In the NZZ,
In the FT, Mehreen Khan reports about the IMF’s conditional acceptance to lend to Greece.
The IMF’s “agreement in principle” (AIP) tool draws on a practice where the fund is able to greenlight its involvement in a debtor country, conditional on the government and its creditors agreeing to future debt relief measures.
Of course, the dispute about the merits of debt relief is unresolved. The IMF thinks Greek debt is ‘unsustainable’ and the European creditors should bear more losses, earlier on while some Euro area countries disagree. (For the numbers, see here).
Euro area ministers and the International Monetary Fund unveiled a deal … that will … sav[e Greece] … from default this summer. The IMF will join the bailout as a partner but withhold any money until euro area finance ministers give more detail on what debt relief they might offer Athens. …
Euro-area policymakers have been trying to reconcile competing EU and IMF visions of the €86bn programme and, crucially, whether it will make Greece’s debts sustainable.
Programme conditions set by euro area governments in 2015 included budget surplus targets that the IMF said were punishingly ambitious and unlikely to be met. The fund set out a different vision: lower primary surplus targets for Athens, coupled with comprehensive pension and tax reform and, crucially, far-reaching debt relief.
At the centre of the puzzle was Germany’s finance minister, Wolfgang Schäuble, who has insisted that the IMF must join if Greece is going to continue receiving tranches of bailout aid — but has also resisted significant debt relief commitments.
Given that the fund could not join up unless convinced that Greece’s debts were being put on to a sustainable path, the euro area and IMF had to find another solution — and it came in the form of asking Athens to do more.
To give the IMF confidence that Greece could hit budget surplus targets set by the euro area, Athens was asked to widen its income tax base and cut pensions. The measures, adopted in May, are estimated to be worth about 2 percentage points of gross domestic product.
In the meantime, Greece plans to regain market access by 2018 (FT).
On Econofact, Daniel Bergstresser provides background information on Puerto Rico’s debt crisis. From his text:
- Unlike U.S. municipalities, a U.S. territory cannot resort to Chapter 9 of the Bankruptcy act.
- The island’s economy benefited from corporate tax exemptions (until 2006) and from tax exemptions on interest paid by municipal bonds issued by Puerto Rico and its agencies (“triple tax exemption”).
- Total bond indebtedness (face value) amounts to over $70 billion, about 70 percent of the island’s GDP. The island owes an additional $50 billion in unfunded pension obligations to its state employees and retirees. Different government-sponsored entities issued the debt, apparently representing different claims on the Commonwealth’s revenue streams.
- Puerto Rican issuers were downgraded from investment grade status in 2014. In March 2015, governor Padilla announced that the island’s debt was unpayable.
- Resolution has been delayed by disagreement about the borrowers’ capacity to repay.
- Puerto Rico defaulted on its general obligation debt in June of 2016 and President Obama signed the “Puerto Rico Oversight, Management, and Economic Stability Act” (PROMESA) law. This created an oversight board with the authority to oversee the island’s budget and facilitate restructuring talks. The law also created a bankruptcy-like “Title III” mechanism. The oversight board placed a moratorium on debt collection by the island’s creditors until May 1, 2017. On May 3 the island entered the debt restructuring process. Chief Justice John Roberts has assigned the case to U.S. District Judge Laura Taylor Swain, and the first hearing in that case is scheduled to occur on May 17.
The Economist (Free Exchange) reports about prospects of a resolution of the Ukrainian debt crisis. It remains unclear whether the planned haircut on some debt tranches will suffice to satisfy IMF demands.
In a Vox column, Jeremy Bulow and Ken Rogoff argue that perceptions of Greek net debt repayments over the last years are wrong.
[C]ontrary to widespread popular opinion, the net flow of funds (new loans and subsidies minus repayments) went from the Troika to Greece from 2010 to mid-2014, with a modest flow in the other direction after Greece stalled on its structural reforms.
They also make some other points:
- Cash withdrawals, non-performing loans and capital losses in the wake of the 2012 Greek government debt default hurt the Greek banking system.
- Mistrust of the Greek government by European partners and Greek citizens slowed down the recovery.
- Greece has incentives to avoid a default on its official loans since default might trigger lower EU subsidies; the loss of other benefits of EU membership; less ELA funding and other forms of financing at below market rates. (Harris Dellas and I have argued the same in our paper Credibility for Sale.)
- As Greece approached the point of being a net payer its bargaining stance hardened.
CEPR Discussion Paper 9562, July 2013, with Harris Dellas. PDF.
We develop a sovereign debt model with official and private creditors where default risk depends on both the level and the composition of liabilities. Higher exposure to official lenders improves incentives to repay but carries extra costs, such as reduced ex-post flexibility. The model implies that official lending to sovereigns takes place in times of debt distress; carries a favorable rate; and can displace private funding even under pari passu provisions. Moreover, in the presence of long-term debt overhang, the availability of official funds increases the probability of default on existing debt, although default does not trigger exclusion from private credit markets. These findings help shed light on joint default and debt composition choices of the type observed during the recent sovereign debt crisis in Europe.
- Policy makers confuse debt and financial crises with a currency crisis.
- Different crises call for different policy responses. Many of those lie in the national policy domain, not the supra national one.
- Shifting too much policy responsibility, too quickly to the European level sows the seeds of new problems.