IMF May Walk Away From Greek Bailout

Earlier today, a "secret" IMF paper surfaced in which the Fund reiterates the need for EU creditors to writedown their holdings of Greek debt.

According to Reuters, who broke the story after reviewing the document, "the updated debt sustainability analysis was sent to euro zone governments late on Monday, and argues that 'the dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date - and what has been proposed by the ESM.'" The IMF goes on to say that Greece’s debt will likely hit 200% of GDP over the next two years and will sit at a still-elevated 170% of output in 2022.

As a refresher, here's a (very) brief recap of the IMFs position on haircuts for Greece: 

A divide between the IMF and Europe (read: Germany), regarding writedowns on Greece’s debt to the EU has been brewing for quite some time and recently returned to the international spotlight when, a few months back, the Fund indicated debt relief was a precondition for its participation in any further aid for Athens. More recently, the IMF released a report on Greece’s debt sustainability just prior to the referendum. The timing appeared to be strategic and may have helped secure the "no" vote for Tsipras. Today, another "secret" IMF document on the sustainability of Greece’s debt burden has surfaced and not surprisingly, the Fund is once again pounding the table on a haircut.

Although Tsipras had resisted IMF involvement in the country's third program, Germany made it clear that the Fund's participation was mandatory. Now, FT says Chrsitine Lagarge may consider pulling out of the deal in light of the fact that Athens' debt is not seen as sustainable. Here's more: 

The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.

 

"Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far," the memo reads. Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.

 

IMF involvement in Greece’s rescue has been critical to a German-led group of eurozone hardliners who believe the European Commission, one of the other Greek bailout monitors, is not sufficiently rigorous in its evaluations.

 

The issue became one of the major sticking points during all-night negotiations between Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, at the weekend, with Mr Tsipras repeatedly refusing to accept IMF participation in a new bailout.

 

According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore "Grexit" from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that "Greece will request continued IMF support" once its current IMF programme expires.

What happens if the IMF walks away you ask? Well, the entire "deal" could fall apart, as the Fund is expected to put up a not insignificant portion of the bailout money, and in the absence of that funding, the gap would have to be filled with "privitization proceeds" which the IMF itself has projected will come to just €2 billion over the next three years. Furthermore, German lawmakers, already exasperated with the protracted negotiations, would likely pull their support altogether. Here's FT again:

If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.

 

In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500bn bailout fund — was expected to put up only €40bn-€50bn.

 

The current IMF programme, which still has €16.4bn in undisbursed funds and runs through March 2016, is expected to make up some of the difference, and eurozone officials had been assuming a follow-on IMF programme would contribute as well.

 

Any shortfall would have to be made up through Greek privatisation proceeds, which have repeatedly fallen short of expectations, or through Greek borrowing on the bond market, which has dried up since the Syriza-led government took power in Athens in January — and which the IMF memo said was highly unlikely to materialise.

 

“Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective,” the IMF wrote.

So in addition to a parliamentary revolt and uncertainty surround urgently needed bridge financing, Greece also faces the possibility that the IMF may walk away, throwing the entire "deal" into question. Here's The Telegraph's Ambrose Evans-Pritchard summing up the ramifications of the IMF's analysis and reinforcing our contention that the US (and its IMF veto power) are pulling the strings behind the scenes and orchestrating "leaks" at opportune times.

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. 

 

It claimed that capital controls and the shutdown of the Greek banking system had entirely changed the picture for debt dynamics, an implicit criticism of both the Greek government and the eurozone authorities for letting the political dispute get out of hand. 

 

 Debt forgiveness alone would not be enough. There would also have to be “new assistance”, and perhaps “explicit annual transfers to the Greek budget”.

 

This is the worst nightmare of the northern creditor states. The term "Transfer Union" has been dirty in the German political debate ever since the debt crisis erupted in 2010. 

 

The backdrop to this sudden shift in position is almost certainly political. It follows an intense push for debt relief over recent days by the US Treasury, the dominant voice on the IMF Board in Washington. 

Should the Fund threaten to pull its support, Germany would face a tough decision: remain belligerent in the face of pressure from IMF (and tacitly from the US), or concede to writedowns which could open the door for Italy, Spain, and Portugal to demand debt relief. 

Imf Greece Sustainability Analysis