Greece and its European creditors might have an IMF problem.
Earlier on Tuesday, a report from Reuters said there existed a “secret” IMF report that said Greece’s debt was unsustainable.
This doesn’t seem like a terribly controversial statement on its own — lots of people think Greece has a debt load that is completely untenable — but the problem is that going forward, Greece and its European creditors were expecting some more help from the IMF.
Writing in The Telegraph on Tuesday, Ambrose Evans-Pritchard said the IMF’s memo, “set off a political earthquake in Europe.”
Right now, Greece has until Wednesday to get a package of reforms through its parliament in order to get started on negotiations for a new bailout worth around 86 billion euros. And this package, as Evans-Pritchard notes, almost certainly assumes IMF funds will ultimately be involved.
But as The Financial Times’ Peter Spiegel notes, the IMF is not allowed to participate in a bailout of a country it deems to be carrying an unsustainable debt burden.
And while Spiegel notes that the IMF has previously bent its rules to participate in Greek bailouts, this latest memo, reportedly presented to European leaders this weekend, could potentially be the organisation signalling that unless there is debt relief included in Greece’s latest package, it will not be participating.
Aside from the IMF’s potential legal prohibition from participating in a new Greek bailout package, the memo provides suggestions on how Greece’s debt burden could become more manageable, including a potential grace period that would see Greece pay no interest or principal on eurozone loans until 2053.
But the real problem this IMF document seems to be posing is a new political barrier into a process that is already extremely politically unstable.
The findings are explosive. The document amounts to a warning that the IMF will not take part in any EMU-led rescue package for Greece unless Germany and the EMU creditor powers finally agree to sweeping debt relief.
This vastly complicates the rescue deal agreed by eurozone leaders in marathon talks over the weekend since Germany insists that the bail-out cannot go ahead unless the IMF is involved.
And the only thing that seemed explicitly ruled out of Greece’s bailout agreement was any form of “debt restructuring” (i.e. a haircut on any outstanding Greek debt), which is basically what made former Greek finance minister Yanis Varoufakis’ tenure so volatile.
From day one, Varoufakis was told by the European powers-at-be that this would not be possible; Varoufakis believed this was the only solution.
And now, it isn’t a firebrand Greek politician calling for restructuring, but the IMF is saying a restructuring is basically inevitable.
As Evans-Pritchard notes, however, the IMF is basically the US government’s only way of making its voice heard in the Greek debt negotiations.
All along, the US has maintained a position that Greece needs to stay in the euro and will need debt restructuring. Which seems like a sort of standard-issue political statement when the possibility of a Greek exit seems remote: this is what the US wants, but Europe will ultimately decide Greece’s fate.
But as we’ve learned, Greece was very nearly on its way out of the euro on Monday morning. And with there appearing to be only a tentative deal in place, the US has only the IMF to make its voice actually heard.
In an interview on Tuesday evening in Athens, Greek prime minister Alexis Tsipras conceded that the deal he has agreed to was not a good one.
It was, however, what the situation required: it is best for Greece to stay in the euro, and if this deal is what it takes, then so be it.
The IMF, which on Monday didn’t get paid by Greece for the second time in 2 weeks, may have decided that Tsipras’ capitulation is not, in fact, what the situation calls for.
In the past few days, markets have reacted as if the Greek crisis is over.
But the reality, it seems, is that we’re not nearly as close to anything resembling a resolution as previously thought.
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