Germany and IMF in Staredown Over Greek Debt Relief

Last year, the game of chicken over the Greek bailout was between Greece and the Troika. Contrary to its hopes, Greece was unable to play members of the Eurozone off against each other (a notion we’d regarded as naive) and unable to rally much support on the streets.

This year, the impasse is between the IMF and Germany. And like last year, it looks as if there is no bargaining overlap between the two side’s positions. It may be that the IMF is bluffing. But if not, the Europeans may find themselves left to their own devices.

The big divide is over the IMF insistence that Greece get significant debt relief, that it simply cannot begin to pay its obligations in full. It’s not been well reported that the IMF has already retreated from its stance last year, that Greece needed to have debt reduction (writedowns of principal amount) for the math to work. But having conceded on a key point, the IMF is holding the line as firmly as it can that Greece needs as much of a break as it can get within the “no haircuts” constraint. Recall that any writedowns would be recognized as losses immediately by the nations that loaned Greece money, which is a third rail issue politically. But the IMF is calling for big breaks. From theWall Street Journal yesterday:

The IMF wants eurozone countries to accept long delays in the repayment of Greece’s bailout loans, which would fall due in the period from 2040 to 2080 under the proposal, according to officials familiar with the talks.

The IMF is also pressing for Greece’s interest rate on its eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due.

Remember that the IMF does not provide much in the way of financial support to these successive Greek gaoling operations. The reason it is perceived to be a key player is it is perceived to have needed expertise (and manpower) and to operate in a more technocratic, independent manner than a European set of minders might, particularly the European Commission, which is seen as too much of a soft touch for small countries. But another big reason the European officialdom wants the IMF in is to put a better face on the fact that the Germans are placing draconian demands on Greece. But now, the IMF is refusing to implement the German playbook.

The Journal also took the position that the IMF would ultimately have to give in to the views of its “majority” shareholders, the Europeans and the US. But in reality, the US has about 1/6 of the votes and the Europeans, 1/3, so the “majority” is barely one. The Greek bailouts are unpopular among the other voting members, who oppose so much in IMF resources and balance sheets being devoted to the Greek program.

Moreover, Lagarde is a skilled bureaucratic infighter. It’s hard to see how she and the IMF come out looking good if the Greek program blows up in two or three years, while she will still be the head of the organization. The old “program” that was agreed to in the interim deal last year was for Greece to achieve a primary surplus of 3.5% by 2018. That’s tantamount to asking someone whose muscles have atrophied due to being on a starvation diet to break rocks for eight hours a day. It’s nuts and the IMF, in techospeak, has said so. And the IMF no doubt recognizes that the forecast risk is all on the downside: Brexit, a Fed tightening leading to capital sloshing out of emerging markets, China going wobbly, a Trump presidency (Mr. Market is going to have an initial temper tantrum to show him who is boss), would all have moderate to serious slowing effects on the global economy. So Lagarde’s personal incentives are to cut a realistic deal or get the IMF out.

Lagarde’s need to get the Europeans in line if at all possible, or get US support may be the reason for leaking the story of the outlines of the deal to the Wall Street Journal, and a follow-on story in the New York Times, rather than through its traditional pet channel, Peter Spiegel of the Financial Times. If you understand the history of how badly the record of austerity is, and how the IMF’s forecasts have consistently been wildly optimistic, you’ll know that the European insistence that the old program can somehow be implemented, even after the Greek economy took a huge hit as a result of the banking holiday last summer, is utterly delusional and that even the IMF forecasts are unrealistic. But if the IMF has been trying to shore up support for its position in the US, it had better be doing a better position in with key parties, like the US Treasury, than it has with the media. From the Times:

The restructuring plan will be a tough sell. There is a sense among the eurozone creditors that the I.M.F. is being overly pessimistic about Greece’s outlook, to help drum up support for debt relief. While European officials have been playing up signs that Greece is bottoming out, the I.M.F. has been more skeptical about the country’s potential to raise revenue, shore up its budget and overhaul its economy.

There is a wide gap on the economic picture. Europeans estimate that Greece will hit a primary surplus — a budget in the black, before debt repayments — of 3.5 percent by 2018. The fund figures it would be closer to 1.5 percent at that point.

“There is a very strong belief in Europe that the I.M.F. is essentially cooking the numbers by being overly pessimistic about political and economic developments in Greece in order to strong-arm Northern Europe into providing more generous debt relief,” said Mujtaba Rahman, the Europe director for the Eurasia Group.

The Eurasia Group quote gives an idea how much Kool-Aid is being consumed across the pond.

And last week, in Der Speigel, German finance minister Wolfgang Schauble effectively said he was not willing to consider IMF-type debt relief till 2018. That is demanding the IMF would give up all of its bargaining leverage and trust that Germany might go along later. This sort of messaging to the German public comes off as a ploy. Schauble is moving German opinion in a direction that is hostile to the IMF plan, which will then allow him to pretend that he can’t get Parliamentary support for debt relief.

This posturing and messaging is a warmup for a Eurogroup meeting next Tuesday. All parties recognize that the differences need to be narrowed considerably then for a deal to be cinched in July, since talks will be on hold through the Brexit vote on July 23. While the Eurozone has managed to pull together last-minute kick-the-can-down the road deals repeatedly, it becomes harder as Greece continues to deteriorate and the interests of the creditors become more divergent. And lest anyone get too complacent, do not forget that Greece came very close to not getting a deal. Negotiations had broken down rancorously and seemingly terminally, and it was only on-the-scene efforts by Francois Hollande to get everyone back at the table that got the talks back on course. While the odds still favor an agreement coming together, it’s a mistake to assume that it’s a given.