Transcript of a Conference Call on Greece, Tuesday, December 13, 2011
Poul Thomsen, Deputy Director, IMF European Department
Mark Flanagan, Advisor, IMF European Department
Conny Lotze, Deputy Chief, IMF Media Relations
MS. LOTZE: Hello, everybody, and thank you for participating in this conference call. Let me just set out the rules very quickly, and then I’ll introduce our speaker. He will then make some introductory remarks, and then we go to questions and answers.
I have on the line with me Poul Thomsen, the Mission Chief to Greece, and the Deputy Mission Chief to Greece, Mark Flanagan. As I said, they are both speaking on the record, and as you probably know, they are both on mission right now in Athens.
We are not going to answer any questions on the mission that is in the field right now. This call is solely on the Staff Report for the Fifth Review, that was in the Executive Board last Monday. As you’ve seen from the press release then, the Review was approved, and the sixth installment was also approved by the Board.
So I’m going to hand it over to Poul Thomsen now, and then we’ll go from there. Poul?
MR. THOMSEN: Thank you, Conny. Yes, and welcome to all of you. Let me just say a few words about the Staff Report, and the discussion for the Fifth Review. As you will see from this report —
OPERATOR: Mr. Thomsen’s line has just dropped.
OPERATOR: Mr. Thomsen has rejoined.
MR. THOMSEN: Thank you very much. Sorry for that.
As I started saying, we have revised GDP growth down rather significantly, to minus-6 percent in 2011, and minus-3 percent in 2012.
As those of you who have been with us from the start know, you know that we have expected here, in 2011, to reach an inflection point, where the recession would start bottoming out, and we would start getting a slow recovery going. That has not happened. Instead, the economy is continuing to trend downwards, reflecting that the hope for improvement in market sentiments and in the investment climate is not materializing.
As you will see from the report—the report reflects partly less favorable external demand developments but, above all, that internal developments have not been as expected.
Also, reforms have been running behind schedule, and have not reached the critical mass needed to decisively transform the investment climate. There have been problems during 2011 with implementation of the fiscal program.
And, three, we are seeing a significant contraction in credit instruments. Bank liquidity remains very tight. Banks are, at the same time, reevaluating credit risks, and are deleveraging, in part, because they are concerned about losses on loans.
And, four, this all has taken place against a background, in 2011, where there have been questions about political domestic support for the program, which, obviously, also is the reason why there is hope for improvement in sentiments, if they are to materialize.
So the economy is continuing to go down rather than bubbling up. And the Fifth Review, in terms of the number of measures in three key policy areas, aimed at correcting the trends observed in 2010.
There are a number of additional fiscal measures—they are listed in the paper—that will help to contain the deficit. But given how late we are in the year, it’s clear that the original target of 7½ percent is no longer within reach, and we see a deficit of about a 9 percent.
As far as the financial sector is concerned, liquidity is tight, but there are instruments in place to deal with this. The key issue is policies and methods to preserve adequate capital in the face of the much deeper than expected economic downturn, and especially the large losses resulting from the plan to revive.
And, as you will see in the report, there is now a process underway to strengthen the HFSF [Hellenic Financial Stability Fund]. The HFSF is the public backstop mechanism for providing capital for banks that cannot raise the necessary capital through market-based means. And there also will be a significant augmentation of the capital of the HFSF.
Other reforms—as you know, this is key to ensuring that the economy restore competitiveness through productivity-boosting reform, rather than through cuts in wages and incomes. Particularly in the context of the Fifth Review, there is an agreement to suspend the extension of sector-level collective agreements to the firm level for enterprises that have not been participating in these sector-level collective agreements. That will add significantly to labor flexibility, and help make sure that productivity is better aligned with wages and individual enterprises.
Let me add here a couple of other things. PSI [private sector involvement]—as you know from the summit of European leaders in October, there was a decision to significantly strengthen the PSI—in particular, to call for a 50-percent nominal haircut, with parameters for the PSI to be agreed in such a way that they would yield a debt-to-GDP of about 120 percent by 2020. These negotiations are ongoing. And this PSI is expected to be in place early next year.
Let me conclude by mentioning that, of course, as I said, one problem with the program has clearly been the lack of broad political support. Perhaps the failure of the original program, the failure to bring about the original program recovering in GDP by now, is above all a reflection of this lack of broad support. Therefore, it’s very important, now that the additional Review has been signed off by the new government, and by the three partners that are supporting this government, and we are hopeful that that will help strengthen the program and also help strengthen the ability to implement reforms will be a signal to vested interests that there is broad political support for this program.
So let me stop here and take whatever questions you have.
QUESTIONER: Good afternoon. I have a question. You say under the program baseline, Greece has the capacity to repay the Fund. How are the risks on that prospect? Do you think that if the PSI is not as well supported as you would wish for, it would seriously endanger the Fund’s repayments?
MR. THOMSEN: Well, I think that the PSI that’s been put on the table is key to securing debt sustainability and, of course, to assure adequate financing of the program for the next 12 months. I am confident that we will get this PSI by reducing debt to 120 percent of GDP.
But let me also remind you that European leaders have, at the previous summit, back in July, said that they are going to continue to support Greece “for as long as it takes” for Greece to restore market access—of course, assuming that the program remains on track.
So I think this combination of private-sector support and official-sector support—this commitment to provide official-sector support at the triple-A financing rate of the ESFS, together with this comprehensive PSI, entails a major improvement in the prospects for debt sustainability, compared to the past.
QUESTIONER: Are you not worried at all that Greece would not repay the Fund?
MR. THOMSEN: No, no. No concerns in that regard.
