Lagarde Distances the IMF From Implications of Leaked Debt Sustainability Report

By Nathan Tankus, a writer from New York City. Follow him on Twitter at @NathanTankus

Earlier this week I did a detailed analysis of the way the media misreported Lew and Lagarde’s statements last week regarding Greece. Yesterday this type of misreporting reared its ugly head again when an update to the Debt Sustainability report by IMF staff released a couple of weeks ago was leaked to the press. The report outlines the obvious: the banking system shut down has had a major impact on the economy and thus makes the previous estimates of growth and Greece’s budget position out of date. As a result, more debt restructuring than previously “estimated” will be needed to make their debt sustainable. This is all based on the IMF staff’s estimates for Greece’s future budget position, which have been notoriously and consistently inaccurate for years. It must be emphasized that what is being argued about is not whether Greece’s debt is sustainable in reality, what is being argued over is whether it is sustainable in their projections.

In general, when discussing large complicated institutions distinctions must be made between parts of this institution. The mainstream press is particularly bad at that kind of nuance because these organizations are already complicated: making further distinctions between IMF managing directors, IMF staff and the IMF executive board gets needlessly obscurant in their view. However, these distinctions are important. The report that was leaked two weeks ago and the latest update to that report was written by IMF staff and specifically “neither discussed with nor approved by the IMF’s Executive Board”. Additionally, Christine Lagarde or her title “managing director” appear no where in this document. Thus to say that the “IMF” is saying anything in this report is deeply misleading.

The reporting of this latest update was even more muddled because it was combined with an anonymous statement from a “senior IMF official” by the Financial Times. The Financial Times lede reads as follows :

The International Monetary Fund has warned that it might not be able to participate in Greece’s bailout if the programme does not include substantial debt relief, setting itself on a collision course with the country’s eurozone creditors.

Despite the implication of the first few paragraphs following the lede, the basis for this statement is not the report but the statement made by the “senior IMF official” that:

We have made it very clear that before we go to the [IMF] board [for authorisation to release funds] we need a concrete and complete solution to the debt problem,”

Thus, the report itself doesn’t make any claims about the implications of their analysis for a new IMF program. It is this quote from an anonymous official that does that. Further this is a very confusing (and perhaps incoherent) quote. Who is this anonymous official? What group of people does the anonymous official’s use of the word “we” refer to? According to Article XII, section 4B of the “Articles of Agreement of the International Monetary Fund ”

The Managing Director shall be chief of the operating staff of the Fund and shall conduct, under the direction of the Executive Board, the ordinary business of the Fund. Subject to the general control of the Executive Board, [s]he shall be responsible for the organization, appointment, and dismissal of the staff of the Fund.

This (and the rest of the document) suggests to me that it is the Managing Director (ie Christine Lagarde) who goes to the board and ask for authorization. Is the anonymous official claiming to speak on behalf of Christine Lagarde? If so why is she not making this statement publicly? In my mind this anonymous official’s statements only make sense in three situations:

  1. Christine Lagarde is both unwilling to sign on to a deal the Eurogroup would currently agree to and unwilling to overtly and strongly pressure them to create a “better” deal they could sign. Thus she is aiming for a Grexit and no deal.
  2. Christine Lagarde is willing to sign on to whatever deal the Eurogroup would currently agree to but wants to covertly pressure them to offer more debt restructuring. In other words it’s a point of contention but not a dealbreaker.
  3. Many on the IMF staff don’t want Lagarde to sign whatever deal the Eurogroup is currently considering and specifically want much more debt restructuring. They have and are willing to leak things to the media to attempt to create this outcome whether by embarrassing their own Managing Director or putting indirect pressure on the Eurogroup.

To me option three seems like the most plausible. The same FT reporters (Peter Spiegel in Brussels and Shawn Donnan in Washington) reported over three weeks ago that a “senior [IMF] official” says many staff at the IMF “would rather cut off their little finger” than continue being involved in Greek bailouts. The use of similar descriptions (“senior official” and “IMF senior officials”) implies that the same sources at the IMF that said this over three weeks ago have been leaking the Debt Sustainability analysis and interpreted them for the press. 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. Thus, in this scenario this statement makes sense as a calculated lie by IMF staff to influence events. This also may suggest that my intuition earlier this week was wrong: it may not be the Obama administration crafting a narrative with the leaked reports and selective interpretations of official statements, but simply off the record comments from these same IMF staff sources (or at least, a complicated combination of both these sources).

