Greece is out of IMF & ECB aid (not really) - part 2

With declining GDP and reduced inflows into the budget, and despite both new loan packages at the end of June 2015, the Greek government could not pay the monthly payment of the IMF loan, which meant bankruptcy to the IMF. In order to avoid this, the third aid package was followed, which granted Greece an additional EUR 86 billion of new loans, which were not fully exhausted. This financial package was approved in exchange for a permanent large primary budget surplus, additional cuts in public expenditure, tax reform, privatization of public enterprises and labor market reform. In the third package, the infamous "troika" broke down, as the IMF did not want to co-operate in granting additional loans until the EU countries write off half the debt to Greece. The IMF insisted on this position to date, arguing that under these conditions and projections of growth, the Greek public debt is long-term unsustainable.

Why then euphoria? The truth is that, after the three packages of assistance at first glance, the perspectives for Greece appear to be quite excellent until 2060. The loans from the third aid package are expected to be repaid by Greece in 2034. They should be repaid by 2060. The average interest rate is only 1.62%, while Greece still has cash reserves from the last package of cash aid (loan) and will not have to loan any extra money for at least two years ....to refinance debts.

It sounds great. The EU countries have solidly helped Greece not to bankrupt, to be financially rehabilitated and have access to international financial markets again. In exchange for this, Greece must merely rationalize public expenditure, reform the tax system and the labor market, and privatize all public economic enterprises. Well, in fact, for the next 42 years, it has to cut public expenditure and increase taxes so that it can maintain a permanent primary surplus in the budget by 2060 (surplus without taking into account interest expenditure). By 2022, this surplus should amount to 3.5% of GDP, and then by only 2% of GDP by 2060.

And in the last two sentences, it is the core of the Greek problem, which, with the official end of the financial aid arrangement, is only being postponed for several years into the future. Namely, Greece was forced the next five years to generate 3.5% (or more) of GDP fiscal earnings as their expenditure, followed by 38 years of this surplus of 2% of GDP. Officials and the High Representative of the European Commission (EC) probably find those numbers quite acceptable.

But the practice, it's all totally different. This requirement of the EC is practically based on science fiction. Barry Eichengreen and Ugo Panizza made a survey in 2014 to determine how many countries (in the period 1974-2013) were able to maintain the primary surplus above 3% of GDP in the long run. They found that in the last 40 years only 5 such countries were able to maintain a primary surplus above 4% of GDP for 10 years and only 12 countries that had a primary surplus above 3% of GDP for 10 years. Countries with a primary surplus above 3% of GDP over a 10-year period are therefore extremely low and primarily concern small developed countries and for exceptional situations and in a period of high economic growth. Their experience will therefore be difficult to repeat for a period of 10 years, let alone for 42 consecutive years. It's science fiction. Even at such low growth.