QUESTIONER: I’d like to turn to the debt-sustainability analysis on Greece.
What conclusions can be drawn from your review? Are you projecting that there will be a largest part that sector involvement? And how can you ensure the participation of private sector? Thank you.
MR. THOMSEN: Well, as we said at the start, I have no comments on the ongoing discussions here right now, including any discussion on the PSI. These discussions, they’re going well, but let them finish, and then we can discuss. I’m sure a PSI will be in place, but let this process run its course.
Let me say on the debt sustainability analysis, I think what it does show is that the outlook for debt is highly dependent on growth. That, of course, underscores the point that—what this is all about—structural reform to boost productivity. If we don’t get this boost to potential growth over the medium term, the debt sustainability analysis shows that there is clearly a problem. So I think that this is the main conclusion.
QUESTIONER: I would like to know if the IMF is going to participate in the second bailout program decided by your troika partners on October the 27th, including a new loan.
MR. THOMSEN: I did not understand this question. Could you please repeat it?
QUESTIONER: I would like to know if the IMF is going to participate in the new bailout program decided by the European partners, including the new loan, on the 27th of October. Did you understand?
MR. THOMSEN: Yes, I did understand. No, we have not received any requests yet. We have a program in place. We continue to expect to be supporting Greece.
There is no request yet for a new program, the mission here is not for further discussion on the EU program.
QUESTIONER: So you are not in this second one?
MR. THOMSEN: No, we are not—discussions on that have not commenced. We don’t have a request yet. This is not what we are here for now. We are here to look at program implementation, and discuss the outlook for next year. But there is no discussion of policies for next year at this stage.
QUESTIONER: The recent developments concerning the execution of the budget show that there might be a quite big deviation from the target.
So do you expect that additional measures for 2012 will be necessary? And, if so, what kind of measures would they be? Would they be on the part of expenditure or structural reforms? Or what?
MR. THOMSEN: It’s too early to say whether additional measures will be needed. We’ll come back in January, once we have the outcome from the end of the year. It is true that it’s tight, it’s challenging to meet the end of the year target, but it’s too early to have a final view on that.
Certainly, our view is—as you know—that there is a need to re-focus the fiscal program on the expenditure side. That we have, if you like, in our view, too much on taxes. And I think one of the things we have seen during 2011 is that we have reached the limit of what can be achieved through increase in taxes, and that any further measures, if needed, should be on the expenditure side, and the revenue side has to rely on improving tax administration.
QUESTIONER: I would like to ask Mr. Thomsen if he would be ready and willing to admit that mistakes have been made in the implementation and the design of this program on the side of the IMF?
MR. THOMSEN: I think that there are some lessons to be learned. I just gave you one of them. I think there has been too much of a reliance on taxation. That’s certainly one of them that won’t lead to a refocus of the program.
Also clearly one of the things that is fundamentally different is, as I said, in terms of the implementation of the program—I do think that reforms, structural reforms—as I said in my introductory remarks—have fallen short. They are well behind schedule. They are well away from this critical mass, where people conclude that Greece is doing business in a fundamentally different way.
And I think, above all, this is the main reason why the hope for bottoming out of the recession has not yet happened.
QUESTIONER: I have one specific question on language in the report, if I could. And then sort of a broad one about where we stand. You say that, regarding the PSI, that “low participation in debt exchange, and a significant amount of holdouts that would be amortized with European support.” And you characterize this as “a real risk under a purely voluntary approach” that could leave debt at 145 percent of GDP in 2020. Is that to hint, in any way—I mean, it seems to hint very strongly that the IMF feels an involuntary exchange—i.e., a credit event—may be necessary to make this work. Is that true?
MR. THOMSEN: No, we are hopeful that having participated as an observer to these discussions, that Greece and its creditors will come up with a deal that is with a very high participation—a voluntary deal with a very high participation.
I think given that there is this $30 billion involved, that’s a lot of money. I think that should be possible.
QUESTIONER: And the broad question is this: I assume we’re at a point right now where any change in the financing gap is going to have to either come from increased European support, or increased private-sector support.
And I guess what I’m wondering is, why trust them any longer? This has dragged on for a year-and-a-half. At what point does the IMF say, “You know what? We don’t need to be involved in this anymore. They’re not doing what they say?”
MR. THOMSEN: Well, we recognize that this, as far as policy implementation is concerned, it’s a very complex situation. And process has been made on many fronts. The fact is that there is still quite a long way to go, and this will take longer than originally expected—in part because the external environment is so much less favorable, but also because it has been more difficult to get the broad political support that we also had hoped for when we started out.
So, we are facing much stronger headwinds. It doesn’t mean that we’re not making progress. We are making progress. And it’s certainly not a reason to give up.
As far as debt is concerned, I come back to what I said before, that the combination of the July summit, which provided this “for as long as it takes” commitment on the part of the official sector, to provide financing at triple-A financing rates, and this comprehensive PSI that is now on the table—the outlook for debt surely has improved, compared to the Fourth Review.
QUESTIONER: Okay. And, if I could—just one last question.
The implications of this amount of the guarantees that are kind of piling up on the Bank of Greece, are they in any way contingent liabilities of the government itself? And what are the implications of that number growing so large?
MR. FLANAGAN: Yes, these are contingent liabilities. It’s important to recognize that the banking system is, in effect, a contingent liability to the government. Guaranteed to a certain amount and, of course, financial stability, important objective of the government, and an objective of the program.
So I would think of it more as a formalization of existing contingent liabilities. And, yes, we monitor it. But I don’t think this formalization has any substantive implications. They exist already.
MS. LOTZE: Thank you very much. I think we’re going to end the conference call here.