While German chancellor Angela Merkel has stamped out whatever rebellion there was in Greek prime minister Alexis Tsipras and has got Greece to fall in line with her wishes—including agreeing to a fund worth 50 billion euro of Greek assets for privatisation to repay creditors and recapitalise banks—she needs to rethink her strategy. The last bailout programme failed precisely because it was too aggressive and called upon Greece to make too many sacrifices. As a result, while Greek GDP collapsed a fourth and resulted in large unemployment, the country’s macro indicators looked far worse. In the current case, while European Stability Mechanism head Klaus Regling has said the Greek banking system will soon collapse, the IMF—a significant contributor to the eventual bailout programme—had made it clear the programme cannot work in its current form.
The IMF, it is true, got it horribly wrong by underestimating the impact of the austerity on Greek GDP. Having learnt its lesson, the IMF is more cautious now and, in a report a few weeks ago, it spoke of the need for a considerable write-off of debt, by around 53 billion euro. Yet, there is little chance of that since the text of the agreement reached last week says ‘the Euro Summit stresses that nominal haircuts on the debt cannot be undertaken’. Given how disastrous this can be, in a very unusual move, the IMF came out with another note on Greece reiterating its concerns. While saying the cost of the bailout had gone up by around 25 billion euro more than it forecast just a few weeks ago—because of the greater need to fix the banks—it said the earlier projections were Greece’s debt would fall to 124% of GDP by 2020 and substantially below 110% by 2022. But now, given the dramatically weaker growth trajectory, debt would rise to 200% of GDP in the next two years and would be 170% of GDP in 2022—these are levels that are clearly unsustainable, and more so since, in any reforms package, there are bound to be periods of large reforms fatigue. Apart from the fact that this means the IMF is warning of another Grexit possibility a few years down the road, it also puts a question mark over the IMF participating in a reforms package that it knows is doomed to fail.