Leaked Memo Reveals IMF (Still) Wants Out of Greece Bailout and Plots to Pressure Germany to Act

While a leaked IMF memo does not represent a crisis, it’s awfully reminiscent of the bad old days of 2007 and 2008, where the really important stuff happened on weekends.

Wikileaks obtained and published an official transcript of a conference call among Poul Thomsen, the program chief for Europe, Delia Velculescu, the head of the mission in Greece, and another official, Iva Petrova, that took place a mere two weeks ago. The conversation makes clear that the IMF team is frustrated by the fact that Brussels, meaning the European Commission, is sticking to fiscal surplus targets for Greece that the IMF regards as unrealistic, meaning there is no way Greece can achieve those goals. They discuss how the EC will instead want them to push Greece to make even deeper spending cuts, when Greece and the Trokia are still at loggerheads over issues like cutting Greek pensions (a third rail issue in Greece since the pension programs serve as a catchall social safety net).

Recall that the IMF had what appears to have been a staff revolt last year, via a leak of a debt sustainability memo for the upcoming, so called “third bailout” of Greece that made it crystal clear that Greece’s debt was not sustainable. “Sustainability” is supposed to be a bedrock requirement for IMF participation. Lagarde managed to tamp down the consternation over the leak and kept the IMF in the negotiations, while also insisting that Greece needs significant debt relief.

Yet here it is, nearly nine months later, and none of the fundamental elements of the impasse of last summer have changed. Greece is not willing to gut pensions and make other “structural” adjustments anywhere near as aggressive as the Troika wants, even the less unrealistic IMF. The IMF wants the other members of the Trokia to cut Greece’s debt levels. But Germany’s position is that debt cuts are off the table, since Greece has gotten enough debt relief for it to get by for a few years.

The governments of the Eurozone, contrary to the IMF, fantasize that they can make the numbers work by wringing even deeper spending reductions from Greece, even though Greece is proof that lowering fiscal spending, particularly in a weak economy, results in GDP falling so far that the debt to GDP ratios get worse, not better. And that’s before you get to the fact that reducing government services below a certain level results in failed states. Readers speculate that the reason that hasn’t already happened in Greece is the strength of family-based support systems.

The final boundary condition to bear in mind is that Germany, not just the German government but also the Bundestag, which has to approve any deal, regards IMF participation as essential. The Bundestag regards the IMF seal of approval, that the deal passes their debt sustainability analysis, as a precondition for approval. The administration (and the rest of the Troika) wants the IMF in because only it has the manpower and expertise to supervise the compliance of a stage with a “program,” meaning the austerian “reforms” that are a condition of receiving bailout funds.

The part of the leaked memo that triggered official consternation was that the IMF is fed up both with what they deem as a lack of reality regarding the debt targets and the propensity of other members of the Troika to drive decisions to the wire:

THOMSEN: Yeah, but you know, that discussion of the measures and the discussion of the debt can go on forever, until some high up.. until they hit the July payment or until the leaders decide that we need to come to an agreement. But there is nothing in there that otherwise is going to force a compromise. Right? It is going to go on forever.

VELKOULESKOU: It will, yes, until July, if nothing happens beforehand. I agree.

They regard this brinksmanship as particularly dangerous in this case. The negotiations will come to a standstill in the month or so before the Brexit vote so as not to taint the outcome. The aftermath, if it is a no, will mean European leaders will not focus on Greece. Thomsen discussed that he was surprised that the refugee crisis had not brought the fact that the IMF was not on board to the forefront (ie, he appeared flummoxed that the refugee crisis was being treated in isolation).

It is almost certain that this leak was sanctions, with the intent of putting pressure on the principals, and was done via Wikileaks to create a fig leaf of plausible deniability. This isn’t the first time in the Greek negotiations that there has been a leak from the IMF that appeared almost certain to have been authorized by the senior levels of the European team (Poul Thomsen is seen not just as powerful in the IMF but indispensable; he’s their best kneecap breaker). The first about Thomsen telling the Eurogroup* in April 2015 that Greece needed debt relief. The leak took place an unheard-of two weeks after the event, strongly suggesting it came out of the IMF because it had become clear their message was ignored. The second was the one we mentioned earlier, the disclosure of a debt sustainability analysis (which has serious weight for the IMF procedurally) that showed that Greece needed debt reduction. The report 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. That looked to be a staff rebelllion (again, likely at the European team level, which by all accounts had had it in dealing with Greece, plus by the IMF breaking its “no more Argentinas” rule of making loans that could not be repaid). As we discussed long form last year, Lagarde tamped down the media firestorm and kept the IMF in the deal.

