMF during the 1990s, may also be a contender. He currently governors the Bank of Israel but at 67, Fischer may be too old to head the IMF for the next five years.

Other possible candidates from developing nations include former South African finance minister Trevor Manuel, Mexico’s central bank governor Agustín Carstens and Montek Singh Ahluwalia, the deputy chairman of India’s planning commission.

IMF Chief’s Sexual Assault Charges Impact French Election

The arrest of Dominique Strauss-Kahn, the French head of the International Monetary Fund, on charges of attempted rape in New York City this weekend will probably make it impossible for the Socialist to run against Nicolas Sarkozy in next year’s presidential election.

Until Saturday, the former French finance minister was seen as the left’s best hope of recapturing the presidency next year.

Although he was known as something of a womanizer, Strauss-Kahn was able to appeal to centrists — unlike many of the other presidential contenders in his party.

In a survey conducted for the popular magazine Paris Match last month, Strauss-Kahn was the only Socialist Party candidate who beat Sarkozy in a hypothetical runoff with 61 against 39 percent support. Read more “IMF Chief’s Sexual Assault Charges Impact French Election”

G20 Designs Mechanism to Balance Global Trade

The world’s major economies agreed on Friday to subject themselves to regular tests to detect imbalances that could upset the stability of global trade.

The G20 has debated measures to reduce trade deficits and corresponding surpluses, assuming that the spendthrift of some, particularly the United States, and the reliance of others, notably China, on such excess consumption was one of the root causes of the global financial crisis of 2008.

China, France, Germany, India, Japan, the United Kingdom and the United States would face special scrutiny under the new arrangement as they each account for 5 percent or more of the G20’s total economic output.

The group would not have the authority to force its members to adjust their trade policies if imbalances are detected. Rather the situation is referred to the International Monetary Fund which would conduct another study of a nation’s balance of trade before making recommendations. Read more “G20 Designs Mechanism to Balance Global Trade”

G20 Agree to Monetary Fund Power Shift

Finance ministers of the world’s developed economies agreed this weekend to extend leadership positions in the International Monetary Fund (IMF) to rising powers as Brazil, China, India and Turkey. The European Union has agreed to surrender two of its seven executive directorships out of a total of 24.

The United States in particular has pushed Europe to give up several of its seats on the Executive Board of the Fund. The Americans hope that by granting representation to emerging economies, these will be more willing to address trade distortions.

China, which keeps its currency artificially undervalued in order to export more cheaply, is unlikely to change its monetary policy in spite of IMF reform. An American proposal to limit current account imbalances to 4 percent of national income failed to win support among a majority of finance minister and central bankers gathered in South Korea in anticipation of the G20 summit two weeks from now. Read more “G20 Agree to Monetary Fund Power Shift”

Reflections on the Asian Financial Crisis

What is now known as the Asian Financial Crisis began in July 1997 in Thailand where the baht fell victim to massive speculative attacks. Before the currency was finally devaluated to lose over half of its value, the country’s economic growth came to a grinding halt amid disastrous layoffs in previously booming sectors as finance and real estate. The Thai stock market lost so much as 75 percent of its value within mere months.

With Thailand’s economy apparently so similar to that of other newly industrialized East Asian states, investors worried that others would soon follow in its downfall so they began to pull out. The contagion that spread was deeply interwoven with the fact that many of Asia’s emerging economies had their currencies pegged to the American dollar. Businesses in these countries in the preceding years had borrowed massively in dollars. When their native currencies were devaluated, loans suddenly had to be repaid in more expensive dollars. Investors feared that many of the loans could not be repaid at all so they called in short-term loans or refused to renew them. By the time the states had depleted their foreign exchange reserves in desperate attempts to defend their currencies; East Asia was already abandoned by investors who had fled in widespread panic. The expectation of devaluation had made devaluation inevitable. The previously so blossoming young economies of East Asia were now thrown into a state of despair with many businesses collapsed and millions unemployed, once again living in poverty.

In the wake of the crisis, an intellectual debate quickly erupted over its origins. The “Asian Miracle” of previous years had so impressed many commentators that it was difficult to understand how it could have apparently collapsed within such short time. Read more “Reflections on the Asian Financial Crisis”