Giorgos Papaconstantinou: The Greek program was designed from scratch
Was there any way for Greece not to resort to the IMF bailout mechanism in May 2010, and if so, was it attempted?
We never “resorted” to the IMF. We resorted to a European mechanism, in which the eurozone demanded the participation of the International Monetary Fund in order to provide funding for Greece. The same was done for other European countries [that were in trouble] and is now a permanent fixture of the eurozone’s mechanism. From there on, the only way for Greece to avoid resorting to any mechanism would have been for the international markets to continue being willing to lend to us. But a country with a fiscal deficit of 16 percent, a trade deficit of 15 percent, debt of 130 percent [of gross domestic product] and a credibility deficit does not have a lot of choices. Neither taking measures sooner nor fantastical lending from Russia, China or the Middle East would have helped us avoid the mechanism, which could not even be avoided by countries with much better economies and fiscal performances, such as Ireland, Portugal and now Spain.
Why did the IMF agree to fund a program that some, including Panayiotis Roumeliotis, say it knew would not work, and especially given the size of the loan made to Greece?
The IMF’s participation in the Greek rescue mechanism is 30 billion euros, or 30 times more than our country’s contribution to the Fund’s reserves. This has never been done for any other country and it would not have happened for Greece if the other two-thirds of the program’s funding had not come from the eurozone. It is therefore inconceivable to say that the IMF chose to lend these funds knowing that the program would not work and that it would end up losing its money. Moreover, in contrast to what he was saying two months ago, in his new book, Roumeliotis admits that when the program first went into effect the prevailing view at the IMF was that it could render Greece’s debt sustainable in the medium term. Of course, no one can deny that such programs have many difficulties in implementation. The Greek program was designed from scratch, under very particular political circumstances, and that is why from the outset -- however hard it was to make this opinion public -- all of the parties involved were aware that adjustments and changes would have to be made over the course of implementation. That, for example, was the case when the repayment period was extended and the interest rate reduced.
However, wasn’t it ultimately the case that the program was flawed from the start?
I must remind you that in the first few months of implementation the program worked in terms of reducing the deficit and introducing structural reforms. By the end of the year , we had achieved a reduction of the deficit by 5 percentage points of GDP, while in the first months alone we managed to put the issue of Greece’s statistics to rest, the labor reform plan was voted through Parliament, and we had some control over our spending and revenue for the first time.
Roumeliotis has now written that in September 2010 he had received congratulations from the IMF’s board of directors regarding Greece’s progress. This lasted until October 2010 and the famous meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Deauville, where the discussion about restructuring Greek debt in the countries of the eurozone was initiated under the worst possible circumstances. The decision to provide for a restructuring of the debt from 2013 if it was deemed unsustainable led foreign investors to abandon the bonds issued by Greece as well as by the other countries of the eurozone periphery, resulting in a massive widening of the spreads -- which had narrowed significantly since Greece joined the mechanism -- and in Ireland and Portugal also having to sign up for the European mechanism. Greece was put back in the line of fire and pressure resumed to make the program even more reliable and to stress that a restructuring would not be necessary.
Given that many analysts, including within the IMF, had argued that a write-down of Greek debt would be inevitable, why was this not done at the beginning of the program?
Because the eurozone and especially the European Central Bank did not advocate such an event under any circumstances. The reason for this is not be found in the realms of conspiracy theory, which would have the Europeans wanting to protect their banks at the expense of Greece. It is that the eurozone did not have the tools to deal with such an event, while at the same time protecting the stability of our single currency. Also, there is no way it would agree to the restructuring of a country’s debt when it had a primary deficit of 24 billion euros [as Greece did in 2009] -- it would not agree to a haircut without first ensuring that the hair would grow back. If we had proceeded unilaterally with the restructuring or if we had threatened to move ahead, we would have had to face sudden death, panic in the banking system, the closure of banks that could not meet demands for withdrawals, an immediate default and a complete economic and social meltdown. We did not experience this and I hope that we never do.
When was the issue of debt restructuring first discussed with the IMF?
Any discussion about the inclusion in the Greek program of such an alternative began after the first memorandum of understanding was signed, when the conditions in relation to the broader economic environment -- especially international and domestic growth as well as the conditions of the markets -- had changed. We put the proposal on the table, mainly with the rationale of pushing the deadline of the debt repayment as part of technical recommendations. Up until the start of 2011, the ECB and the countries of the eurozone refused to engage in any discussion. George Papandreou had said all this in interviews after the completion of the debt haircut.
In discussions with the then-managing director of the IMF, did he ever express doubts as to the viability of the program?
Not only did Mr Strauss-Kahn not express any reservations, but he constantly expressed his unreserved support and his belief that Greece would succeed. At the same time, from one point on he became convinced that Greece’s debt would have to be restructured and that the eurozone would have to be convinced of this.
Did the IMF’s stance change after Strauss-Kahn’s resignation in May 2011?
Every managing director at the IMF brings his or her own style, and Strauss-Kahn was a powerful personality of the social democrat arena who could act as a counterbalance to the largely conservative majority of the European leadership. But the IMF is an organization that has its own rationale and orientation, so in practical terms that change at the top did not alter the basic framework of cooperation. The stance of the IMF changed when the conditions changed.