The IMF’s debt sustainability analysis paints a bleak picture … about previous IMF assessments and about the prospects for Greece.
Last year, the IMF has joined the MOOC movement. On edX, the online education platform founded by Harvard University and MIT, the IMF contributes a set of “IMFx” courses developed by its Institute for Capacity Development. Courses cover
- Debt sustainability analysis;
- Energy subsidy reform; and soon
- Financial programming and policies (analysis and program design) as well as
- Macroeconomic forecasting.
In a Vox column, Daniel Dias und Mark Wright propose various measures of the Greek, Portuguese and Irish public debt burden and emphasize the large variability of these measures.
The following figure, taken from Dias and Wright, shows the scheduled principal and interest payments of Greece, Portugal and Ireland as a percentage of 2014 GDP in the respective country. Not all public debt components are accounted for.
Dias and Wright write:
[B]oth Portugal and Ireland face far larger cash flow requirements, relative to the size of their economies, than Greece for the next ten years. [A]fter this ten-year period, the required repayments on Greece’s debt will far exceed those of Portugal and Ireland, measured as a fraction of their economies. [W]hether or not we view Greece as more or less indebted than Portugal and Ireland depends on how we weigh cash flows in the near future (next ten years) versus cash flows in the far future (more than ten years).
… we can discount a country’s entire debt repayment cash flows by the interest rates embodied in their currently traded debts to obtain an estimate of the market value of a country’s debt. This assumes that the likelihood of repayment of Greece’s EFSF debt, for example, is the same as that for privately held bonds. Under these assumptions, as shown in Table 5, Greece appears to have less than half as much debt as either Portugal or Ireland. These numbers are closer to the estimates computed under the IPSAS standard, which records a debt at market value at the time of issue, and allows for the accretion of this debt if the contracted interest rate on the debt is less than the yield to maturity of the debt. This approach has the counterintuitive implication that the more likely a country is to default, the less indebted it will look.
Dias and Wright contrast a conventional face-value debt measure (the sum of the blue bars corresponding to principal repayment obligations in the figure) with more informative measures. With the latter, Greek indebtedness typically is not as high compared with the other countries as with the first measure.
In an FT letter to the editor, Ian Ball, the Chair of CIPFA International (Chartered Institute of Public Finance and Accountancy), argues that Greece’s financial position is widely misreported. He writes:
While the debt burden is commonly cited as being between 175 and 180 per cent of gross domestic product, this number is incorrect and indefensible because it is based on the face value of Greece’s debt that doesn’t take into account long maturities and concessional interest rates, as well as grace periods.
Greek debt, calculated on an International Public Sector Accounting Standards (IPSAS) basis, is significantly lower, and at the end of 2013 was 68 per cent of GDP. If this is not an appropriate method for measuring debt, then every company on major stock exchanges around the world has got its debt measurement wrong. In neither accounting standards nor economic principle is debt measured at face value. This pervasive misunderstanding of Greece’s real fiscal position has seen agreements reached between Greece and its creditors that do not address the real problem and instead may actually intensify it.
See also my earlier blog post.
A recent IMF draft debt sustainability analysis for Greece, written just before the recent turmoil, foresaw that Greece (or its creditors) needs additional 50 billion Euro plus bailout money, as well as maturity extensions or another haircut. Now it needs more of that.
Peter Spiegel comments in the FT.
On Project Syndicate, Daniel Gros argues that
Greece’s official creditors have granted it long enough grace periods and low enough interest rates that the [debt] burden is bearable. Greece … spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios.
… only governments with access to market finance can use expansionary fiscal policy … it is disingenuous to claim that the troika forced Greece into excessive austerity. Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. … the troika actually enabled Greece to delay austerity.
The considerations guiding the IMF’s debt sustainability analysis which crucially determines the Fund’s lending policy is explained on an IMF website.
The DSA framework is in place since 2002. It has three objectives: To assess the current state; identify vulnerabilities; and examine alternative debt stabilising policies. Both total public and total external debt are analysed. Market-access countries and low-income countries are distinguished. These charts and tables summarise the DSA indicators for a market-access country. An example of the DSA is at display on page 41 in the September 2014 report on Italy.