IMF Staff Attempts to Spread Discord Over Greek Bailout to IMF Board

Over the past few weeks I’ve been covering growing discord between different factions of the IMF over official IMF policy to Greece. As I said two weeks ago:

This suggests a revolt among the rank and file of the IMF that doesn’t extend to the people who will ultimately make the decision. Remember that the definition of a “senior official” is necessarily vague to preserve anonymity and could easily be someone who can’t directly influence the decision made and certainly doesn’t speak for Lagarde

This revolt, which hasn’t been clearly reported on up until now, has now been made crystal clear by recent developments. The FT headline reads “Greece disqualified from new IMF bailout, board told”. This headline explicitly acknowledges that the “board” is being told something and thus for the first time acknowledges the IMF as an organization with constituent parts. In this case the development is that the IMF staff is directly telling the board that it “cannot reach staff-level agreement at this stage”. To ensure this agreement among the staff ,Greece will have to agree “on a comprehensive set of reforms” and creditors will have to be “agreed on debt relief”.

This is an important development but it must be reiterated that despite reports to the contrary, IMF staff agreement with a policy is not required by the Articles of Agreement. Ultimately its the board’s decision to bailout a country . Therefore the more important question is how has the staff briefing affected the Board? Spiegel reports on the Board’s comments this way:

According to the board minutes, several non-European board members — including from Asia, Brazil and Canada — gave warning over the need to “protect the reputation of the fund”, and the document says Ms Lagarde acknowledged their concerns.“[Ms Lagarde] stressed that in their engagement they have to be mindful about the reputation of the fund,” the summary says.

This signals that it is “just” the usual suspects who were already amenable to the staff’s message before they were briefed officially. It is very interesting and important that the Peter Spiegel doesn’t report objections emanating from the United States or European board members. Remember that the U.S. Represents 1/6 of the board and the EU represents a 1/3. Together they make up half the board vote. They can more or less push through a deal over staff objections on their own. It would be bizarre for the board to push for a deal in other capacities and militate against a deal in their capacity as an IMF board member. Lagarde is likely very aware of this and probably discussed this issue with board members informally before making verbal commitments to European leaders. A deal pushed through staff objections will hurt the IMF’s public image but that doesn’t make it impossible.

Note also that the staff didn’t reject a third bailout en toto. They said that a deal requires a “comprehensive set of reforms” and creditors “agreed on debt relief”. This has been Lagarde’s official position for quite some time. Further European leaders such as Draghi that it is “It’s uncontroversial that debt relief is necessary” . Hemming and hawing is not the same as obstructing a deal and I remain unconvinced that Europe is willing to end IMF involvement over extending maturities and interest rate compression on Greek debt.

If anything a stronger threat to IMF involvement is Athens. Lagarde seems to have recognized this as she recently sent Delia Velculescu as a negotiator. She is primarily known as the woman who negotiated the Cyprus bailout. The reason this is so important to the IMF is that senior IMF officials (and possibly the entire staff) belief that structural reforms spur growth. Thus, for the IMF, as Lagarde has made clear many times before, structural reform is as (if not more) important to debt sustainability as debt relief. Lagarde blames a lack of structural reform, not lack of debt relief for Greece’s unsustainable debt.

Reform is the perfect dues ex machina for the IMF since it allows them to always blame the victim for not bleeding enough reforming enough. Forcing Greece to adjust, as opposed to Greece’s creditors, will be the most difficult fight for the IMF in the coming weeks. IMF has never been a friend of debtors and there is no reason why we should believe this time will be different.

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  1. IsabelPS

    I believe that there is an ongoing fight about what will come first, fresh money or fresh legislation (and its implementation), of which this is just a part. Juncker said that Ireland, Spain and Portugal wanted to postpone the third bailout till after elections, which at least the Portuguese denied blablabla.

