What an IMF bail-out will look like…

Taking lessons from Greece.
Sygnia's Magda Wierzycka warns that an IMF bailout comes with consequences for countries in distress. Picture: Chris Ratcliffe, Bloomberg

A year ago, I wrote an article about what an IMF bail-out would look like. At the time I was a lone voice as the scenario seemed unlikely. In the past few weeks the IMF has often been mentioned. I dusted off my article and am re-publishing it so that everyone can understand the implications of an IMF Bail-out.

I thought it useful to look at Greece as an example as I visited the country in 2018. The more I researched, the more I felt like I was reading a Greek tragedy.

The Greek crisis started in the aftermath of the Global Financial Crisis of 2007/08 after revelations that Greece entered the EU, and maintained its membership, by using fake economic data. In other words, they lied about the size of their debts. This news triggered credit rating downgrades to junk, capital flight and bond yields spiking to unsustainable levels. Basically, if Greece wanted to borrow more money to fund running the country, and the repayment of existing debt, it would need to pay unaffordable interest rates. This meant existing creditors faced a very real risk of Greece defaulting on all its existing debt obligations. 

In 2010 three players entered the scene, the European Commission, the ECB and the IMF, bearing gifts. They offered help in the form of loans but with stringent conditions attached, including severe austerity measures, structural reforms and privatisation of state assets. Eventually one loan was not enough. There were three series of loans, in 2010, 2012 and 2015, ultimately amounting to about US$375 billion. Loans came in drips and drabs, subject to regular reviews of the implementation of reforms.

There were dramatic scenes as people protested, the government changed, banks closed for a while, terms were renegotiated over and over again (from lowering of interest rates to increasing the term of each loan), private bond holders were forced to accept a 50% cut on their investments and state assets were sold to insiders at rock bottom valuations.

But the biggest toll was borne by the Greeks themselves. Pensions and wages were cut, the public sector was dramatically reduced, taxes rose and the power of trade unions was greatly diminished by the abolishment of collective bargaining agreements. All in all, the government enacted 12 rounds of tax increases, spending cuts, and reforms since 2010.

And the effect? After the first loan was implemented Greece suffered the longest recession of any advanced economy since the Great Depression, lasting for five years. The economy shrunk by 26% by 2014, while the unemployment rate rose from below 10% to over 25%. By 2014, 44% of Greeks lived below the poverty line and 20% lacked money to buy food. By 2017, although Greece’s debt reduced from the original 300 billion euros to 226 billion euros, its debt-to-GDP ratio shot up from 127% to 179%, the world’s third highest after Japan and Zimbabwe.

In response to a shrinking economy, the government doubled taxes. Personal income tax rose to 70% and VAT to 23%. This encouraged massive tax evasion, perpetuating the recession. Many firms relocated abroad, while over half a million skilled Greeks, out of a population of 10.8 million, left.

By mid-2017 things seemed better. But this was temporary. Further credit lines were needed, further austerity commitments were made, including more changes to labour laws, a cap on public sector employment, and a reduction in pension and social security payments.

Greece trumpeted exiting the bail-out programme on August 20 2018. But the IMF has warned that it will face an uphill battle in managing its debts, sustaining economic growth and supporting the rising number of the poor. Greek banks are weak, as are the private sector balance sheets. Some capital controls remain in place. And although the economy is growing, it is still only three-quarters of its pre-crisis size.

So, what can we learn from this riveting drama? It’s simple. An IMF-imposed austerity damaged economic growth, deflated wages, increased unemployment and reduced tax receipts, making it harder to pay debts and run a country.

South Africa must beware – here be dragons.

Magda Wierzycka is the CEO of Sygnia.


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As long as there is someone to refill the trough , the politicians won’t care. They won’t have to face the consequences, the electorate for they feel nothing will.

SA’s politicians had better dread what the unions will do, even if it is the IMF imposing the conditions. Athens was rocked by violent protests. Can you just imagine what kind of a war it would cause in SA, and I mean literally a war, when the unions get told that half of Eskom’s wêkkas are going to be fired? The IMF had better arrange for a division of UN peacekeeping troops too.

For the moment the unions seem quite relaxed with the ANC’s Plan A: to use union members’ own pensions to pay their salaries.

Magda, it would be interesting to get your opinion on why Zimbabwe has not yet followed the route of an IMF bail-out.

