The unresolved conflicts of the “kick the can down the road yet again” interim deal for Greece of last summer are set to come to a head this July. The IMF insists on Greece geting serious debt relief as a condition of its continued participation. The Germans refuse to give debt haircuts yet seem confident they still get a deal done that includes the IMF. In the meantime, Greece is upset with the IMF even though the agency is pushing for less punitive austerity. But the Greeks are right to be outraged even if the Germans and the ECB are more deserving targets for their ire than the IMF. Greece is in no position to suffer more fiscal punishment. Greece mistakenly believes that the friendlier-seeming European Commission has a real say in the matter, and the European Commission is willing to fudge numbers. And the ECB lurks in the background as the real muscle if and when the application of force becomes necessary.
It’s essential when looking at what is going on in the Greece-creditor negotiations to identify the real power players and what their constraints and points of leverage are. Sadly, a lot of the US reporting has been imprecise to the point that it’s leading normally sound US commentators astray. For instance, Bill Black wrote a post on the Greek negotiations in which he relied on a Wall Street Journal report over the weekend. The Wall Street Journal has only intermittently broken stories on Greece, and the piece Black relied on placed undue emphasis on the IMF and missed how Germany, even more so than last year, is the real heavy (with the ECB also willing to do so but only when it has the cover of elected governments letting it off the leash). Even worse, unlike last year, when Merkel was able to act as a moderating influence on the so-called ayatollah of austerity, finance minister Wolfgang Schauble, this year she is badly weakened by her extremely unpopular stance on the refugee crisis. Schauble had already been able to check her to a degree, due to the Bundestag seeing Schauble as more credible on Greece than Merkel (this matters because in Germany, unlike most other national lenders to the rescue, parliamentary approval is required). Now Schauble is in a position to call the shots with Merkel unable to do much to rein him in.
In early April, INF staff, almost certainly orchestrated by the IMF program team, leaked the transcript of a phone call which showed that the international organization wants out of the unending Greek rescue business and is frustrated by Germany insisting on fiscal targets for Greece that even the austerian IMF sees as wildly unrealistic. The IMF insists that debt reduction is needed, not more extend and pretend. But Germany and other European national lenders find that unacceptable, since under budgetary rules, they’d need to recognize those losses now. And Germany does not want the IMF to exit the bailouts, since it relies on the IMF to act as supervisor. The Europeans lack the expertise and the manpower to play gaoler, plus having the IMF do their dirty work looks less unsavory.
Bizarrely, despite the IMF trying to get the Germans to relent, and increasing the pressure on them via the leak, the Greek government accused the IMF of trying to bankrupt Greece. Aside from the fact that Greece is already bankrupt, the transcript simply does not support that interpretation. But the Greek howling over the IMF meanines has also thrown some foreign commentators off the German scent.*
The IMF team was also fretting about schedule. The upcoming Brexit vote for June 23 means no Greece theatrics for at least the six weeks or so before the vote. And that vote is so close to the date of an ECB payment in July, which experts are pretty sure that Greece can’t make without a new deal, that the IMF was pressing for some sort of deal, or at least resolution of some of the major impasses, sooner. But if the major parties have no overlap in their bargaining positions, they aren’t going to relent until someone is forced to blink. And we saw from the fireworks of last summer that the party that could be forced to relent was Greece, by bringing its already weak economy to its knees through a two-week bank holiday.
The IMF regards the fiscal surplus target for Greece, to be sustained at 3.5% a year, a level Greece agreed to, as unattainable. It thinks Greece can achieve only 2.5% briefly, in 2017, and then could hit 1.5% a year after that. Mind you, these levels are still punitive but 3.5% is is sheer lunacy.
The Wall Street Journal story that Black flagged in his post does say the Germans are trying to cook up an interim deal that it wants the IMF to agree to, but there’s no indication that the IMF is on board:
Greece’s creditors are considering seeking extra austerity measures that would be triggered if Athens misses its fiscal targets, in a bid to bridge differences between Europe and the International Monetary Fund and break a deadlock threatening to unravel the Greek bailout.
Under the proposal, say officials involved in the discussions, Greece would have to sign up to so-called contingency measures of up to about €3 billion, on top of the package of about €5 billion in tax increases and spending cuts Greece and its lenders are already negotiating.
The country would only have to implement the extra measures if falls short of targeted budget surpluses for coming years that were set out in last year’s bailout agreement, the officials say.
The idea, which has support from the eurozone’s dominant power Germany, hasn’t yet been agreed upon, and officials on the creditors’ side say it would be politically hard for Greece’s embattled government to swallow.
This is a German fantasy. The Germans are trying to get to the IMF commit to funding with no haircuts. Lagarde is a skilled bureaucratic infighter and I can’t believe she’d agree to a process that has her giving her trump card of not participating away without getting a firm commitment to what she has insisted on, deep reductions. Sure, the Europeans can continue to do more incremental fundings, but the IMF set the precedent successfully last summer of sitting those out. From the Financial Times:
Although last year’s bailout deal was hailed as taking “Grexit” off the table, it only provided Athens with a quick injection of funds to pay its immediate bills — €13bn was lent to the government in August, followed by two smaller loans totalling €3bn — in exchange for immediate reforms of its pensions and value added tax systems.
Much of the heavy lifting was pushed off into the programme’s first quarterly review, including two major political decisions.
First, the IMF — which has been the eurozone’s partner in all Greek bailouts since they started in May 2010 — declined to participate in the July deal. It said it was unconvinced Mr Tsipras’ government, which had shortly before become the first developed country to default on an IMF payment, would follow through with its reform promises. The fund said it would delay a decision on whether to participate until the first review.
