The IMF and the new Greek restructuring program

For Greece watchers, a recent article by Poul Thomsen, the director of the International Monetary Fund’s (IMF) European Department, will have made for welcome reading. Not least given there do indeed remain “misperceptions about the International Monetary Fund’s views and role in the process” of discussions between the Greek government, European partners, and the IMF regarding “a comprehensive multi-year program to secure lasting recovery and debt sustainability.”

The IMF and the creditors in general understand that Greece will face politically difficult decisions in the coming months to arrive at a program that is viable. Well, yes, but we all thought that there was an agreement last summer and that any implementation details remaining would have been agreed by the end of November 2015. But just as we witnessed in the first half of 2015, Greece is running out of time again, but this time, the real economy really is collapsing: capital controls, the Greek government’s unwillingness or inertia to act, and huge economic uncertainty are killing it, making a viable agreement even more financially expensive and politically costly and tricky. So, an accord is urgent: the Greek economy cannot wait for months, this time.

The “Institutions”[1] also argue that despite the pension reforms of 2010 and 2012, Greece’s pension system remains unaffordable. Again, this is true, but we might recall that back in 2010 the IMF had characterized the pension reforms announced that year as a “landmark pension reform, which is far-reaching by international standards.” And two years later, in its ex-post 2013 review, the IMF hailed the reforms “as one of the main achievements of the program.” Experts Platon Tinios and Antigone Lyberaki
emphasized at the time the flaws of the supposedly radical reform: “Whether a child is ‘underage’ is now examined when a woman completes 20 years’ employment (viz around age 40), rather than at age 50, as previously. Women in this category can receive a pension at age 55 (or a reduced pension at 50).” There are numerous other examples that prove the flaws of the bill and the huge distortion of incentives it created by leading people to early retirement. The result of this is that, after five years, we now have more than 3 million pensioners and only 3.6 million public and private employees, which makes the system simply unsustainable. The IMF bears at least some responsibility for this. Again, the focus should now be on pension reform. But what about growth? Debt might really become unsustainable due to huge pension expenses, leaving aside incentives distortion. But a recovery failure would be twice as bad as a lack of true reform in pensions.

Tax reform is needed, but not at the top

Another point that the “Institutions” insist is the so called “tax evasion of the rich.” Setting aside the fact that Greece has the most progressive tax system in the world, data support the view that Greece’s tax evasion problem is the flipside of the narrow tax base issue, and less a case of the affluent not paying taxes. This is maybe an unpopular view of the Greek tax system, but looking at Table 1 below one can easily understand that the problem is at least very complex.

Table 1: A breakdown of Greek taxation, in euros.

Tax income

Monthly salary

% of taxpayers

% of incomes

% direct tax revenues

Average income tax

Up to 30,000

Up to 2,142,9











More than 60,000

More than 4,285





More than 30,000

More than 2,143





Thirteen percent of taxpayers with an income of more than 30,000 euros account for 62 percent of tax revenues, and the richest 2 percent account for 26 percent of tax revenues, while 87 percent of taxpayers account for only 38 percent of tax revenues. If you break down the first category to capture those earning up to 12,000 euros—55 percent of all incomes—then you will find that more than 50 percent of taxpayers pay almost nothing! Mr. Thomsen acknowledges that there is a failure to broaden the tax base, but this failure concerns mostly those people with low or medium incomes that pay few or no taxes, or those working in the black economy. The greatest proportion of relatively high incomes in Greece are not rentiers, but hard-working people who pay their taxes in full—almost 50 percent of their income. But should they feel threatened, they might well leave the country, making it all the more difficult to steer the economy out of the current mess.

Looking in the wrong places for savings

Finally, the IMF seems to be in favor of a trade, offering debt relief in exchange for pension reform. It is also against the imposition of draconian fiscal adjustment to help growth. Debt relief might be a nice incentive to convince a government desperate to share good news with voters, but I haven’t seen a single study with robust evidence on the unsustainability of Greek debt. What I know is Greece enjoys deferred loans, very long maturities (18 years, on average) and very low interest rates (around 2 percent). So, better to help the government get the economy back on track and then debt will be much more easily serviced than anyone now believes.

[1] IMF, European Central Bank, and the European Commission.

[2] (Lyberaki A., and Tinios P. (Labour and Pensions in the Greek Crisis: The Microfoundations of Disaster. Südosteuropa, 60. Jahrgang 2012, Heft 3, 363-386)