Zim did get an aid package from the AIM. Then, in typical fashion, they defaulted on the agreements and the IMF walked away. Now, the situation in Zim serves as an example of what Greece would look like if the IMF did not intervene. One of the conditions is that Zim should compensate farmers who lost their property. The entire IMF loan will disappear into this hole, leaving the average Zimmer to repay the loan. Capitalism is a b*tch, but socialism is infinitely worse.

Agreed and it isn’t even “socialism”; just an excuse for the ANC “elite” to plunder.

US Sanctions? Still loads of sanctioned individuals (OFAC/SDN) in political control… IMF can’t play in that place until that issue is resolved.

Zim has no choice but to take massive, USD debt postions, to get forex in to stabalise banking systems and underpin their currency… Too bad the leaders wont step away or remove the sanctioned people to facilitate all of this… Greed and power are ugly when blended in an African context….

When the IMF tightens the noose around your neck it is worse than US sanctions as the IMF is conglomerate that represents and has influence in 189 out of the 220 countries world wide. The can stop cash flowing from any of their member states to your country until their loans are serviced and paid. In Zims case they reneged on their IMF obligations and that is why no one is willing to lend them money. In the financial markets there is a sector in the bond market that specifically deals in junk bonds so if Zim did not screw the IMF that would have been an avenue for them to lend money at predatory rates but at least they would have had access to USD but since the IMF is essentially blocking them now they cant even issue bonds in the junk bond market. I think Zim is more an abject lesson of what awaits you when you screw the IMF than most anything else

Too bad that anyone with the actual power to do anything about it is too worried about their own internal politics rather than fixing the mess that they have made.

But the biggest toll was borne by the Greeks themselves. Pensions and wages were cut, the public sector was dramatically reduced, taxes rose and the power of trade unions was greatly diminished by the abolishment of collective bargaining agreements.

All of these things need to happen regardless of the IMF or not to make South Africa Inc a going concern. With the exception of higher taxes, which I would say has already happened! The public sector is way too bloated, the unions are as reckless with wage increase demands as ever and the collective result is we are broke! If the govt had any balls at all they would shut down the useless SOEs of the likes of SAA and Denel and focus on getting ESKOM right.

But of course, that would be political poison… and so here we are.

True, all these things need to happen, especially firing 60% of the public service and getting rid of all SOEs. The one thing which nobody mentions too often is that the Greeks were really good at 2 things: making souvlaki and dodging taxes. Most Greeks, even doctors, evaded tax and operated a black market, cash economy.

There is also a huge underground economy in SA; a cash-based, tax evading economy. Taxis, spaza shops, Pakistani cell phone shops, etc. Also, there is huge and blatant electricity and rates dodging in the townships. The non-payment rate for electricity in Soweto is over 90%, and in some small towns towns the non-payment rate for property tax and electricity in their townships is 100%. Imagine the magnitude of the brown stuff that will hit the fan when the IMF, as they did in Greece, start forcing SA’s authorities to go and collect tax from shebeens and rates and taxes from Soweto.

You’ve said it perfectly.

But there are vast demographic differences between SA and Greece though: a fifth of the population size, highly literate and entrepreneurial and even if they don’t pay their taxes the money still flows around, close to major economies; well established industrial industries; huge tourist income from close to 30 million visitors… etc etc..

Here we are at the arse end of an unproductive, over-populated uneducated continent.

Don’t forget all the Airbnb “entrepreneurs” who aren’t declaring income for tax.

Kieswetter is going to come after them via the deeds office database, soon 😉

And how exactly will the Deeds office be of use? I have various properties, for instance a beach house, storage unit, extra garages, which I have never rented out and never intend to. There must be many more property owners like me.

Dear Magda,
R.W. Johnson painted the picture of an IMF bailout in his 2015 book “How long will South Africa survive? : The looming crisis”.
If you want a full review of the IMF approach, buy his book.

I didn’t see any mention of violence in this article. SA will be very different. This will be the real revolution and the scapegoats will be…………?
You guessed it.

yup, I’m fairly tired of being blamed for this country’s problems. I mean I was 5 when Mandela was voted in… How could I possibly have made a difference yet my skin colour is constantly used to define what I believe in here in SA

Basically the anc and their supremist negroid tribes are racists….QED

It’s an easy sell that’s why, similar to the Nazi’s and the Jews.

