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Friday, August 02, 2013

IMF takes a more critical line on Greece

The IMF  released its latest review of the Greek bailout on Wednesday. As might be expected it was a bit more critical than the version released by the European Commission and ECB a couple of days ago.

As also might be expected the press has focused on the fact that the report reveals an €11bn funding gap for Greece between 2014 and 2016 (higher than that suggested by the eurozone). The report also calls for the eurozone to consider further debt relief for Greece. Neither of these revelations is brand new, with both having been included in the leaked version of the Troika report a few weeks ago.

There are a couple of other interesting points in the 207 page report, including some concrete forecasts on the shares of Greek debt.

These amounts are pretty much as we predicted back in March 2012, where we forecast that by 2015 around 76% of Greek debt could be held by the IMF and eurozone (NB – it’s not clear how the ECB and national central banks holdings of debt [circa €40bn] are classified in the IMF figures. If they fall under private sector here, then the holdings by official creditors may well be higher in reality).

In any case, these amounts drive home that the real question facing Greece and the eurozone (after the German elections) is whether to write down these ‘official creditors’ or not – known as ‘official sector involvement’ (OSI). There will likely be a push to extend the loans further and cut their interest rates but, as the funding gap highlights, there are immediate liquidity and solvency questions facing Greece.

Other interesting points in the report include:
  • The IMF warning of further social unrest: “The risk of political instability remains acute, especially in light of high unemployment and on-going social hardship. Further ambitious fiscal adjustment is needed for public sector debt to decline steadily, which exacerbates the possibility of social stress and political resistance.”
  • Arrears clearance seems to be behind schedule with only €1.4bn of the targeted €4.5bn being paid off. However, Kathimerini reports that this has now been increased to €4bn according to Greek government data.
  • Greece only just manages to quality for IMF assistance, with the IMF saying, “The program continues to satisfy the substantive criteria for exceptional access but with little to no margin.” The explanation involves a few stretches on the debt sustainability front, with the fund arguing, “The risk of international systemic spill overs in case of a permanent interruption of the program remains high and justifies exceptional access.” This raises an interesting question of whether, with the OMT and talk of a eurozone turnaround, the spill over effects are still significant enough to justify such IMF action?
  • The comments by Paulo Nogueira Batista, the Latin American representative on the IMF board, who slammed the overly optimistic assumptions in the debt sustainability analysis and suggested the programme was flawed. He has since backtracked from his comments, while the Brazilian government has issued its support for the bailout programme. Nevertheless, the outburst is a timely reminder of the on-going disputes behind the scenes in the IMF, between the US/Europe and the emerging market countries.


Rollo said...

In the past the IMF has always recovered loan money. But now they are compromised. Lagarde has the split loyalties of trying to save the French banks, the French economy and the Euro; this is in direct conflict with the need to get a realistic outcome for the bankrupt countries in Southern Europe. Without doubt, the IMF will take a hit as will the ECB and the European tax payer.

Rik said...

The EZ recognises that the IMF is senior. So unless they get back on that the IMF is still likely to get its money back. Especially as some other 'accounts' with IMF involvement will keep playing as well.

Anyway the one that is by far most likely to pull the plug is the IMF.
Hard to keep selling this joke with every few months a new edition.

Which would leave the EZ with little options open.

Re State: Likely the main problem as things will run over the budget of the rescue brigade with all consequences. Support will drop in a lot of parliaments. It would anyway going for rescuepackage 4.0. It simply looks ridiculous and totally unrealistic.
Considerable chance of a bankruptcy in other words. And subsequently EZ and likely EU exit (hard to see with Hollande playing hardball, Cameron will not counter on this (he probably has little choice anyway)).
Re Banks: Basically they would all go bust with the country even for collateral reasons only. Could be solved by a guarantee (like before) as that is Off BS and doesnot run over budgets. However with an exit such guarantee would be a very high risk move as BSs of all banks would be ruined by a country default combined with a devaluation (new currency). Only a country default is already very risky. And short term risky not kicking the can risky. Will start to play within months max.
High probability if there is an exit that this will be the party killer.

Not bad at all for the UK. They look to be running straight into a complete mess only mitigation possible via a treaty change.

Rik said...

Btw Lagarde is not the main decisionmaker in these.
It is the US. If the US changes position Greece is a goner.
A president only has a lot of power in daily not frontpage stuff.
And this is frontpage stuff.

Also when the president is technically capable (which say Draghi and Bernanke are, but Lagarde clearly is not. There are 10s of people walking around in the IMF who are much more technically capable than Fifi and so are there in several important countries.

Anyway will mainly start to play when the US gets internal political pressure on this ('The Kenian' looks pretty weak at the moment, so not much help from that side is to be expected. But could start to play around the Detroit bust.
Hard to see eg Detroit not being bailed out (which is not possible financially there are too many in the pipeline to make that even remotely affordable) and dysfunctional Greece getting a 4.0)). Or the US having to give in to pressure from EMs and Co.
Looks not to be playing at the moment.

Denis Cooper said...

So the bad news is that more than three years after the first illegal "bailout" Greece is in a deeper hole than before, and a hole that is still deepening.

But the good news is that her loving eurozone partners could now accomplish her rescue at a stroke, simply by agreeing to forgive her debts to them.

And of course they are all loving, so much so that they are all desperate for a polygamous marriage of their countries into a United States of Eurozone, later to become a United States of Europe, and they are only being held back by the need to settle some tiresome details of the pre-nuptial agreement.

Of course it would not be appropriate for those outside that proposed marriage to speculate about who would be screwing whom, let alone suggest that one vulnerable and abused partner should be helped to escape that destructive relationship; indeed our own Right Honourable Foreign Secretary is also very keen to see it formalised as soon as possible, with or without shotguns at the ceremony.

Denis Cooper said...

Rik -

Messages received but garbled and undecipherable.

Repeat messages with competent cypher operator.

Do not - repeat, do not - send any messages en clair.