Following a speech at the Peterson Institute for International Economics, IMF Managing Director Christine Lagarde was asked to comment on recent press reports indicating a collapse in the discussions between the troika mission and the Greek authorities as well as a budget shortfall of €20bn. Her response and comments provided a brief update of IMF views on current Greek economic situation without any major positive or negative surprise.
First of all, Ms Lagarde fully covered IMF chief of the troika mission, while refrained from commenting on the progress and the preliminary findings of recent discussions with the Greek authorities stating that “our people, including our chief man on the ground, are doing everything they can in order to help and assist, in order to put Greece back on track”.
Furthermore, she identified 3+1 issues that should be addressed by all involved parties – particularly the Greek government – to put adjustment program back on track. On the fist factor, fiscal gap, she confirmed that the package of measures should amount to €13.5bn, including €2bn revenues, most likely from tax evasion noting that “we do not only need €11.5bn of cuts. We need a series of cuts and additional revenue. That is in order to fill in the fiscal gap and help the country redress its public finance situation”.
The second, and most crucial issue for the Greek government, is the implementation of the long-awaited structural reforms, particularly involving opening up of closed professions and labor market reforms stressing that “we need some structural reforms that are in the interest of Greece and the Greek population. So that, those who can work, who want to access markets, can actually do so. A lot of the professions in Greece are still closed up. There has been some progress, the lorry drivers for instance, that has improved, but a lot of the other professions are still highly protected and locked. A lot has been done in the labor market, but it should be maintained, not damaged or destroyed”.
Last, but not least, is the financing issue resulting from a deeper recession and delay in the privatization, while favored an extension of adjustment program, stating that “and then you have the financing, because clearly as a result of macroeconomic situation, the major delay in privatisation and therefore shortfall in proceeds from privatisation and the limited revenue collection, there is a financing gap, especially if you factor in more time”. Although Ms Lagarde, refrained from commenting on the recently reported (by Der Spiegel) budget shortfall of €20bn, I think that it could refer to a funding or refinancing – rather than a fiscal – gap. The latter is estimated by the Greek government and troika at €13.5bn and will be covered by the recently discussed – and pending approval – cost cutting measures of €11.5bn and additional revenues (mainly from tax evasion) of €2bn.
In her concluding statement, she also mentioned that Greek debt should reach a sustainable level stressing that “so it is on the three accounts (i.e. fiscal gap, structural reforms and financing) that we need to make sure that the country can be back on track” adding that “and the Greek debt has to be addressed as part of the equation”.