While Germany and in particular Wolfgang Schauble scored a win in getting a deal cobbled together so that Greece will get more extend and pretend, um, bailout funds, as of July, it’s much less of a win that the high fives at the Eurogroup meeting on Tuesday would lead one to believe.
The IMF participating in the rescue was a condition for Germany providing more funding. The Bundestag has stipulated that earlier; proceeding in any other manner would require the government to go back to the Bundestag to get approval of a bailout without IMF involvement, which would be an extremely hard sell, particularly with a short lead time to work on public opinion as well as individual legislators. Six other Eurogroup members in theory require parliamentary approval for forking more dough over to Greece, but at past decision points, most of these governments, like Finland, have punted on having the supposedly required vote.
The latest maneuver looks like even more of a finesse that the usual European high optics to substance arrangement. The IMF merely signed the memorandum; the agency is not providing any new money. From the Wall Street Journal:
A senior International Monetary Fund official Wednesday said it can’t help Europe with fresh emergency financing for Greece because Athens’s creditors haven’t yet committed to detailed debt relief.
The comments show that the agreement touted by European finance ministers last night to release fresh bailout cash for Greece hasn’t nailed down the key elements the IMF says are critical to finally return the debt-laden country to health. Rather, the IMF’s reserved support for the deal has paved the way for Germany to approve new funds and sets the stage for more tough negotiations later this year….
Eurozone finance ministers and the International Monetary Fund patched together a deal in the early hours of Wednesday that clears the way for fresh loans for Greece and sets out how the country could get debt relief in the future. Photo: Getty Images
But the official said Europe’s acknowledgment that debt relief is needed and would be detailed later this year was enough to win the fund’s conditional backing….
“It chose to capitulate now and fight later,” Mr. [Marc] Chandler said. “Its capitulation was to sign off on the agreement even though the debt relief that it had insisted on as a precondition is a little more than vague suggestions until the end of the current program.”
The IMF had recognized back in April that it and the Germans (and the European Commission, which also endorsed the fantastical idea that Greece could achieve a primary surplus of 3.5% by 2018); that’s why it leaked the notes of the conference call between the European program chief Poul Thomsen and the head of the Greek negotiating team. That kicked up a wee media storm but failed to accelerate the talks. The call participants discussed exactly what happened: a deal of some sort would need to be patched up in the May Europgroup meeting just past, or else be cobbled together in early July, after the Brexit vote, since no Eurocrat wanted a tough negotiation over Greece to give the Leave campaign talking points. And if Leave won, there would be so much official fire-fighting that it would be hard to devote the needed attention to Greece. Hence the incentives favored yet another kick-the-can deal.
But this kick is not moving the can very far. Initial messaging indicated that things were settled until 2018. But a careful reading gives a different picture.
A story at the Financial Times, giving a German-inside-baseball view of things, contends that German Finance minister Wolfgang Schauble has convinced key parliamentarians that he has things stitched up till 2018…but look at the very first paragraph to see what is really going on:
Wolfgang Schäuble, Germany’s finance minister, came out of the tortuous Greece rescue negotiations with enough ammunition to see off his domestic critics, notably the sceptics in his own parliamentary ranks — at least for the next few months.
With the compromise deal struck in Brussels early on Wednesday he achieved his two most important aims — keeping the International Monetary Fund on board and putting off any decision on substantial debt relief until 2018. For his conservative CDU/CSU bloc, these are the issues of most significance….
The financial hardman of chancellor Angela Merkel’s government has also given considerable ground. Debt relief is very much on the agenda and there is now a possibility, albeit tentative, of one day relaxing the fiscal straitjacket imposed on Athens at Berlin’s insistence — the ultra-tough 3.5 per cent fiscal surplus target.
But changes to last year’s €86bn rescue agreement are modest enough to allow Mr Schäuble to sidestep any immediate need to return to the German parliament for approval, and so avoid the risk of a new rebellion by sceptics opposed to bailing out Greece….
But things could get a lot trickier in the autumn, when the IMF is due to decide whether to participate in Greece’s latest rescue. Mr Schäuble has always insisted the IMF take part, but the fund is insisting that first the eurozone must commit to making Greece’s debt sustainable, which could mean agreeing the outlines of a debt-relief package.
Still, German officials feel the can has been kicked far enough down the road to avoid upsetting the 2017 Bundestag election.
If you skimmed the article, it gives prominence of play to Schauble’s skill in achieving a compromise, and it’s easy to miss how short the runway really is. And in a few months, particularly with a rash of strikes protesting the latest set of bills passed in Greece imposing yet more austerity, the IMF is sure to have an even stronger case that Greece cannot possibly get to a 3.5% primary surplus by 2018 and the forecasts, and hence the repayment schedule, need to be reworked in a big way.
Now there may be yet another Big Excuse to browbeat the Fund into line. But the IMF’s incentives are not to be in a deal if it risks another default (or arrearage, in IMF speak). And with the Obama Administration in serious lame duck territory as of the fall, it is also not clear how much it will want to muscle the IMF. Of course, the offset is that if there is market turmoil (Brexit, China, and a January 2016 or worse style upheaval as a result of a Fed rate rise are all possible triggers), the Fund will again be pressed to stand down.
In other words, the odds favor the IMF being muscled into line. But Lagarde is also a master bureaucratic infighter; she would not be where she is otherwise. So if events break at all in the Fund’s favor, expect them to be used as fully as possible.