IMF and Eurocrats in Clinch

Wrangling Over Greece

by Pater Tenebrarum

Make no mistake, they are doing everything they can to keep Greece in the euro area. There have after all been many opportunities to just say 'game over' and they were never taken. We suspect there is a good reason for this: if Greece were to default and leave the euro zone, it would be proof that the euro is not 'irreversible'. It may well result in a chain reaction, with others leaving as well. So apparently the decision has been made to just keep bailing Greece out.

However, an unexpected delay has popped up. Greece still hasn't received its €31.5 billion aid tranche, in spite of fulfilling all the 'troika' demands – some of which almost caused the new coalition government to break apart.

The problem in a nutshell is this: everybody, including the IMF, knows that Greece cannot reach the long term debt targets that were set out in its bailout. It 'needs more time', but that means it also needs more money. Even if it gets both, it will under no circumstances be able to reach the debt/GDP ratio targets set out, even though the initial long term target is twice as high as the maximum level allowed according to the Maastricht treaty. In other words, not even that farcical target is anywhere near the realm of the possible.

That ultimately means that someone must take a loss. Private creditors have already suffered an effective 70% markdown on their Greek bond holdings, so the only creditors left to take a hit are the official ones. 

And this is where the problem is: there are elections in Germany next year. Imagine if Mrs. Merkel were to agree to a public sector 'haircut'. The opposition would rake her over the coals for 'breaking her promise that Germany wouldn't lose anything'. Naturally, had the opposition been in her shoes, they would now be facing exactly the same problem.

The IMF's leadership does not have to face elections. Given that the IMF does not solely represent European interests, it cannot keep making exceptions for Greece it would never have made elsewhere. And so the positions of the negotiators have produced a standoff.

Bloomberg reports:

“European finance ministers failed to agree on a debt-reduction package for Greece after battling with theInternational Monetary Fund over how to nurse the recession- wracked country back to fiscal health.

With creditors led by Germany refusing to put up fresh money or offer debt relief, the finance chiefs were unable to scrape together enough funds from other sources to help alleviate Greece’s debt burden, set to hit 190 percent of gross domestic product in 2014.

Greece’s fiscal woes have defied three years of rescue efforts, rekindling doubts about Europe’s crisis-containment strategy and maintaining a cloud over the euro, postwar Europe’s signature economic accomplishment. More than 11 hours of talks broke up early today in Brussels without an agreement. That leaves the next aid payment, which has been held up since June, frozen until at least another emergency ministers’ meeting on Nov. 26.

“We have a series of options on the table on how to close the financing gap,” German Finance Minister Wolfgang Schaeuble told reporters. “We discussed the issue very intensively, but since the questions are so complicated we didn’t come to a final agreement.”  (emphasis added)

In reality, it is not at all as complicated as Schäuble makes it out to be.

Fatal Signal
Not only is there an election looming, the Germans are also afraid that giving Greece a big break would entice other peripheral countries to demand the same or to begin wondering why they should bother with austerity measures. This assessment has a good chance of being correct.

Here is  'Der Spiegel's take on the situation:

What he [Schäuble, ed.] didn't say is that the core of the debate is quite simple — and highlights the serious, and potentially dangerous, divide which has opened up between the euro-zone member states and the International Monetary Fund. Both sides are eager to see Greece's overall debt load shrink to a level that Athens can shoulder on its own. But whereas the IMF believes that the only sure way to get there is by ushering in another partial Greek default, euro-zone leaders, Germany first among them, would like to avoid such a scenario at all costs.

With Greece having recently been granted two extra years to reach its budget deficit reduction targets, the debate is now focusing on overall debt reduction. The IMF insists that Athens reduce its debt load from a current level of around 170 percent of gross domestic product (GDP) to a ratio of 120 percent by 2020. Based on measures in place today and current growth forecasts for the Greek economy — combined with the two-year budget deficit delay — that target is likely unreachable. As such, the IMF is insisting that Germany and other creditors forgive a portion of Greece's debt.

Such a move, however, is anathema to Berlin. Indeed, Chancellor Angela Merkel's Christian Democratic Union (CDU) party on Wednesday once again emphasized its opposition to such a debt haircut. Norbert Barthle, a senior CDU parliamentarian and the party's budgetary spokesman in the Bundestag, told German radio that he "very much hopes" that Germany can ward off a debt haircut.A partial default, he said, "would be a fatal signal to Portugal, Ireland and perhaps even Spain." Such countries, he added, would immediately wonder why they should bother adopting difficult austerity and reform measures in the future.”  (emphasis added)

In the background there hovers however the fact that a haircut would mean that for the first time since the crisis began, the European bailout fund – and with it the countries financing it -  would lose money. As Der Spiegel puts it, in view of the upcoming election “the appetite for such a move in Berlin is extremely limited.”

How will that impasse be resolved? It is hard to say, but we cannot see the IMF relenting on its position. One way or another, Greece will default again – whether now or later.