Issue 41 | March 2017

Global Economics Monthly

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Greece on the Brink: Déjà Vu, All Over Again

Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics

Bottom Line: Greece and its creditors are again locked in a showdown over reforms, cash, and debt relief. Another cliff-hanger ahead of heavy July debt payments looks likely. Extend-and-pretend is a dead end for Greece and an increasingly populist Europe, and a more ambitious agreement seems ruled out by bailout fatigue in creditor countries. Markets are once again underestimating the risks of “Grexit.”

The Greek government’s negotiations with Europe and the International Monetary Fund (IMF) once again occupy the front page of the papers, and all parties appear to have learned little from past exercises. Ahead of a March 20 meeting of Eurogroup finance ministers, Greece is resisting reforms to pensions, labor and product markets, and fiscal policy that would unlock the next tranche of assistance and pave the way for negotiations on debt relief at some unspecified future date (certainly after German elections). Creditors are resisting a concrete commitment to debt relief that could mobilize support in Greece for reforms, while the IMF is criticizing both sides and threatening to withhold its endorsement (and financial support) of any deal. Most likely, the standoff will continue until July, when $7 billion in debt payments is due to the European Central Bank, the IMF, and private creditors (see figure 1). Greece appears to have neither the will nor the resources to make those payments, so avoiding default will require European creditors to disburse from their existing loan programs

The expectation that, as in the past, Greece and its creditors will reach a deal at the last minute has provided support to markets. Most investors I talked to also assume that the IMF will soften its opposition to a kick-the-can deal and agree to come along in some form. But short-term agreements to provide more cash for incremental reforms—while deferring concrete decisions on debt—mean that a durable solution to the Greek crisis is becoming more remote.  Read more »

 

Looking Ahead: Kahn's take on the news on the horizon

BREXIT

UK Prime Minister Theresa May’s government still plans to trigger Article 50 before the end of March. But the invocation will likely not occur until late March, and formal talks with the EU will not start until mid-May, further exacerbating the uncertainty of the Brexit process.

FRENCH PRESIDENTIAL ELECTION

While recent polls suggest Francois Fillon or Emmanuel Macron to be elected in the incoming French election, a surprise victory of Marine Le Pen remains a risk.

CHINA

The Chinese government has lowered the annual growth target to around 6.5 percent. The shift of focus to containing the risks of high leverage to financial stability is important. However, more tangible results of economic liberalization, such as reforming state-owned enterprises, are necessary to sustain the growth momentum.

 

FROM THE MACRO AND MARKETS BLOG

The President’s Economic Agenda: the Fight Begins
 

Robert Kahn 

President Trump’s address to a joint session of Congress highlighted the central economic themes that animated his campaign: a tougher policy on immigration and trade, a focus on infrastructure, broad deregulation, “massive” tax relief and the repeal and replacement of Obamacare. The unifying theme was economic nationalism and renewal. Read more »

 
The Long-Term Economic Costs of the President’s Executive Order on Immigration
 

Robert Kahn 

For all the human disruption and confusion associated with President Trump’s executive order on immigration released on Friday, it is also worth noting the potential for substantial negative macroeconomic dislocation from increased barriers to travel to the United States.  Read more »

 
After the Italian Referendum: a Treacherous Period for Banks and Growth
 

Robert Kahn 

The post-referendum market response to Italy’s referendum mirrored the reaction following the Brexit and U.S. election votes: calm after a knee-jerk negative reaction. Most market participants do not expect snap new elections. Italy today in this sense does not look much different than it did yesterday. Read more »

 

ABOUT CGS

The Maurice R. Greenberg Center for Geoeconomic Studies (CGS) works to promote a better understanding among policymakers, scholars, journalists, and the public about how economic and political forces interact to influence world affairs.

 
Brad W. Setser
@Brad_Setser
Senior Fellow and Acting Director of the Maurice R. Greenberg Center for Geoeconomic Studies Expertise

Edward Alden
@edwardalden
Bernard L. Schwartz Senior Fellow

Thomas J. Bollyky
@TomBollyky
Senior Fellow for Global Health, Economics, and Development

Willem H. Buiter
Adjunct Senior Fellow

Blake Clayton
@bcclayton
Adjunct Fellow for Energy

Heidi Crebo-Rediker
@heidirediker
Senior Fellow

James P. Dougherty
Adjunct Senior Fellow for Business and Foreign Policy

Jennifer Harris
@jennifermharris
Senior Fellow

Miles Kahler
@MilesKahler
Senior Fellow for Global Governance
Robert Kahn
Steven A. Tananbaum Senior Fellow for International Economics

Sebastian Mallaby
Paul A. Volcker Senior Fellow for International Economics

Meghan L. O'Sullivan
Adjunct Senior Fellow

Peter R. Orszag
@porzsag
Adjunct Senior Fellow

Kenneth S. Rogoff
Senior Fellow for Economics

Varun Sivaram
@vsiv
Douglas Dillon Fellow

Matthew J. Slaughter
@MattJSlaughter
Adjunct Senior Fellow for Business and Globalization

A. Michael Spence
@amspence98
Distinguished Visiting Fellow

Benn Steil
@BennSteil
Senior Fellow and Director of International Economics