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Leaked Memo Reveals IMF (Still) Wants Out of Greece Bailout

Wednesday, April 06, 2016 By Yves Smith, Naked Capitalism | News Analysis
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While a leaked IMF memo does not represent a crisis, it's awfully reminiscent of the bad old days of 2007 and 2008, when 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.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.

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Leaked Memo Reveals IMF (Still) Wants Out of Greece Bailout

Wednesday, April 06, 2016 By Yves Smith, Naked Capitalism | News Analysis
  • font size decrease font size decrease font size increase font size increase font size
  • Print

While a leaked IMF memo does not represent a crisis, it's awfully reminiscent of the bad old days of 2007 and 2008, when 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.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Yves Smith

Yves Smith has been in and around finance for more than 30 years as an investment banker, management consultant to financial institutions across a large range of wholesale banking and trading markets businesses, and a corporate finance adviser. She has also written for The New York Times, Al Jazeera, the New Republic, Salon, the Conference Board Review, the Australian Financial Review and other financial publications. Her TV appearances include NBC News, CNBC, Fox Business, PBS, Bill Moyers, The Real News Network, Democracy Now!, Russia TV, ABC (Australia), Al Jazeera and BNN (Canada). Follow her on Twitter: @yvessmith.