A new IMF programme for Portugal highlights the heavy conditionality attached to loans. Meanwhile, a big, and very public, fight is brewing over debt in Greece.
In late May the IMF board approved a €26 billion ($38 billion) loan package to Portugal, as a contribution to the overall loan of €78 billion which has been orchestrated by the European Union. A further €26 billion is being financed by the eurozone under the European Financial Stability Facility, while the balance is being financed by the European Financial Stabilisation Mechanism, a body under the European Commission, which is backed by all 27 members of the EU. Portugal’s memorandum of understanding with the EU, negotiated by a caretaker government without a popular mandate (see Update 75), will firmly put the IMF’s co-financing of arrangements with the EU in the spotlight of critics of conditionality. The agreement showed that the EU loan has over 200 conditions attached, including the finest details of national fiscal policy. Mass protests in Portugal occurred sporadically throughout the negotiation period.
The economic policies demanded of Portugal mirror those the IMF typically imposed in Africa during the structural adjustment era (see Update 62), such as value-added tax rises, privatisation of state-owned enterprises, a 5 per cent cut in the average level of all public sector wages, a reduction in the size of the public sector workforce, and the imposition of larger health service user fees. However, the agreement has unusual conditions as well, such as reducing: incentives for renewable energy; the number of municipalities; and social security contributions paid by employers. At the same time, the agreement includes further private bank bailouts, with €12 billion being put into a facility for injections of public funds into Portuguese banks.
an attack against democracy and national sovereignty
The largest trade union confederation in Portugal, the CGTP, described the package as “an attack against democracy and national sovereignty, a clear capitulation to foreign interference, a denial of the country’s development, and a genuine assault on workers and the people”. The union particularly slammed the proposed reduction of the only social tax payable by employers as weakening the social security system. It also said the planned revision of the labour law, to make it easier and cheaper to dismiss workers, fostered insecurity.
The early June election saw the Socialists, whose leader negotiated the loan terms, routed by the centre-right Social Democrats. The prime minister elect Passos Coelho said “we are very ambitious about these structural reforms, much more than what is laid out in the (bailout) agreement.” The situation was so depressing to Otelo de Carvalho, the leader of the Portuguese revolution that overthrew dictatorship in 1974, that in early May he stated: “I would never have led the April 25 revolution if I had known that we would today find ourselves in this situation.”
The IMF’s conditionality review (see Update 75, 74) will not take into account the Portugal programme, because it came after a February cut off date, but the loan raises awkward questions. In comparison to the EU’s 200-plus conditions, the IMF agreement with Portugal only had 22 structural conditions. However, many were actually bundles of conditions, such as the privatisation plans for 10 state-owned enterprises being listed as only one demand. Additionally, the co-financing with the EU means that failure of the Portuguese to meet the EU conditions would still result in a suspension of the IMF loan.
Greek debt in the spotlight
Portugal signed its IMF loan just over one year after Greece became the first eurozone country to borrow from the Fund (see Update 71), but the apparent failure of Greece’s programme may force a policy rethink in Europe. The Greek IMF-EU programme envisioned the country borrowing on bond markets again in 2012, but that is impossible, as the interest Greece would have to pay has doubled to over 16 per cent. By end May, credit rating agencies had severely downgraded Greece’s ratings and assessed the chance of default at 50 per cent.
Greece failed to meet its original fiscal deficit targets, as the government continually uncovered hidden spending and failed to realise more tax revenue. In early June a joint mission from the IMF and EU agreed to release the next tranche of the Greek loan, but did not finalise a second package to bridge the new financing gap. The conditionality in the existing programme was ratcheted up, with the government now expected to bring in €50 billion through privatisation rather than the €15 billion agreed at the last review (see Update 75).
In early April, German magazine Der Spiegel reported that the IMF had finally recognised that Greece needed to restructure its debt (see Update 75, 73, 72) because the austerity programme was not going to be successful. The magazine said that the Greek government, the European Central Bank and other major EU countries rejected the IMF position in programme negotiations. After the report was published, the IMF denied that it had ever suggested restructuring, but bond markets were spooked.
In early May, 400-plus activists from Greece and across the world met in Athens to confront the current debt crisis of the European periphery and plan international solidarity and coordinated action against fiscal austerity. The gathering discussed alternatives such as debt audits and debt repudiation, including presentations on similar experiences in Ecuador, Argentina and Brazil. The concluding Athens declaration on debt called for citizens in Europe to “challenge the austerity policies of the EU and the IMF, oppose international financial power, and reject the slavery of debt. We call on people across the world to show solidarity.” There is now mounting political pressure for an independent debt audit commission and financial reform in Greece as well as a push for similar calls for debt justice in other European debtor states such as Ireland.
During the end May IMF-EU review, the main square in Athens, situated in front of the parliament building, saw a giant sit-in turn into a semi-permanent encampment. With at least 30,000 in the square daily and as many as 200,000 on a weekend in early June, the protest is being compared to the social movements that toppled the governments in Tunisia and Egypt. A ‘people’s assembly’ voted that they would “not leave the squares until those who compelled us to come here go away: governments, the Troika (EU, ECB and IMF), banks, the IMF memoranda, and everyone that exploits us. We send them the message that the debt is not ours.”
As many others have done, an early May article from Washington-based think tank New America Foundation compared the situation in Greece to Argentina before its default in 2001. Author Michele Wucker argues that Greece and other sovereigns need to restructure their debt, and that “a pre-emptive default would minimize the risk that would come with an uncontrolled breakdown like Argentina’s.”
Interesting comparisons have also been made with Iceland, which has not yet agreed to full debt repayment for creditors of failed private Icelandic banks. The government has insisted on subjecting any repayment package to a referendum; the most recent such vote in April again failed to garner sufficient support. The IMF package is still on track after more than two years (see Update 71, 68, 67) despite some of the Fund’s major shareholders’ demands for full repayment of creditors. Aditya Chakrabotty of UK newspaper the Guardian argues that Iceland’s refusal to pay back private creditors means that it “now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy. … Iceland was a country wrecked by implementing free-market dogma crudely and quickly; it may yet became another such lesson of how an economy can ignore free-market dogma – and come out far better than its critics predicted.”
Conditionality debated outside Europe as well
European countries are not alone in facing austerity. An early May paper from US-based think tank Center for Economic and Policy Research said Jamaica’s debts were unsustainable and that “pro-cyclical macroeconomic policies, implemented under the auspices of the IMF, have also damaged Jamaica’s recent and current economic prospects.” It concludes that Jamaica’s “policy mix risks perpetuating an unsustainable cycle where public spending cuts lead to low growth, exacerbating the public debt burden and eventually leading to further cuts and even lower growth.”