Thus given the history, this leak looks to be yet another effort to use the media to put a spotlight on the non-sustainabilty of Greece’s debt and force concessions from the Eurozone countries, particularly Germany. But there’s another complicating factor. Germany’s finance minister, Wolfgang Schauble, is seen as more credible by the Bundestag, which has to approve any rescue, than Merkel. Last year, Schauble played a cagey game of making clear his opposition to a bailout, which Merkel regarded as key to her legacy, without going into open opposition (Merkel does not want to preside over a Eurozone breakup). Schauble has made it clear that he thinks Greece should leave the Eurozone, to the point that Germany should subsidize an exit. Now that one of the big pluses of staying in the Eurozone, that of the free movement of people, is being rolled back due to the refugee crisis, that idea might seem less radical than it did a year ago. But we’ve pointed out that the banking IT issues or re-introducing a Greek currency are enormous, and because they involve an extremely large number of independent actors, the at-least-three-year timetable can’t be accelerated. In other words, the Eurozone is a roach motel.

Merkel is now seriously weakened domestically thanks to the refugee crisis, which would seem to be Schauble the opportunity to use the almost certain interruption in negotiations due to the Brexit vote and the resulting unresolved impasse to put his exit plan on the table. But countering that is the need to have Greece cooperate with the Rube Goldberg plans for Greece and Turkey to control the flow of refugees into Europe. Having the Greek government contend with an exit (or even another banking crisis, the vehicle used to bring Greece to heel last summer) would guarantee Greek non-complaince with any refugee plan. Greece could legitimately argue it was unable to muster the resources under the current circumstances.

The notion that the leak is a political ploy is consistent with the article by Peter Spiegel in the Financial Times. Spiegel is the most plugged-in reporter in Brussels. He goes to some length to make clear that what was leaked in fact was no news to the parties to the negotiations:

One official involved in the talks said the transcript accurately reflected Mr Thomsen’s private and publicly stated views, albeit in “more direct and colourful language”. Many of the points raised by Mr Thomsen in the call have been made publicly on his IMF blog.

Spiegel also reports that the Greek government charged the IMF with trying to put Greece into an early default:

Olga Gerovasili, a Greek government spokesman, said the statement showed Mr Thomsen was pushing for a Greek default before the British referendum in June.

“The Greek government asks the IMF for explanations whether pursuing the creation of bankruptcy conditions in Greece, just before the British referendum, is the Fund’s official position,” Ms Gerovasili said.

I don’t see anything in the transcript that supports this reading. And that’s before you get to the fact that Thomsen lacks the authority to take that action.

In fact, the IMF comes off as the least bad actor of the Troika, which given its record as a neoliberal fist in third world countries, speaks volumes about European politics. The IMF sees the cost of the Eurocrat “kick the can down the road” solution to every crisis, that noting gets solved and the underlying problem fester and become gangrenous. And the IMF started warning last year that the “extend and pretend” approach to Greece’s debt crisis had run out of runway. But the IMF seems to be cast as Cassandra, even though the warnings look blindingly obvious to anyone who is not part of the problem.

* The Eurogroup is a working group of all the finance ministers of the Eurozone member states. Although it has no formal status, in practice, the member states will not consider a Greek bailout until the Eurogroup has signed off.

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  1. Larry

    Yves closing paragraph is what still stands out as remarkable to me. If the IMF is calling out economic policies, imagine how bad those policies are in reality.

    I also think the IMF response shows a strong race and class bias. The IMF employees people from Europe and identifies countries like Greece as first world, so the usual economic fist policies cannot possibly be applied.

  2. No one in particular

    A slightly different reading: Greece is bankrupt, and a failed state into the bargain, has been for years. However, for geopolitical strategy, (nobody wants Putin to fiddle with access to the Bosporus, which would unhinge the uneasy balance in the region) – the corrupt structures are kept alive – and all concerned want to delay the obvious, inevitable insolvency of the Greek state – for as long as possible.

    All the bailout plans since 2010 have been based on “if only” numbers and kick the can strategies. The IMF is right to ask for the cancellation of most of the debt (which in real terms, will never be repaid) – in principal, if and only if – the current and future tax income of Greece would be sufficient to pay for the budget, it wasn’t and isn’t. So Greece will need, depending on estimates, between a 1-5bn a year, for the indefinite future, to pay it’s current expenses – a yearly gift to be ponied up by the EU mostly. Nobody is willing to admit it, and the yearly gift has been given without the paying taxpayers being aware. [the IMF asks others for debt forgiveness, whilst insisting on getting her own money back – thus basically asking the EU to repay the IMF on behalf of Greece].
    Another aspect – if the EU were to agree to nominal debt relief – two things would happen – the ESM would have to book “real” losses – and thus trigger the guarantees, i.e. “real money” would have to flow from e.g. Italian or French tax coffers to pay – [or Spain, which currently has no working government] – with two unfortunate effects for Angie and else;

    Firstly, the public would have to become aware of the “real” costs of the continuing euro rescue effort – and given the emergence of right populism all over Europe….. a very bad idea….

