Quick Update on Greece, Germany, and the IMF

We’d posted earlier this week that odds favored a Grexit. With the Greek bridge loan deal having passed the key hurdle of securing passage in the German Parliament, and Lagarde making it clear that the IMF will support an eventual bailout deal with “restructured” loans (ie, no haircuts), the odds have shifted. It is now more probable that this pillage-of-Greece program stays on track near term, meaning the so-called “third bailout” gets completed.

The events of this week should also serve as a reminder of the need to consume news reports with care, and we were initially thrown off by the leak of the IMF sustainabilty report. It said as clearly as you can in IMF-speak that its loans were not likely to be money good even in the event of very aggressive maturity extensions and interest rate reductions. Translation: if you don’t make haircuts, you’ll get a default down the road. The lenders are hitting the end of the line as far as achieving reduction in the economic value of the debt providing enough relief is concerned. And IMF rules require that its loans need to be “sustainable”. The only reason that the clearly unworkable previous IMF loans to Greece were approved were due to the board issuing a systemic risk exception. There’s no systemic risk to a Greek default now, so it’s much harder for the board to engage in porcine maquillage this time.

Remember that Germany has ruled out haircuts but also regards IMF participation as essential, not just as a money source but even more important as a monitor and enforcer. Thus the IMF looked like a potentially fatal impasse, particularly since the powerfully placed German finance minister Wolfgang Schauble was already pumping for a Grexit, and all but three of the other Eurozone members ex Greece and Germany were opposed to yet another rescue.

But the press was ahead of itself in saying that this represented the IMF wanting out of the deal. We could see why that was plausible, since the IMF staff has been up in arms about lending to Greece and is even more upset and demoralized over the pillorying the organization is taking over its role in the past Greek bailouts and current negotiations. Moreover, continued lending to Greece is certain to hurt the IMF long term. It won’t simply get bad news clips. When it finally takes losses (and this is baked in, even the IMF forecasts in the leaked report seemed unduly cheery), the member nations who will have to eat their share of them will almost certainly demand their pound of flesh, which might mean governance changes or other restrictions.

But contrary to initial press tacit assumptions, this leak does not appear to have been officially authorized, for reasons Nathan Tankus discussed earlier this week at some length. Despite continued misleading headlines, Lagarde has made it clear the IMF will lend if it gets enough in the way of debt restructuring ex haircuts. What do the European national lenders really care if maturities are extended another 30 years versus 40 or 50 if 40 or 50 is the price of getting the IMF in? And if people closer to the negotiations believed that the IMF was in revolt, one would have expected Schauble to start undermining the bridge loan legislation and Merkel to stand aside as he did it, since Germany regards IMF participation as a must-have. Thus the passage of the bridge financing authorization by the Bundestag is indirect proof that the IMF is expected to stay in. So the media was way ahead of itself in declaring that this signaled some sort of rupture.

One of the things we managed to forget was that the initial leak that the IMF was pushing hard for debt relief came well after the event (the Riga Eurogroup meeting in April) where they first made the case. That long a delay is extremely rare in the media game. And it was Poul Thomsen, the powerful head of the European IMF program team and thus leader of the negotiations with Greece, who was reported to have made the case at Riga for debt reductions. Thus the best guess is that it was someone from Thomsen’s team, or perhaps even Thomsen himself, who was behind that leak and potentially the explosive one of last weekend. And given Lagarde’s too obvious difficulties in fielding questions about the leak don’t jibe with the notion that it was authorized at her level.

Yet curiously, or perhaps deciding it might be wiser not to put the intensity of staff revolt in the spotlight,*, Lagarde is now acting rather late in the game as if she knew about it in advance. From the Financial Times:

In an interview broadcast on US television on Thursday night she also defended the decision for the IMF to go public with two separate, provocatively timed debt analyses in recent weeks. The fund, she said, had been making the case for debt relief in private for months but had decided to release its analyses because “it’s just best to have it all out”.

I’ll ask Nathan Tankus to track down the actual interview, but there is an interesting lack of agency, at least in the Financial Times account. It makes it sound as if “the Fund had decided” as in the leak was a deliberate policy decision at a time it could derail the deal getting done. So is the normally sure-footed Lagarde losing her touch, and she failed to appreciate that the leak would be interpreted as the IMF saying it wanted out, which is something she’s had to take great pains to stress is not about to happen? Or is, as they say in Venezuela, she is getting in front of a mob and calling it a parade? She is clearly trying to tamp this little firestorm down, but the row over the debt restructuring is not to be settled for months. We’ll be doing some more parsing of actual interviews to see if we can glean more from reviewing Lagarde’s remarks in context.

* Senior IMF officials openly acknowledge how deeply upset IMF staff is over Greece, suggesting that it is such an open secret that they can’t deny it.


Update 12:00 PM Sunday : Nathan Here. The quote is extracted from this PBS interview:

CHRISTINE LAGARDE: Oh, it’s been on the table of negotiations all along.

And the IMF has been very clear all along that the debt issue was to be addressed and was critical. That’s not a — it’s not a new development. It’s been probably more public on the basis of transparency, because I think it’s just best to have it all out. But it’s been very clear to all the euro area finance ministers, to the euro area partners, to everybody.

In context her statement appears much less passive. It also doesn’t seem likely that she would choose this moment to have “transparency”. In line with  Yves analysis above I would rule that “she is getting in front of a mob and calling it a parade”.

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