One of the main reasons readers should be skeptical of the other options is the public statements Lagarde has made since the leak of the latest report. In particular, she appeared in a segment with Christiane Amanpour on CNN international. Parts of the conversation are transcribed below but readers should watch the segment in full for themselves

CA: so it’s quite amazing that you’re saying this now, everyone has been sort of been putting a huge amount of pressure on Greece, sort of shoving everything down their throat and you’re now saying … ‘Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far’. Why are you arguing this at this hour?

CL: well Christiane we have been arguing this for quite a while actually and what is very disappointing is that while Greece was on the path to sustainability and actually over-performing about a year and a half ago, in the last year and a half there has been a significant deterioration both as a result of the previous government not doing the things that it was supposed to do in terms of measures and the new government delaying some of the measures and also reversing reforms that had been undertaken by the previous team. It has been the combination of these two over the last 18 months or so which has been quite devastating for the country. Now we did say that all along to the Europeans but clearly the necessary deterioration which has taken place in the last couple of weeks as a result of the bank closure and the capital controls put in place by the Greek authorities has made the whole situation a lot more serious.

There are a few interesting points here: she blames the deterioration of Greek finances on both the previous and the current Greek governments. In other words further debt restructuring, to the extent that it is needed, is needed because of local mismanagement of the economy. What is even more interesting is her comments on debt restructuring itself

CA: Does Ms. Merkel have to finally say debt relief?

CL: I have some hope, because as late as a couple of hours ago, I understand that there were some more positive noises towards that principle of debt restructuring. What we have said to all of them is no matter what form it takes, whether it is by extending maturities, providing a longer grace period, compressing the interest rates on the one hand; or through other options such as transfer, which I think is not in the cards, such as haircuts which is not in the cards as I understand form the political point of view in those member states, but one way has to be found in order to release the burden and allow that country to demonstrate that yes it can be back on a sustainable path and yes it is serious about structural reforms and it is serious raising tax and collecting revenues.

Thus the burden of adjustment falls on Greece to raise taxes, collect revenue and implement structural reforms which will explicitly make their debt more sustainable by making their economy more competitive. She mentions that debt restructuring needs to happen and implies that sufficient debt restructuring will occur through options that aren’t haircuts on the face value of debts or direct transfers from other member states. She doesn’t comment on how much debt restructuring will be necessary and surely gets nowhere near saying that if there is not sufficient debt restructuring the IMF will not be able to sign off on a deal. Why would she take this interview and comment so publicly if she was authorizing these leaks? Again, why authorize someone to comment anonymously if her goal is to pressure the Eurogroup to provide more extensive debt relief? This seems like the strategy of staffers in open revolt, not the strategy of an in control managing director.

As this piece was being finished Donnan and Spiegel published an article in the FT which supports my hypothesis entitled “Latest IMF debt relief push baffles eurozone creditors”. In it two “eurozone officials” claimed that while “the IMF chief, made clear in one of the plenary sessions that any request for a new programme would have to be approved by the IMF board”, she did not say that without sufficient debt restructuring there would be “no new IMF programme”. Notably, neither did the document or Lagarde say that. The confusion documented above emanating from an anonymous “senior IMF official” has been successful in muddying the waters between the Eurogroup and the IMF. What this has accomplished is very unclear. The article ends by saying

Officials said despite the awkwardness over the IMF stance, it need not throw a wrench into the current talks, which are only about a new eurozone bailout to go alongside the existing IMF programme.

But once the IMF is asked to disburse some of the €16.4bn remaining in its programme, which is likely to come as early as September, things could get tricky – though in theory, it can hold on until next March, when its current programme is due to expire, before presenting a fully-funded plan to its board for approval. The IMF can wait. But, once again, it is pushing for the conversation in Europe to change.

Thus the IMF’s concerns can (and seemingly will) wait until early next year, which is a lifetime in financial time especially with Greek banks still closed. This confusion looks to be the invention of angry staff who don’t want to be involved in Greece anymore. If Lagarde wanted to wash her hands of Greece or attempt to coerce Europe into more “generous” debt restructuring measures she would have been saying that explicitly and loudly. Until there is a headline that says “Lagarde says no IMF money will be dispersed without extensive debt restructuring” read reporting on IMF “motivations” and “warnings” with extreme skepticism. If this does ultimately prove true, it will become clear well after the current round of deals are already done and thus be no help to Greece at all.