  2. alex morfesis

    greece must reform…but

    there seems nothing in any of the reforms to build anything that would resemble capital creation institutions…greece has very few banks and no credit unions nor credit co-ops…it has no landesbanks…no ex-im bank…no competition nor institutions to create euro debts/instruments…it is not really able to function in a currency union with such limited avenues for capital growth…fdi is interesting, but this aint kazakstan…

    greece must reform and at least catch up to the 20th century…not to help germany…but to help itself…

    but somewhere in the discussions it must insist on being allowed to establish credit institutions in line with the rest of northern europe…or it will end up taking in water with broken bilge pumps…after a shiny new coat of paint…

  3. David

    On Wednesday, Tsipiras gave an interview with Syriza affiliated radio. On reform implementation,

    I know well the framework of the deal we signed at the euro zone summit on July 12…We will implement these commitments, irrespective of whether we agree with it or not. Nothing beyond that.

    and debt relief,

    What’s crucial is that we got a commitment for debt relief, which will take place after the first review of the program, in November

    I took the FT article to be a response to these comments and the IMF making sure Syriza is kept on a short leash.

  4. TheCatSaid

    Much depends on what the specific reforms are.

    I learned a lot from the article here that Yves recently linked to on a different thread (in response to my questioning why Syriza hadn’t implemented certain kinds of changes that would impact media oligarchs and the Greek elite):

    Highly worth reading. It mentions specific reforms that are genuinely needed, and which have been promised repeatedly, but which never seem to occur.

    I’ve heard that “Reform” is a code word interpreted in a particular way within Greece (as punishing tax increases that hit hardest those who have the least). However, the HBR article describes reforms that are needed including things Syriza promised to tackle but so far hasn’t.

    1. juliania

      In response to ‘so far hasn’t’, here’s Varoufakis in his article “My Piece at Le Monde Diplomatique”:

      “. . .From the beginning, time and again, we proposed that legislation should be passed on three or four areas that we agreed with the institutions – e.g. measures to tackle tax evasion, to shield the tax authority from both political and corporate influence, to address corruption in procurement, to reform the judiciary etc. Their reply was: ‘No way!’ Nothing should be legislated before a ‘comprehensive review’ was complete.

      During the Brussels Group negotiations, we would be asked to present our plans for VAT reform. Before we could pin down an agreement on VAT, the troika representatives would shift to pension reforms. They would immediately rubbish our proposals before moving on to, say, labour relations. Once they rejected our proposals on that, they would shift to privatisations. And so on, ensuring that the discussions moved from one topic to another, before anything was agreed, without any serious negotiation on any of topic, creating a process that resembled a cat chasing its tail. For months the troika representatives stonewalled, insisting that we should talk about everything, which is equivalent to negotiating on nothing at all.

      Meanwhile, without having put forward any proposals of their own, and while threatening us with a cessation of talks if we dared publish our proposals, they would leak to the press that our proposals were ‘weak’, ‘ill-thought’, ‘not credible’. In hope that they would, at some point, meet us halfway, we went along with this impossible process. . . “

      1. TheCatSaid

        YV refers to the “Brussels Group” (other Eurozone finance ministers?) and the “troika” as preventing Greece taking action on various positive reforms, in the portion of the interview you quoted above.

        I’d love to know if this represents elite insiders tying Syriza’s hands and making Syriza appear / be ineffective or worse, or represents YV trying to spin Syriza’s lack of actions, or refers to the troika/Brussels Group genuinely trying to make Syriza present a plan that addresses “everything at once” (yet while supposedly asking Syriza to focus on one facet at a time)???

        The troika or Brussels Group did specifically say in one of the agreements that they didn’t want Greece taking any “unilateral” actions–would this have included preventing Greece from taking positive actions for reforms that might hurt the interests of various interested parties? (elites, oligarchs, bankers/cronies of the Eurogroup upper classes; the interests that support certain powerful Europen governments? the powerful electricity union closely connected to Syriza according to HBR?)

        The “truth”–to the extent it exists and is someday revealed–may depend on interpretations by various participants, and may involve varying degrees of any or all of these things.

        The HBR article approaches some of the nuances, and shows once again how challenging it is to identify good or bad actors, good or bad intentions, not to mention varying degrees of skill in relation to strategy, negotiation technique, & implementation.