    Secondly, much worse – the contagion resulting from officially questioning the logic of the bailouts – would open the can of worms whether other states or banks (e.g think Italian non-performing loans, only for a second) are insolvent, too – and ESM ist too small to save e.g. Italy.

    The situation is between a rock and a hard place – dammed, if the do debt relief for Greece, dammed if they don’t. Pick your poison.

    1. Yves Smith Post author

      Thanks for this. Big lapse on my part in not mentioning that recognizing losses now would have budgetary impact (unless the powers that be can figure out yet more fancy financial footwork), while the debt from the member states payments starting so late (2020 on one set of loans, 2022 on another) that any loss recognition is perceived to be OK because it’s back ended and would hit budgets gradually, over a period of decades. And very helpful comments on how that would play into the current politics.

      1. No one in particular

        “Turkey runs the bosporus” – currently – too true. However, Putin would love to change it, if he could – as Russia wanted to control it for centuries….. control of the bosporus was one of the red line for the Brits to tailor their activities….before WW1..

        And for how long would Turkey’s control of the Bosporus go unchallenged – if Putin would get a foot into a rapidly disintegrating Greece?

  3. Keith

    What sort of track record does the German favourite, “the banker’s solution”, have?

    When South American and African nations were in trouble the World Bank stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

    It was a disaster.

    In the Asian Crisis in 1998 the IMF stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

    It was a disaster.

    When Greece got into trouble recently the IMF stepped in and offered loans as long as they reformed their economy with less public spending, austerity and privatising previously public companies.

    It was a disaster.

    Ever heard of Einstein’s definition of madness “Doing the same thing again and again and expecting to get a different result”?

    One nation refused to follow the “banker’s solution” that the IMF wanted them to follow, Malaysia, in the Asian crisis. It was the first to recover.

    The “banker’s solution” is all about looking after investors and creditors.

    Capital controls are only imposed after investors have got all their money out.
    Malaysia did this early on.

    Once the investors have been saved the nation can be asset stripped to pay off the debts.

    The people of the nation, who cares?

    1. Yves Smith Post author

      This is basically what has been done to Greece and to a lesser degree, to all the countries in Europe that underwent IMF “programs”.

      But you miss the point. The point is not to have the programs work. It is to punish “bad” borrowers, as opposed to the stupid or corrupt lenders who made the loans, which is how this traditionally worked. Lenders know, or ought to know, that borrowers are overly optimistic at best and crooks at worst. They are supposed to underwrite the loan (as in make a risk assessment) and price it accordingly (as in build in enough profit that they can afford to make some bad loans, since it’s impossible to avoid all losses).

      And the worst is the the overwhelming majority of European politicians and technocrats, particularly those in Germany, actually believe austerity works. They think the problem is that it hasn’t been implemented forcefully enough.

        1. fajensen

          The places of ill repute in Copenhagen does indeed charge quite a bit extra for “German”.

          The receptionists working at the better hotels all know that a lot of high-up people often request these services (and worse) while on business traveling, so, these decision-makers probably think that a bit of leather, bondage and aggressive language is good for all situations, ;-)

  4. Keith

    That was the idea once upon a time, when the interest rate reflected the risk involved in the loan and the cost of default was effectively priced into the loan.

    These days creditors seem to expect to operate in a risk free environment and never make a loss.

    Psychopaths never learn from mistakes because they never take responsibility for them.

    To learn from your mistakes, you first need to take responsibility and then work out what you did wrong.

    There are a lot of psychopaths around these days.

  5. JOhn

    I have been waiting for Greece or one of the PIIGS to default and exit for a long time but for whatever reason, despite all that has happened, people still want to stay on the euro. Perhaps more importantly, anyone with half a brain knows that under these circumstances, switching to a newly printed currency and avoiding a total economic collapse is impossible. No elected official will want to be the ones that do this. The kick-the-can game could go on for decades. At what point will it become possible to leave the eurozone without suffering economic devastation? The most likely scenario of a eurozone breakup would be one of the wealthiest countries, one strong enough to make the transition, reverting to its native currency. Germany wouldn’t for fear of losing exports, the Netherlands because of its financial sector, but France? And the National Front is looking pretty strong too.

    Anyway, why can’t Greece just get a current account surplus going again and then default on its debt but stay on the euro? Getting the debt burden off their back would help the economy grow. It seems to me that this would be their best course of action.

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