Mr. Colm McCarthy:

I thank the Chairman. I want to speak briefly about what has happened since last Sunday or early Monday morning. I will place it in the context of successive so-called rescues of Greece and draw a few conclusions about what this may mean for the eurozone going forward. First, we need to be clear that what emerged at the weekend has not moved Greece any closer to an exit from reliance on official lenders. The economic situation remains very grim. The Greek economy looked briefly last summer as if it was beginning to recover. There was then a political crisis towards the end of the year and things began to turn downwards. We do not have very recent data but with the banking system closed down, as a result of actions by the ECB, in the middle of tourism season, it is reasonable to guess that economic activity in Greece is declining.

A number of forecasts are quoted this morning in the Financial Timesfrom people who think that output will be down again this year. The events of the weekend have also reminded people that there are fundamental design flaws in the eurozone and that these have yet to be properly addressed.

I want to say a few things about this third Greek rescue. Of course, it has not been negotiated yet. All that happened at the weekend was that a process was initiated and there will now be discussions and negotiations that may eventually lead to a third so-called rescue programme for Greece.

I will give a little bit of background. When states lose access to the private sovereign debt markets they can no longer run budget deficits, nor can they replace historic borrowings as they fall due. Unless they can get some form of non-market finance, they will be forced immediately into possibly highly destructive fiscal corrections. There are international mechanisms to avoid that. The most important one is the IMF, which is a kind of credit union for governments. Governments can go there if they can no longer finance themselves on the private debt markets.

In Europe we now have a common currency and arrangements have emerged in crisis circumstances in Europe. As members of the joint committee know, the IMF has been corralled into these.The objective of official lending programmes as traditionally provided by the IMF has been simple - it is to return the distressed country as quickly as possible to credit worthiness and hence to market access, without unnecessarily severe contractions in economic activity. That is the objective of these programmes. Sometimes they work and sometimes they do not, but mostly they have worked around the world.

We had a second programme for Greece in 2012. This is the third one. A second programmes means that the first programme failed and a third programme means that the second programme also failed. The third Greek programme remains to be negotiated. It will have to be implemented against the background of an economy which seems to be contracting again. The banks are closed for business and will probably require yet another recapitalisation. Greek government debt is already approaching 180% of GDP. Some people feel that it will now rise to 200% if the rumoured terms of the third programme are enacted.

Of course, Greece has already been in default twice to the IMF. The summit communiqué released on Monday morning indicates that the third programme will have the following features; no early recapitalisation of the banking system that is not provided for in the communiqué. The communiqué is only a draft. It was done in a hurry and is also very badly written. The detailed programme may fill in some of the gaps. As of now, however, there is no provision for the early recapitalisation of the banks, or even for the early re-opening of the banking system; a renewed and front-loaded fiscal contraction - this, it should be borne in mind, in an economy that is almost certainly contracting again; and third, no write-down of state debt.

Commentators have already warned that a programme along these lines will likely see GDP in Greece not just fail to stabilise but also possibly to contract further. I have cited two references to short pieces that were published yesterday and which are worth looking at. There has been a score of other pieces by economic and financial commentators around the world, which are along the same lines. They identify a high degree of risk that the third programme for Greece will also fail.

I would remind members of the committee that there is a third programme because the second one failed and there was a second one because the first one failed. These people are predicting that there will be a fourth.

The communiqué lists a series of reform measures, some of which could assist economic recovery in the longer term. None of them is likely to have sufficient effect inside the programme horizon to offset the negative impact of new expenditure cuts and new tax increases.

I want to go back briefly to the first Greek rescue in 2010.

The financial crisis erupted around the world in 2008. The European sovereign debt crisis started in Greece in 2010. There had been weakness in various peripheral sovereign bond markets through 2009 and spreads widened and so on. The first crisis of a country that looked as if it could not borrow at all happened in Greece. The troika did not exist until the Greek rescue was put together in 2010, which was important and has cast a long shadow. The background is that the government changed at the end of 2009. There had been a New Democracy government under a man called Karamanlis, which had fiddled the figures. The public finance numbers were not correct. Public debt was much higher than it appeared to be and the budget deficit was much bigger. The new PASOK government under George Papandreou progressively discovered the scale of the holes in the public finances, Greek prices fell and eventually Greece was forced out of the bond market and had to be rescued.