        1. Yves Smith

          The reason I don’t take this Varoufakis story seriously is:

          1. In March, Syriza passed a bill for 200 million of humanitarian reform, IIRC food aid. The deal they’d signed less than a month called for “no unilateral action” that had any fiscal impact. And do not forget that the timetable in that memo also called for Syriza to have its reform proposals in and approved and the money to them by the end of April. The creditors never envisaged it would drag on the way it has.

          So to them, the passing of the bill looked like a stunt to play to a domestic audience and try to make them look bad. And as it turns out, Greece didn’t move at all quickly on this aid (which IIRC was food aid). One of the Greek outlets (Keep Taking Greece?) reported as of mid-May that they were still taking applications!

          2. In early April, when it was clear the Greeks were behind on delivering their list of reforms. Djisselbloem said that Greece could deliver a partial list of reforms and get the money in tranches. Presumably Greece would focus on the uncontroversial matters like improving tax collections

          3. Canceling media licenses of oligarchs almost certainly would not have budgetary impact in the Troika sense. Those licenses were probably underpriced and could be sold to others for the same or probably higher prices.

          2 and 3 are why I have trouble taking Varoufakis seriously. Even if that one conversation was true, it was a snapshot that quickly became dated in light of 2.

          1. TheCatSaid

            I can understand why they might include several things to play to the domestic audience. I find it hard to understand why they wouldn’t be more aggressive about at least starting to tackle some of the oligarch-related aspects of their election platform.

            If they wanted to try to keep everyone on board, maybe they could have tried to put through legislation that would have addressed a range of things so as not to target any one group but make progress all the same.

            Easy for me to say, of course. . . The lack of inaction in certain areas seemed very strange and I keep thinking there must be additional things going on behind the scenes. (For example, would people working in the ministry of finance have put spanners in the works, if they had allegiances to prior governments?)

            It feels like there were/are multiple layers of:
            –too-poorly resourced departments
            –mixed loyalties
            –PR spin
            –different people with different ideas

            all muddying the water at the same time.

            YV lying may be one piece of the muddiness, but was it the biggest or most important piece?

            He was surely in a leadership position where playing it very straight could have made a huge impact–and that this doesn’t seem to have happened is a disappointment to many. OTOH, is playing it straight a pollyanna-ish expectation in the hotbed of EU / Greek politics?

            The more I learn about the Greek situation, the more I feel additional undercurrents that don’t yet have names.

  5. susan the other

    Damned if you do and damned if you don’t. And the creditors can’t agree what to do. No wonder the Greeks kept trying not to get pinned down. It’s ironic that Schaeuble got away with smearing Greece and polishing up the EU Core when Germany is the biggest purveyor of this dilemma. The most interesting thing about Greece is, as usual, what isn’t being offered or even discussed – a new approach. Why aren’t the creditors acknowledging that their system is mortally flawed? Will anyone be making a profit off this debt going forward? It’ll just be a very prolonged period of transition to a non-capitalist world where it is finally accepted: money as we know it doesn’t make sense anymore.

    1. German native speaker

      Germans are good enough for making from scratch a side dish for the dinner party they are invited to, such as Lasagne. Meanwhile, without further notice, the host decides to not supply the salmon main dish that she invited everyone to, and instead, when the German arrives with her side dish, the host informs her that there will be no salmon provided by said hose, but that the German’s side dish is now supposed to feed eight people, as the main dish. Why not start small when it comes to ethics, instead of big accusatory words. Please stop smearing Schaeuble. I don’t agree with him/ his policies but he did not smear Greece.

      1. susan the other

        I don’t like smearing Schaeuble. But I can’t help it. He’s doing things that not only do not help the situation, they create it. Schaeuble has sound ideas sometimes. His idea for removing Greece from the EU was sound for German finance. His comment that we “are overbanked” made sense for the entire western world. His anger at Greece’s lack of discipline is understandable. But he stands in the way of a solution. He and many neoliberals. I admire Schaeuble. He’s been tough and smart. But he is living in the past.