What, a discussion of how Greece came to be in this mess without mentioning the Euro? Newly minted EU countries got to borrow with Germany’s credit rating, which is how Greece, in a show of poor fiscal discipline, ended up with such astronomical debts. Since they no longer had a printing press, they couldn’t inflate, so they deflated instead.

Being on the Euro is like being on the gold standard: either you run a surplus [impossible for everyone in an economic block], or you deflate.

Yes, SA is doomed at the hands of the IMF, but Greece is a poor case study for our situation.

I seem to recall “euro” is Greek for piss ? which was quite apt at the time.

and it sounds that you stay in S#$t forever

The economic policy stagnation is causing more damage to the economy than State Capture.

The only solution is for the ANC to split.

The Competition Commission can start this by investigating the monopoly power of the trade unions.

Fascinating and informative. Thanks Magda.

In 1976 the UK went cap in hand to the IMF and received the largest loan in history, at that time. James Callaghan’s Labour Party bankrupted the United Kingdom, just like the Labour Party (Tripartite Alliance) is bankrupting South Africa at the moment. The austerity measures caused the Labour Party to disintegrate into different factions(does it sound familiar?) This opened the door for the Knight in Shining Armour, the woman who broke the back of the unions, Baroness Margaret Thatcher, to cure the ills of “the sick man of Europe”.

South Africa has contracted the socialist disease when the ANC entered the room and we are becoming the “sick man of Africa”. The ANC cannot be part of the solution because it is, in itself, the essence of the problem. What can happen though, is that the IMF conditions will drive the disintegration of the tripartite alliance and open the door for the DA and the Ramaphosa faction to implement Thatcher(free-market) policies. The major benefit of IMF intervention is not the money, but the inevitable change in government that accompanies the conditions of the loan. The IMF loan is the doughnut that lures the socialist party into the guillotine…..

If the ANC does not like “doughnuts”, then they won’t go the IMF. They will prefer not to lose their head, and they will follow the only alternative. They will inflate the debts away. Our debts are largely denominated in local currency. The purchasing power of Pension Funds will disappear into the hole left by the devaluation of the currency. Our alteratives are really simple, either the ANC loses its head on the IMF guillotine, or we lose our pension funds in the hyperinflation spiral.

I don’t think the IMF option is that bad after all. The alternative will put madam Magda Wierzycka out of a job. The ANC is taking us on the road to slavery. Baroness Thatcher called the work of August von Hayek “her manifesto”. He wrote about the ills of socialism and the benefits of free-market capitalism. If every voting South African read “The Road to Serfdom” by August von Hayek, our problems will disappear without any need for IMF interventions.

I spent months in the Uk in the pre-Thatcher period and it was a dump. Yes … her best quote was: ‘The problem with socialism is that you eventually run out of other people’s money.’

The ‘other people’s money her in SA come from the middle-class taxpayer.

Ooh, another book on my reading list.

There is a big rand hedge component to the JSE all share. Right now wed 7 august 16h00 the all share is green and the ZAR/USD is red. Pension funds have exposure to offshore, SA inc and SA hedged. Who knows what it will be like tomorrow 8 august, or even at 17h00 today? But it’s the poor who will be klapped by inflation, not NECESSARILY those with pension money accrued.

For sure Sensei and your third paragraph is what I predict. As you note, much of SA’s debt is in ZAR and so can be devalued down but at a very high cost to the people – inflation. Greece still had a Euro that held its value.

In the first sentence this women cant help herself fibbing. Lone voice my ass. You’ll asset managers have been punting “Ramaphoria” and positivity and shoving SA investors into your loser domestic funds. We see you. Also who cares about the economy, this is an individual threat, Cyprus, Greece, Argentina etc citizens woke up with thier bank accounts frozen. Think prescribed assets on steroids. Get your money away from the government, offshore stocks, property, crypto etc.

Forget the IMF, worry about the EFF.

The likely path SA will is:

1. Raised taxes to breaking point and annexed pension funds ~ Capital flight of the financially mobile

2. Desperate loans from Russia/China with natural resources as collateral.

3. IMF aid with austerity T&C’s with unemployment reaching 70%+

4. EFF socialist revolution, default of IMF loans, hyperinflation, starvation completing our reversion to the African mean.

Greece will look like a cake walk.

‘’Elementary my dear Watson’’

‘’Fanks’’ Magda – There are approximately 10 million forex traders in the World!