At this stage virtually all of the Greek state debt was debt to private investors in Greek sovereign bonds. Greece did not have any official debt or none worth talking about. Briefly, the state debt in the early months of 2010 turned out to be 115% or 120% of GDP. People had thought it was much lower but the figures were not correct. The budget deficit was into double digits and the economy was contracting. In those circumstances, it is unrealistic to argue debt sustainability. There were economists in the International Monetary Fund, IMF, at that time who argued that the Greek debt was not sustainable and there should be a haircut of sovereign bond holders. That was not done. It was overruled by the political leadership of the IMF and pressure from the big European states. The first so-called rescue of Greece was a rescue of its creditors. That will be familiar to people who followed what happened here with the creditors of the bust Irish banks. Many of the problems we are dealing with date back to the failure to handle the first Greek rescue properly.

One of the things that disturbed me and many other observers about events last Sunday was the explicit threat to expel Greece from the eurozone. The manner in which it was delivered was laughable. Wolfgang Schäuble, the German finance Minister, referred to a five-year time out from membership of the currency union. That is utterly impractical and could not be done. The fact that the threat was made was extraordinary. This is meant to be a currency union, its members have abolished their own currencies. They do not have any currencies. People talk about bringing back the drachma as if it was still alive somewhere in a cave on Mount Athos and could be revivified. It does not exist. Greece does not have a currency any more than Wexford has a currency. To threaten a state which has abolished its own currency with expulsion from the common currency is an extraordinary event and it was a first.

This in turn means that the risk of an ultimate Greek ejection from the common currency has not gone away. As for the programme, if a third programme for Greece was being designed by economists rather than politicians who are trying to allocate blame, it would have several features. It would have to show a clear path back to market entry, that is what financial rescue programmes do. When the IMF takes the plane south, to Latin America, as it has often done, to Brazil and Mexico and places like that, its modus operandiis to find out how bad is it; say the debt is too big; find out who was foolish enough to lend the money, whether the government or the banks; break the bad news; give it a haircut; lend the government enough to get through a few years in which it will have to cut the budget deficit anyway, because it is a structural deficit, and hopefully get the country back into a position where it can borrow money again; and try to do that without deflating the economy too much. That is what these financial adjustment programmes are supposed to do. That is what it says in the text book. That was not done in the first or second Greek rescues. It looks like it is not being done in the third. That means that the decisions at the weekend do not address the problems in the Greek economy but they also do not remove the risk of Grexit. Some of the newspapers on Monday reported this as great news and it means the risk of a country being flung out of the euro has been removed. I do not think that is the correct interpretation. That risk has not been removed.

As for the programme itself, there have been new reports this morning that the IMF may not participate in the next programme. The German Government tried to make IMF involvement a condition of there being a third programme. There has been a lot of angst in the IMF about its involvement in 2010. The IMF was split. Many people in the IMF did not want to go along with the first Greek programme because they thought it was not properly designed and that it did not pass a test which has been in the IMF rule book for ten or 15 years, since the Argentinian crisis. The rule is not to lend IMF money to a country unless the programme is going to make its debt sustainable and will get the country back into the sovereign debt market under its own steam within a few years. That is my paraphrase of the rule. The rule is known colloquially as the “no more Argentinas rule”. The IMF had to ignore that rule, which it did not because the economists wanted to but because the executive board, which is political, and the then managing director, Dominique Strauss-Kahn, wanted to participate in the Greek rescue as a junior partner with the European institutions. The clock has turned, however, and it looks as if the executive board of the IMF may forbid the board to lend any more money to Greece because the deal does not respect the rule that it shows a plausible way to debt sustainability for Greece.

There is a long report in the Financial Timesthis morning, which I find credible but who knows? The IMF has non-European members. They are called China, India, Brazil, Australia and all sorts of other people. It is their money as well. Greece is in default to the fund and they are all conscious that what they agreed to do in 2010 was a mistake and it is possible that the IMF executive board will decline to participate in the third programme as envisaged. The Germans have said they will participate only if the IMF does because there is some convoluted argument that they trust the IMF and they do not trust the European Commission or something. I do not know what it really is about. I would not assume the IMF is going to participate.

If any of the committee members have free time during the summer and want to understand the international politics of what is going on, they should read a paper by Paul Blustein about the first Greek deal. It is a fantastic paper. I noted it at the bottom of the document I circulated.

This guy used to work for the IMF and he has spoken to all the principal actors. I regard the May 2010 Greek deal as the original sin in the mismanagement of the eurozone crisis and this guy has nailed it. If one reads nothing else about the first Greek bailout, this is the thing to read. He has spoken to all sorts of people. People retire all the time from the IMF. Once they retire, they are free to tell the truth, which they are not allowed to do when they are in office.