Update 10:25 PM:

Lagarde went on PBS to repeat many of the same points she made on CNN.

“Sooner or later the banks will reopen as a sign that confidence is restored”

Well I’m reassured, aren’t you?

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  1. bkrasting

    What country is paying back its debt? Certainly not the USA, Germany, UK or Japan. Why should Greece be expected to pay the principal on its debt?

    The issue is can they pay interest? Question for Nathan – Can Greece “afford” to pay 1% on its 320B of debt? That would be about 1.3% of GDP. By comparison, the US is paying about 2.4% of GDP.

    1. susan the other

      I’d like to hear the answer to your question too. I think it might revolve around the inflexibity of the flexible exchange rate. Seems like the sole purpose of flexible exchange rates was to maintain a strong currency. With an iron fist. Curiously coinciding with austerity everywhere. But especially in the EU we see this playing out. Germany is adamant not to pay for Greece and equally adamant not to inflate the euro. So I’d like to request another answer: Is financial time accelerated (more like metastasized) because of floating exchange rates?

    2. Nathan Tankus Post author

      Every country “refinances” their debt in the sense of issuing more interest rate bearing government liabilities when they spend more than they receive in tax revenue and/or need to cover maturing bonds. The issue with the Eurozone countries is they have no control over their currency and worse their banks can be strangled to such an extent they can no longer provide local financing to the government ( a common practice in convoluted systems like this for example antebellum banking in the united states). Without being able to refinance their debts using private creditors the only game in town is the Troika (barring alternative financing mechanisms like parallel currencies).

      There is an argument to be made that if they hadn’t been “bailed out” by the creditors they could have structured a major debt restructuring with much better terms than the Troika terms that could potentially have given them access to private markets again much sooner. but that’s relatively speculative.

      1. dw

        and not just countries do this. just about every business does. seems like about the only real people are the only ones who pay back their debt

      2. ahimsa

        In the sense that all post-event analysis of possible alternative paths which could have been taken are ‘relatively speculative’ – sure. But seriously, Nathan, how could they have ended up with worse terms than the Troika have now imposed or have been locked out of private markets any longer?

        Back then Greece certainly could have forced haircuts on their creditors but, just as was the case in Ireland and elsewhere, there was pressure from the EU(and Geithner’s US Treasury) to avoid sovereign and/or bank defaults within Europe. Ok, fine, there was uncertainty about the potential contagion and fear of a Lehman repeat, and so we ended up with extend and pretend ‘bailouts’.

        The unforgivable is that there is still a point-blank refusal within official EUdom to hold up their hands and own this decision. They do not accept this was foreseeably utterly unsustainable and will not clearly explain this to the public. They simply cannot admit they (Merkel & co.) chose to make Greek’s creditors whole with European taxpayers money knowing Greece would realistically never be able to pay it back.

        To my mind, Europe chose this path back then, not Greece. Logically, economically-speaking, Greece would of course have chosen to default. Europe insisted otherwise and are now punishing the Greek people rather than take collective responsibility.

    3. David

      The UK is paying back it’s debt. From the Guardian,

      A century on, the UK government will start paying back the nation’s first world war debt, which amounts to £2bn.

      Back then £2bn was an economy. Now, it’s a small bank.

  2. David

    Legarde’s term is up next year. Could this be an effort to make sure she doesn’t get another term?

    1. Nathan Tankus Post author

      Yves thinks it was very unlikely she would get another term (and probably doubtful she wants one). I tend to agree. This feels like genuine frustration on the part of staffers that has bubbled up to one person.

    2. Yves Smith

      The odds are very low irrespective of Greece that she would get another term. We’ve had two French heads of the IMF over the last two terms, DSK and now Lagarde. The developing economies that constitute half of IMF funding and half IMF board seats were outraged when Lagarde was voted in that the IMF head was not from an emerging economy. There would be an enormous ruckus for a new head even if Greece worked out swimmingly.

      Perversely, the disaster of Greece will be used among advanced economies to keep Lagarde in, or if she wants to go (who would want to have to arm wrestle Merkel and Schauble and Draghi all the time? That must be exhausting), another European, because only a European would be perceived to be “trustworthy” to the rest of the Eurozone and the EU (Europe has 1/3 of IMF board seats, double the US’s 1/6). But the Board might be get lucky if developing economies put up a candidate that is sufficiently neoliberal to be acceptable to Europeans (or one who spent enough time in Europe to be deemed to be sensitive enough to their issues).

