Office .Memorandum May 10, 2010 STRICLY CONFIDENT!A1. Subject: Board meeting on Greece’s request for an SB A - May 9, 2010

Office .Memorandum
May 10, 2010
STRICLY CONFIDENT!A1.
Subject: Board meeting on Greece’s request for an SB A - May 9, 2010

The Board unanimously approved Greece's request for a three-year Stand-By Arrangement
(SBA) amounting to €30 billion (SDR 26.4 billion) or 32 times the Greek quota, (he largest
program approved by the Fund to date. Bilateral financial support o f €80 billion will be available
from euro area partners. The total amount o f €110 billion will cover the expected public,
financing gap during the program's period, Greece has undertaken to draw on the IMF and
European Commission (EC) resources in a constant ratio o f 3 to 8 in each disbursement
throughout the program’s period.
The main objectives o f the program are: (i) reducing the fiscal deficit to below 3 percent of GDP
by 2014, with the debt-to-GDP ratio beginning to stabilize by 2013 and then declining gradually;
(ii) safeguarding the stability of the financial system through the establishment of a fully
independent Financial Stability Fund (FSF) -that will support banks, if necessary; and (iii)
restoring the competiveness of the Greek economy through comprehensive structural reforms,
in addition to the fiscal measures already taken by the.authorities in early 2010 (amounting to 5
percent o f GDP), the program envisages a front loaded fiscal adjustment o f 11 percent o f GDP in
2010-13 . All the measaures have been identified, the main ones being : (i) an increase of lax
revenues by 4 percent o f GDP, primarily through higher VAT rates; (ii) a significant reduction of
expenditures by 5.2 percent o f GDP, primarily through abolishing the 13th and 14Ih salaries of
civil servants and the 13th and 14!h pensions both in the public and private sectors, except for
those with low salaries or pensions; and (iii) structural fiscal measures of 1,8 percent o f GDP,
which will .
While supporting the program, several non-European Executive Directors raised numerous
criticisms.
1. Delay in requesting Fund assistance.
According to some chairs (Australia, Canada, China, Russia, Switzerland), this delay highlighted
shortcomings in the Euro Area architecture, including its (rather confusing) communication
strategy, which looked “piecemeal” according to the U.S. chair. The German ED clarified that,
absent a provision in the Maastricht Treaty, the European Union had to rapidly devise a
mechanism for financial assistance, which is now fully operational. It was most noticeable that
six] • u r o pea 11 E D s (Germa ny, Be 1 gi um, Spain, Fra n ce, th e Netherlands arid D e i mi a rk) issued n
joint .statement in supporting the SBA for Greece,
2, Optimistic growth assumptions
The Chinese and Swiss chairs emphasized that growth will eventually determine the ability o f
Greece to manage its debt burden. Even a small departure from the program’s baseline scenario
may derail the objective of fiscal consolidation, putting debt sustainability at risk. Staff replied
that there can also be upside risks, possible related to the uncertain size of the informal economy.
3. Risks of the program.
Because of the double-digit fiscal adjustment faced by Greece, some EDs (Argentina, Australia,
Canada, Brazil, and Russia) poitried to the “immense” risks of the program (and the ensuing
reputational risk for the Fund).-Some compared the Greek situation to that o f Argentina before
the end-2001 crisis. On the other side , tire Russian ED noted that in the past other Fund programs
(e.g., Brazil and Turkey) deemed particularly risky proved successful instead.
The exceptionally high risks of the program were recognized by staff itself, in particular in its
assessment o f debt sustainability, by stating that “on balance, s ta ff considers debt to be
sustainable over the medium term, but the significant uncertainties around this make it difficult
to state categorically that this is (he case with a high probabilityA
Staff stressed that the credibility o f the program relies in part on the fact that it allows Greece not
to not tap markets for a long period o f time (1-2 years). Effective implementation of the program
would lead to substantial fiscal primary surpluses that are expected to reassure markets despite
the high level o f public debt.
Staff admits that the program will not work if structural reforms are not implemented. In this
regard, the biggest challenge for the authorities will be overcoming the fierce opposition o f
vested interests. The Australian ED emphasized the risk o f repeating the mistakes made during
the Asian crisis, in terms o f imposing too much structural conditionality. While Fund's structural
conditionality is “macro-critical”, the conditionality imposed by European Commission seems a
“shopping l i s t .
Staff acknowledges that the program will certainly test the Greek society. Staff met with the
main opposition parties, nongovernmental organizations, and trade unions. In s ta ffs view, the
“striking thing” is that the private sector is fully behind the program, as it is seen as the tool to
bring to an end several privileges in the public sector.
4. Debt restructuring
Several chairs (Argentina, Brazil, India, Russia, and Switzerland) lamented that the program has
a missing element: it should have included debt restructuring and Private Sector Involvement
(PS I), to avoid, according to the Brazilian ED, "a bailout o f Greece'sprivate sector bondholders,
mainly European financial institutions”. The Argentine ED was very critical at the program, as it
seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to the
Argentina’s crisis o f 2001. Much to the “surprise” of other European EDs, the Swiss ED
forcefully echoed the above concerns about lack o f the debt restructuring in the program, and
pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism.
Staff pointed out that debt restructuring lias been ruled out by the Greek authorities themselves.
Although there were discussions on PSl, replicating the experience o f the Bank Coordination
(“Vienna”) Initiative was not possible, because Greek sovereign bonds are dispersed among an
unspecified number o f holders. Besides, Mr. Lipsky pointed out that 90 percent of these bonds do
not include Collective Actions Clauses, which would complicate a restructuring even further.
The Dutch, French, and German chairs conveyed to the Board the commitments of their
commercial banks to support Greece and broadly maintain their exposures,
5. Modalities on the joint IMF/EC/ECB reviews of the program.
Some Chairs (China, Egypt, and Switzerland) stressed the risk that joint reviews may reveals
differences o f judgments among the three involved institutions (IMF/EC/ECB). Staff specified
that representatives o f the three institutions will be “sitting at the same table at the same time”.
The Fund is an independent institution and will carry out the reviews accordingly: In principle, if
the EC does not agree on disbursing its share of financi ng, because o f unmet conditionality by
the Greek authorities, the Fund might retain its financing because o f lack o f financial assurances.
But this appears to be only a theoretical possibility. In fact, the mission chief for Greece (Mr.
Thomsen) emphasized that ”cooperation is o ff to a good start”, as during the discussions in
Athens the ECB took the lead on financial sector issues, the European Commission on structural
issues, and the Fund on fiscal issues. Cooperation is a strength o f the program, and there are
checks and balances.
6. IMF’s “preferred creditor” status
The U.S. chair (supported by Brazil and Switzerland) emphasized that, because o f the preferred
creditor status, the Fund’s loan will be senior to the bilateral loans from E.U. countries pooled by
the European Commission. Staff confirmed that this is the case, because o f the public good
nature of Fund financing, and in accordance'with Paris Club’s rules.
7. Criterion No. 2 for Exceptional Access to Fund resources
The Swiss ED (supported by Australia, Brazil, Iran) noted that staff had “silently” changed in the
paper (i.e., without a prior approval by the Board) the criterion No. 2 of the exceptional access
policy, by extending it to cases where there is a "high risk o f international systemic spillover
effects'. The General Counsel clarified that this was justified by the need to proceed
ex ped Piously, on the a ss u rn ption th a 111t e B o a rd a p p r o v a 1 won lei take place 1 hro ugh die Summing
Up, The change in the access policy was necessary because Greece could not constitute an
exception, as Fund policies have to be unifovmily applicable to the whole membership.
C o n tri b u to r: F. S p ad a j b ra