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.