  3. Gabriel

    The fact that this “senior IMF official” clearly has the bureaucratic cover to continue leaking embarrassing talking points for Lagarde to deal with publicly suggests Oliver Blanchard to me. Other candidates?

    1. grayslady

      Blanchard would be my pick, too:

      1. He’s resigning from the IMF in September, 2015.
      2. He’s the chief economist for the IMF; therefore, his views would be important to financial reporters.
      3. He has a distinguished career in academia, whose institutions would probably welcome him back with open arms even if he is exposed as the leaker.
      4. In 2013, he took the unusual step of co-authoring an IMF working paper, along with a relatively young IMF research analyst, Daniel Leigh, that quantitatively proved those countries relying on deficit reduction (fiscal consolidation, in economics speak) were further below their projected growth targets than countries that didn’t assume deficit reduction would necessarily lead to increased growth.

      1. Nathan Tankus Post author

        This is a reasonable supposition. I’m honestly not that concerned with who the leak is though. What’s more interesting is that it’s happening and whose ever commenting and leaking is repeating what he/she thinks is a common position among the staff.

        1. Gabriel

          grayslady–What you said, and excellent catch with (4). Had forgotten about that.
          I would add a ,
          (5) Looking at his bio, Blanchard seems primarily to be an academic, and therefore issues of long-term historical reputation have to matter to him in a way that don’t (or are less immediate) to more political people like Lagarde or Strauss-Khan.
          Bad enough certainly to risk going down as the academic handmaiden of the Andrew Mellon de nos jours, but note also that, in the neo-monetarism that captured so much of mainstream economics, there’s a special place in its demonology for the officials of the Fed during the Great Depression (Bernanke to Friedman, “you’re right, we did it”).

          Nathan–entirely agree. Just having a bit of fun with our generation’s variant of the “Who’s Deep-Throat” parlor game.

        2. grayslady

          Agree that the “why” is important, but perhaps the “why” is explained by the “who”. If Blanchard, as the head of the economic research department, is opposed to misguided austerity (and I have no idea if he is, although the co-authored article would lead one to believe he was trying to make a statement at a higher level than if the paper had simply been produced by a lower level analyst), it seems likely that those hired in his department might share those views. Therefore, it is possible that an internal departmental conflict has been simmering for some time. So maybe the real question is not “why”, but “why now”.

    2. Yves Smith


      There are tons of “senior officials” at the IMF. Picking the only one that is in the media as the candidate is simply trying to connect the only dots you know about.

      I’d deem Blanchard to be highly unlikely to be the source of any leaks. He’s been too high profile and having to square too many circles to want to opine privately. In general, the people who are in the media are unlikely also to be planting leaks themselves. Really senior ones might do it through allies. Blanchard, as the head of research (the poor stepchild in power at the IMF) would have reasons not to want to spend chips and put his operation at risk. Plus I am just about certain his team does not do sustainability analysis, but more academic research. The sustainability analysis comes from the program side. They are also the people dealing with Greece who want out. Blanchard is in an ivory tower publishing operation, by contrast.

  4. Lars Jorgensen

    Why could the leak not be a coordinated leak from one of the staff members (Blanchard) – to tricker a public conversation on the issue of debt reduction/a more viable deal for Greece – without IMF risking too much. And in this way having Lagarde going out public saying a bit of the same much more diplomatically?

    After all one of the biggest problem with the concept of debt relief to Greece now is with the public of Germany and other European nations. If Lagarde and IMF went directly out with a tough position on this, they would get a hard reaction in public. Why could this not be a strategic ‘soft way approach’ to move the discussion a bit further. We must also not forget, that US (Obama) certainly is interested in finding a longer term solution. This speaks for IMF pushing for a (far) better deal for Greece, than both the citizens and the European politicians are willing to offer at present.

    1. Nathan Tankus Post author

      but what does the soft approach do? All it seems to have done is generate confusion. Additionally, it seems very clear form the eurozone behavior that Lagarde didn’t tell anyone behind a closed door there would be no IMF involvement without more debt restructuring than the eurogroup is willing to do. At least, that’s seems doubtful. It seems like anything Lagarde could accomplish by leaking this to the media, she could have much more effectively accomplished by telling Eurogroup leaders all this behind closed doors. This feels like a power play from people without all that much power.