Second, agreement on how much debt relief would be granted to Athens was also deferred until the first review.
That review was scheduled for last October and is still hanging in abeyance due to continued wrangling.
What is also missing from this cheery German view is the fact that the IMF regards “targeted budget surpluses for coming years that were set out in last year’s bailout agreement” as a dead letter. Here were the surplus targets, per Reuters last August:
The targets, tweaked from an earlier baseline scenario, foresee a 0.25 percent of gross domestic product primary budget deficit in 2015, turning into a 0.5 percent surplus from 2016, 1.75 percent in 2017 and 3.5 percent surplus in 2018, the official said.
The IMF currently sees Greece instead showing a 1% fiscal deficit for 2018, while the European Commission projects a 0.5% surplus. The IMF also disagrees with the EC and the Greek government on the cuts and tax increases Greece has proposed. The Greek government and the EC content that those measures will produce the needed additional 3.0% in fiscal surplus. The IMF thinks the tax increases would hurt growth, and wants the government instead to find only 2.5% in additional fiscal measures, consisting of pension cuts and closing loopholes. That means the IMF wants Greece to achieve a 1.5% surplus for 2018, again consistent with its view that Greece cannot save its way to pay off the current debt loads and lenders like Germany must give debt haircuts (the lenders are close to the limits of what they can achieve with more maturity extensions and interest rate reductions). The gap between the EC and the IMF is so large that they presented their plans to the Greek government separately last week. And Lagarde underscored how serious the IMF was about its position in remarks before a meeting this weekend at IMF headquarters. From the Financial Times:
….Ms Lagarde is now confronting the possibility of pulling the IMF out of the Greek rescue after nearly six years during which the fund’s reputation has taken a battering….
“[The] 3.5 per cent [target] in the short term might be achievable by some heroic — and I really mean heroic — effort on the part of Greece and the Greek people. We are sceptical about it, but we are open to seeing what additional measures the authorities are proposing,” Ms Lagarde told reporters ahead of today’s start of the IMF spring meetings in Washington.
“What we find highly unrealistic on the other hand is this assumption that this primary surplus of 3.5 per cent can be maintained over decades,” Ms Lagarde added. “That just will not happen.”
It also looks as if the IMF hope to make progress before the probable Brexit negotiating holiday hasn’t worked out. Indeed, Wolfgang Schauble spoke to Frankfurter Allgemeine Zeitung, and even with the crude Google translation, it’s clear he is digging in in response to Lagarde’s remarks. From Google Translate (original here):
It is the common will of the donors institutions IMF , European Commission, European Central Bank (ECB) and the euro bailout fund ESM to negotiate with a common position with Greece. All had agreed to make every effort to move things forward as possible in the coming week.
Lordie. Schauble is telling the German public that the negotiators are on the same page when the EC and the IMF are further apart than ever, and that’s before you get to the IMF/German split. That means that Schauble’s fast track plan also verges on delusional:
The goal is actually to achieve until the meeting of the Euro and EU finance ministers next week in Amsterdam advances to then agree “relatively fast” in the next week or possibly for the following two weeks: “Whether that happens, I can not say, “Schaeuble said. It was the common will.
More accurately, it is delusional in light of the fact that Germany isn’t relenting on debt haircuts:
Schäuble insists that the IMF also contributed financially to the third bailout for Athens and not only with his expertise. This was required by the German Bundestag. “I can not help,” Schaeuble said. The legal situation be it. A haircut for Athens he refused again categorically.
He was convinced that following agreement between the donors with Athens an analysis of debt sustainability will arise no need for additional debt relief. Schaeuble referred to the already very long repayment terms and the interest exemptions for up to ten years.
The “third bailout” is the one to be finalized by July.
Schauble is bald-facedly misrepresenting the process and almost certain outcomes. The “debt sustainability analysis” is an IMF work product, and last year, IMF staff leaked a document showing that, in IMF speak, the numbers did not add up. With Greece’s condition even worse then than now, there is no basis for thinking that the IMF will budge on its bottom line, that big debt haircuts have to be part of the mix.
Moreover, the European program team has continued to leak shamelessly. Lagarde was rattled enough last year that it certainly looked like at least the leak of the debt sustainability analysis was not authorized by her. And IMF staff is close to universally opposed to continuing to be involved with Greece. She faces the not-trivial odds that the program team could go into open revolt along the lines of the Nixon Saturday Night Massacre, the event that moved public support of impeachment to a majority. Schauble appears to have discounted what might happen if, say, Europe and the US pressured Lagarde to knuckle under to Germany’s demands, but then Poul Thomsen, the highly regarded program chief for Europe, and Delia Velculescu, the head of the mission in Greece, both quit.
And Schabule’s acting as if the Bundestag’s views are arrived at independently is utterly disingenuous. He’s led them to where they are, sold them on the past bailouts, and is still the voice that carries far and away the most weight. If Schauble were to change his mind and do a full court press in the media and with individual legislators, he could get the Bundestag on board. But Schauble himself does not want to relent, so the odds of this happening are close to zero.
So brace yourself for another bout of Greek bailout fireworks. Sadly, no matter how events play out, the one certainty is the people of Greece will be the losers.
* It is remotely possible that the Greek government is actually being shrewd, since for them to look like they were cooperating even in part with the IMF against Germany might only stiffen German resolve. But the Greeks have so misread and misplayed European politics throughout these negotiations that I doubt it. Their actions have been driven by domestic political needs. The Greek government wants the IMF to exit, since the European Commission is eager to step in as supervisor and the Greek government is confident that they will be more lax. At present, the German government has no apparent fallback if the IMF does depart. But it’s hard to imagine the Germans would stand for the EC running the Greek program, given their obvious contempt for the EC in this area.