June 8, 2016 – Project Syndicate published an editorial by SEP Senior Fellow Daniel Gros, in which he discusses the possible benefits of excluding the International Monetary Fund from the Greek rescue program. He argues that the IMF’s debt sustainability analysis for Greece is biased—if Greece’s creditors accept a haircut, IMF credits would become more secure, creating an inherent conflict of interest. In short, a creditor should not be setting the terms of a debtor’s insolvency proceedings. Additionally, the IMF is charging a much higher interest rate to Greece (up to 3.9%) than European creditors (slightly above 1.%, on average), with repayment terms of 5-7 years (compared to 50 years for European funding). These rates and terms are part of why projections show Greek financing needs exceeding 15% of GDP in as soon as 15 years. Gros points out that a simple way to avoid this outcome is to replace the IMF’s expensive short-term funding with cheaper European substitutes. That alone could return Greek debt to sustainability, “even by IMF standards.”
- The original article is available from Project Syndicate.