          1. German native speaker

            Schaeuble offered again in the beginning of this year to loan several hundred tax specialists to Greece (yes to the Syriza government) and the offer was again declined. One gets the feeling that it’s like dealing with a passive-aggressive child that continuously defies and reneges on every attempt at agreement. Germans are not easy to deal with of course – self-righteousness, up-tightness, anal character traits, and a damaged power chakra from how they behaved before. Most outspoken critics of sending more money to Greece come from the new German states (ex East Germany) that had been bailed out generously themselves after reunification. These are the people Merkel is afraid to lose as voters.
            The collective unconscious – it’s old, it’s heavy, it’s dark and joyless, a burden, and causes a seemingly never-ending wheel of blame and revenge.

  6. steelhead23

    Thank you Yves for unpacking the conflict between staff (highly educated econometricians, I would assume) and the policy/action setters in the upper echelon of the IMF. I struggle for words as I try to divine where such conflict between advisors and those seeking advice may lead, so ironic must suffice. IMF staff went to the board to express concern that due to prior strangulation of Greece’s productive economy through austerity reforms, prior projections were rendered inaccurate and they recommended additional measures be taken, including debt relief. Given this advice, IMF supported a plan that provided simply more reforms, LaGarde’s deus ex machina, proffered with no hint of debt relief. The irony is that instituting more “reforms” would further harshen economic projections, making it more, not less, likely that Greece will eventually default. Perhaps irony is insufficient. Insane seems more apropo.

    1. Oregoncharles

      In other words, there’s a hidden agenda (&/or a truly terrifying level of incompetence.)

  7. Matthew Cunningham-Cook

    “They can more or less push through a deal over staff objections on their own.”

    Maybe. You need to get an 85% supermajority to pass anything at the IMF. This has been a focal point for criticism, that the US has veto power over everything because it has about 16% of IMF Board.

    1. Yves Smith

      I have time to look at this only briefly now, but I don’t think you are correct.

      First, bailout decisions are made by the Executive Board, not the full board.

      Second the IMF’s own governance language is not anywhere near as precise as you suggest. It says that Executive board decisions are generally made by consensus, but is silent on what exactly the exceptions might be.

      This is from the paper Nathan mentioned on the 2010 bailout:

      Moreover, the perception that the IMF was doing Europe’s bidding inflamed tension over the Fund’s long-standing governance problem — the disproportionate share of voting power that European countries hold relative to their economic size, the overrepresentation of those countries on the Fund’s executive board and the control Europe has exercised over the managing directorship.

      However, there is this:

      These standards, as will be recalled from the explanation above, required that a country receiving an extraordinarily large loan must have a high probability of debt sustainability. Unsurprisingly, SPR did not believe Greece met this standard — and SPR had unique leverage over this matter, because its signature is required on any document of this kind going to the executive board.

      This from the same paper:

      The other was the Strategy, Policy and Review Department (SPR), whose director, Reza Moghadam, wielded more power than anyone at IMF headquarters except for Strauss-Kahn, according to commonly received staff wisdom.

      but notice that the footnote contradicts this by saying “Technically, IMF management could have brought the document
      to the board without SPR’s signature, but that would have been
      extremely awkward and embarrassing.”

      The problem with consensus based elite international organizations is that their agents develop all these informal conventions that aren’t set in stone but staff tend to internalize them and believe they are unbreakable rules. Goodhart’s book on the Basel committee makes this quite clear.

  8. SC

    Schaeuble is terrible but in a way he has been saying that Germany will not offer better terms so Grexit is the best alternative. Haven’t a lot of economists argued the same? I guess the obvious reaction is that Schaeble could make concessions ie debt relief.

    Also regarding the earlier piece that Yves wrote about differentiating bt IMF staff and exec board in reference to leaked IMF report on unsustainable Greek debt, I think that the other countries (US, Japan and more) within board just leaked that stuff. Not high-level staff but Jacob Lew himself in an effort to get Germany to soften demands. At least that’s the word in DC, but who knows.

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