      1. Lars Jorgensen

        I think it actually is a power play with people with much power – but their powers neutralizes each other. We have three prime players, who are most important in this game (besides the rest of the eurozone’s leaders, the commision and ECB, namely the IMF/USA, Germany’s political leaders and the German voters. But they are keeping each other in a stalemate.

        The German voters are not prepared to pay more (the German media have a large responsibility for this), which blocks the German government. Not least for this reason is the German government not really prepared to consider a debt reduction. But IMF/USA think it is important to change this in regard to Greece for security reasons – but also because the tough austerity is bad for Europe anyway. Now none of these three players are able/prepared to change position. So in this respect I think you are right, that we are talking about a power play with people without much power.

        So which player can be moved? Not IMF/USA. And the German leaders can only be moved, if they can do it without losing all their legitimacy and political support. Therefore … one has to massage the German voters. How can one do that? Well I think IMF’s message that a debt reduction is necessary (which by the way was not even understood to be sent via an unofficial leak at first) is a very reasonably attempt in trying to do this.

        Finally I don’t think there is any doubt, that Lagarde would tell (probably have) the European leaders, that IMF (Washington) belives a far fairer deal for Greece is needed. And I think it probable that they share something like the analysis above.

        1. Gerldam

          It seems to me that this is a case where you have to choose between horror without end ( Europe putting money into Greece indefinitely because Greece’s competitivity is nowhere near that of Germany) or end of the horror (writing off the whole of Greece’s debt and adding the now close to €400 billion on Europe taxpayer’s back.
          Given the abysmally low level of Europe’s governance, no one wants to choose so they kick the can down the road once more.

    2. Yves Smith

      See my comment above. Blanchard is not on the program side, I am just about certain his operation does not do the sustainability analyses on specific countries. That comes out of the program side.

  5. IsabelPS

    I have read a couple of times that Thomsen can’t stand the Greeks no more (and vice-versa).

  6. Dan Allen

    It is very easy to do searches in newspaper quotes showing that LaGarde is actually lying here.

    At the first Eurogroup, far from a characterization of the Greek “reform” as outperforming, LaGarde blamed the Greeks (directly to Varoufakis) for not implementing enough reforms.

    She stated this openly to the press.

    At the time, Varoufakis had been in office for 4 days.

    1. Yves Smith

      By the IMF’s standards, they had indeed not made enough reforms. They had put off all the ones that were hard, like doing anything about tax collection, cracking down on oligarchs, reforming pensions, or reforming labor markets.

      You can correctly say the last two are dubious, but Lagarde was marking Greece against an IMF scorecard on reforms. The “outperfoming” was on growth, not reforms. Greece was tgetting back to”growth” despite not having done them all. But as Varoufakis pointed out, the “growth” was due to nominal GDP falling but inflation falling faster. That isn’t growth by any standards except that of the economic profession.

      So Lagarde is not lying in the normal sense. She’s an expert at very complex truthiness. That makes her more plausible, and hence dangerous. than liars.

  7. PeterD

    The IMF has a general disclaimer on its website concerning all its documents and research publications:

    Except where expressly stated, the findings, interpretations, and conclusions expressed in the Materials on IMF Sites represent the views of the authors thereof and are not necessarily those of the IMF or of its Management, Executive Board, or member countries…. Reliance upon any such Materials shall be at the User’s own risk.

    1. Gee

      This is very important. It’s an escape hatch, CYA for management.

      The IMF leaders just want to have it both ways – tow the EU/ECB line, play weak third leg of the troika stool, yet somehow manage to not have their imaged tarnished quite so badly. The reality is, they are just as cruel and evil, and their exploitative history is example enough. They break countries with their “help.” Why would Greece be any different?

  8. BondsOfSteel

    It’s clear that Lagarde is supporting the narrative that Syriza is solely responsible for Greece’s default. This is political theatre, and supports the demand of several northern European leaders for regime change.

    Of course, being an American, I kinda chuckled when I heard that term… “regime change”. It didn’t work out so well for us (trillions spent… > 1/2 million killed… and it’s still a black hole). I doubt it will work out so well for them. They’re going to have to loan a lot more money to themselves [in Greece’s name] so that when debt relief (or full default) comes, the numbers will be even larger and more politically toxic.

    They are literally throwing good money after bad…

  9. john

    This is a continuation of 2008.It should have been allowed to fall then. The system should have failed then. .A better system could have been created then, now with more bailouts it is more loss to the taxpayers.This is not a system that can be corrected . Debt on debt has taken place and it is unsustainable now.

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