IMF Not Funding July Greece Deal, Still Wants Serious Debt Relief Before Committing New Dough

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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.

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  1. hemeantwell

    Yves, thanks for your ongoing effort to keep us aware of Greece’s plight. The desperate concessions made by Tsipras, unavoidable or not, have been part of a breakdown of what last year looked like an emerging solidarity between the peripheral countries in the EU and sections of the left in the core countries. For now the situation is terribly disheartening, but your work at least keeps it in view.

  2. RabidGandhi

    Might this also be a sign of ambivalence within the IMF? Yes, there is the crew from the conference call who are in a more reality-based world that sees that Greece will never pay back its full debt. But the IMF has other concerns on the horizon: in addition to possible Brexit there is also, inter alias, the timebomb of Ukraine which I understand will soon be at the IMF’s doorstep with cap in hand. This is the Ukraine that already has two strikes against it: an even more anemic repayment outlook, and IMF rules barring lending to countries at war. The problem then would be US pressure to give Ukraine a NINJA loan anyway. The hawkish Obama regime did this already, and the pressure might be even worse under a neo-con HRC regime or similar (with Sec’y of State Nuland?).

    I would assume Lagarde is more cognizant of pressure from Washington than are her policy wonks like Poul Thomsen. We saw before how significant voices within the IMF can reject austerity while the fund’s actions go in the opposite direction. Could yesterday’s decision to “extend and pretend on the decision to extend and pretend” be above all a sign of the same internal disunity between Lagarde and her staff?

  3. Jim Haygood

    Up-to-date numbers are surprisingly hard to come by. But if the new deal adds €10 billion to Greece’s €323 billion gov’t debt as of last summer, then the new debt total is about €333 billion.

    Divide that total by Greek GDP of €176 billion, et voila … debt-to-GDP of 190 percent.

    It’s simply fatuous for Dieselboom & Co. to believe that Greece is going to dig its way out of this hole.

    Stats on net migration from Greece are nonexistent, too. But given that EU-citizen Greeks can migrate within the EU, one would expect that those who can are bailing out of Greece’s hopeless plight by leaving, just as Puerto Ricans who can are fleeing to the U.S. mainland.

    How are they gonna collect tribute from a country whose workers have fled, leaving children and old folks?

    Paris to Spain, countries in pain
    Caught up in flight, feeling the sight
    Europe dying

    — Steve Winwood, Night Train (1980)

    1. Emma

      It’s not about digging a way out their hole, it’s about making it deeper. International financiers will simply swoop down, snatch up national assets (utilities, infrastructure etc.), raise the prices, and then extract any remaining ‘oil’ from the few ‘olives’ left.

  4. JustAnObserver

    Each time the can gets kicked it goes only X% of the previous distance, with X less than 100. So, in the limit, the max distance to irreducible crisis (Grexit or debt reduction) from the beginning of the Eurozone crisis in 2010 is

    Crisis @ FirstKick * (1/(1 – X/100))

    If we assume FirstKick = 1 year and (very optimistically) X = 90% then we have Grexit or something else in about 2020. A small reduction to 85% gives an unfudgable crisis in the 2nd half of next year.

    Other readers are invited to give their estimates of FirstKick and X.


  5. No one in particular

    Thank you, Yves. You are very alone in trying to get the facts into the open…

    The German Press reporting was a shame, as in “Schaeuble won”… however…. piecing bits and scraps together – and applying more than a pinch of salt…

    Firstly, there is immediate debt relief, at least in cash-flow terms, i.e. reduction in interest rates – who will pick up that bill – to be guessed – no information.

    Secondly, the “rescheduling” will transfer some of the IMF monies to the ESM or other EU institutions, i.e. the EU taxpayer is bailing out the IMF – immediately. Which will soothe the issues with the “advisory” role the IMF might take in the future – and might allow them to fudge the “debt sustainability analysis” if their are no IMF funds at stake.

    And the IMF will not provide funds going forward – which is at least at odds with the spirit of the agreement Schaeuble with his MP’s, because the IMF will not need to be as demanding, given the more comfortable risk position.

    And in autumn, the fight for the German election in 2017 (autumn) will have started in earnest, and the rebels will be kept in (Merkel) line by the threat of not getting a safe place for reelection……..

  6. John

    If Greece achieves a current account surplus, couldn’t it just default on all its debt? As long as more money is coming into the country than flowing out, default wouldn’t mean they’d have to get off the euro, right? And with full relief on the debt burden, the economy would have a lot more room to grow. I don’t understand why this isn’t their strategy.

    1. Yves Smith Post author

      Won’t happen because they won’t have a functioning payments system if they go to the drachma. It took eight years of planning and three years of execution for the introduction of the euro to go smoothly. Greece is stuck in a roach motel by virtue of the enormous IT issues, and hardly any of the relevant systems are in Greek hands.

      No payments system means Greece can’t get paid. Hence no trade surplus.

      See here for details:

      1. TheCatSaid

        Didn’t John say he thought Greece could default without leaving the euro? Is he right? Does anyone know what would happen if Greece just stops making debt payments, but retained the euro? Would the EU bureaucrats dare to kick Greece out of the eurozone, or would that be too much risk for them to take?

        1. Yves Smith Post author

          Fair point, but if they default, the ECB will shut down the banking system as they did last July. They are arguably even required to; they can’t provide ongoing support under various “emergency” programs that have been stretched to the max to support Greece (mind you, this is reflection of the lousy design of the eurozone and not munificence on the ECB’s part).

          The economy went from bad to asphyxiating within weeks. Food shortages were starting and drug shortages (inadequate supplies of insulin!) were already underway.

          The position the armchair generals take is to default and exit the eurozone so as to cheapen the currency.

  7. TheCatSaid

    I read that WSJ quote as mentioning “European finance monsters”.
    It’s probably more accurate.

  8. Emma

    It is tempting to say that things would actually improve for several countries, if in unison, they threatened to, or indeed simply went ahead and pulled out of the EMU. They’d undoubtedly be severely punished and the short run would be painful – but it already is quite painful anyway. Valuable assets could be retained at a national level… opposed to being privatized by international vultures “pennies on the dollar” at a neoliberal level.

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