Credible deal requires tough decisions by Greece and lenders, says IMF’s Blanchard

A credible deal between Greece and its creditors requires tough decision on both sides, the International Monetary Fund’s chief economist, Olivier Blanchard, noted on the organization’s blog on Sunday, as negotiations between the cash-strapped country and the institutions were halted over the weekend.

The question, said Blanchard, was how much of an adjustment had to be made by the two sides. On the subject of Greece’s primary surplus target, Blanchard said this should be reduced, rendering fiscal and economic adjustment for Greece less difficult, while leading to more external funding on behalf of the country’s creditors as well as “commitment to more debt relief” on the part of the European creditors.

“Just as there is a limit to what Greece can do, there is a limit to how much financing and debt relief official creditors are willing and realistically able to provide given that they have their own taxpayers to consider,” said Blanchard on the blog.

Creditors proposed to the Greek government to lower the medium primary budget surplus target from 4.5 percent of GDP to 3.5 percent and allow the country two extra years to achieve this, with the target for 2015 standing at 1 percent along with a “more limited set of reforms,” wrote Blanchard.

For such an agreement to be effective there were two conditions noted Blanchard. On the one hand, Greece would have to proceed with a comprehensive VAT reform and further adjustment to the country’s pension scheme – which along with wages account for about 75 percent of primary spending – with pension expenditure being lowered by 1 percent of GDP (out of 16 percent).

European creditors, on the other hand, would “have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability,” noted Blanchard. “We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.”