The Cost of a Haircut: Greece, Eurozone, IMF

NEW YORK ( TheStreet) -- Earlier, I noted there were two parts to the International Monetary Fund Stand-By Program for Greece: austerity and increasing its competitiveness. However, by the beginning of 2012, the IMF had concluded that the austerity part of its plan for Greece had failed. Why?

  • the austerity measures were so extreme that initial efforts to implement them made things worse (slower growth, shrinking government revenues, and higher unemployment); and,
  • the measures were politically impossible to implement -- instead, governments fell and there were riots in the streets.
  • On July 4, the IMF estimated that GDP would decline by 4% in 2011 and by 1% in 2012. Six months later, the IMF concluded GDP would fall 6% in 2011 and another 4% in 2012.

    IMF estimates were wildly optimistic on unemployment as well. Last July, it projected unemployment at 16% in both 2011 and 2012. Six months later, the fund raised the projection to 18% in 2011 and 20% the following year.

    To its credit, the fund saw what was happening and gave up on austerity measures. Its Stand-By Program was ended early, and its new Extended Fund Facility Program emphasizes labor market reforms and other measures to make Greece "competitive."

    Germany continues to have a different perspective: more austerity. And to that end, it forced other euro countries to accept a European Union treaty amendment: Government deficits should be no more than 1% of GDP. Because the IMF (at least for now) has given up on austerity while Germany and other strong euro countries still promote it, a rift between the IMF staff and euro countries has developed. But while the euro countries are more supportive for Greece, the IMF remains in control of what gets done: it set the conditions for disbursements and it polices them.

    Old and New Programs

    The first bailout program for Greece was 110 billion euros, with the IMF Stand-By providing 30 billion euros (27%) and euro countries providing 80 billion euros (73%). Table 1 provides details on disbursements and cancellations.

    Table 1. -- Original Greek Bailout Funds
    (in billions of euros)

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