Average daily turnover in the global foreign exchange market daily is approximately 5.1 trillion U.S. dollars.
Magda, as an ex FX trader I can assure you that, most FX dealers know very well what the implications of an IMF bailout is – you flatter yourself when you claim that you are a ‘’lone voice’’, my dear!

in 2002 and 2003 clever analysts also said it is the end of SA..the ZAR will go to R20, everyone took the allowed R500 000 out of SA…it turned and dropped to R7…now will it reach R20 after 16 years or will it turn ?….think before you answer.

Deon, we did not have a Marxist inspired ANC at the helm back then. We had relatively high economic freedom (capitalism) under a fiscally conservative government.

Please go read about the NDR and try and understand what it means for the future of the country. If you still believe the Rand will strengthen under this socialist onslaught of destruction, then I wish you good luck!

agree…I did not say the Zar will go stronger..just a question to think about…and maybe it is the $ that is the problem…see what it is doing to the Aus$, NZ and many others…so do not only blame SA politics

There is not a single SOE or municipality that applies appropriate measurement on performance and consequence for non performance. So, IMF bailout here we come.

exactly it is known that approximately 40% of municipalities are currently under administration and the worsening non payment culture of communities are disturbing – the GDP to debt ratio – the weakening currency – the absurd taxes – the high unemployment will all make it crystal clear for the IMF to bail SA out – now they’re bringing in NHI no freaking ways

I wanted to be an investment banker when I grew up. Then I lost interest.

Diminshed trade union power.
Govt spending cut. Civil employees retrenched. Wage cuts.
Privatization of SOE’s.
That doesnt sound too bad.

Can we start the bail-out right now please?

“The Greek crisis started in the aftermath of the Global Financial Crisis of 2007/08 after revelations that Greece entered the EU, and maintained its membership, by using fake economic data.”
AFAIK no Greek politician or civil servant has ever been jailed or even charged for this faking of data. Causing billions of Euro damage to the country without getting punished for it seems not limited to SA only.

Magda misses that the causes of the Greek IMF bailout were:
• The Greeks tried to break Micawber’s Law: [in brief] spend within your income else misery. SA has fallen into this trap.
• The EU had a fatal flaw. It had a common currency but not common economic policies, meaning that the drachma could not devalue and self-correct. SA may avoid this, but at the cost of imported inflation and capital flight.
• Greek industry could not compete with German industry. There is global tendency for wealth creation to concentrate, usually in cities at the expense of villages and the country. Germany became the “city” while Greece became the “village”. SA has this internal division between its metros and rural areas; increasingly it is playing a “village customer” role in the global economy.
• While all economies depend upon the circulation of money and upon some degree of subsidisation, in SA the pool of wealth creators is too small and the circulation of money/subsidies has too much “friction” (read: Fruitless & Wasteful Expenditure, theft, inefficiencies and other manifestations of Corruptheid) think Sassa grants crises, textbook non-delivery, school pit toilet drownings, Life Esidimeni, …..

As Realist101 posted elsewhere:
“Contrary to belief. An IMF bailout will be good for those working and paying taxes for a living. Not so much for those voting for a living.
SA’s bailout will not be like Greece. In Greece the IMF bailout had to fix the income side of the balance sheet. In SA the IMF will come and correct the expenditure side of the balance sheet.

Good news is that no incumbent government has ever survived the election after an IMF bailout.”

I fully agree hence I would not mind the IMF through their Structural Adjustment Programme do the bailout. I pay my taxes I am a scholar fully funded by myself. in all of this hype and concerned around the IMF in fact I welcome it because many countries today would cease to exist if the IMF had not been lenient as a lender and always pushed for reform. it is difficult in the African context for reform to happen hence corporations take advantage of a lackluster government and no reform. The IMF will come with conditions however it should be good as if the Government of SA cannot correct this then get in the International community and bring in the IMF. history dictates that no government survived and stayed in power after a IMF bailout, so that in itself is the death of the ANC. Maybe we could have the IMF deal with all the critical development issues that the state fails to act on. They indeed would reform taxes, check the balance of accounts and also position us back to SA as a global investment destination. I own offshore stocks not because the SA companies are bad to invest into it is just the effects and the lack of progression South Africa shows currently. the famous words of donald trump, maybe Africa is a s….hole after all (SA is).

End of comments.



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