Lagarde Says No To IMF Aid For Greece

Over the course of six painful months of negotitations between Athens and its creditors, one concern lurking in the background was whether the IMF would be on board with a third program for Greece. 

Questions over the IMF's role in the new €86 billion aid package came to a head this month when two consecutive "leaks" showed that according to an internal analysis of Greece's debt sustainability, the Fund would not be able to participate in the new bailout unless EU creditors were willing to write down their portion of Greece's debt. 

This touched off a politically charged and explosive debate which pitted the IMF (and, by implication, the US) against Brussels (and, by implication, Berlin) on how to go about providing debt relief for the Greeks - the IMF pushed for haircuts, while Brussels favored "re-profiling."

Now, we get the first sign that the IMF may be ready to officially pull out. Here's FT, with the breaking story:

The International Monetary Fund’s board has been told Athens’ high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the institution will join the EU’s latest financial rescue.


The determination, presented by IMF staff at a two-hour board meeting Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the Fund will not decide whether to agree a new programme for months – potentially into next year.


That delay could have significant repercussions – particularly n Germany, where officials have long said it would be impossible to win Bundestag approval for the new €86bn bailout without the IMF on board.


According to a four-page “strictly confidential” summary of Wednesday’s board meeting obtained by the Financial Times, IMF negotiators will “participate in policy discussions” to ensure the eurozone’s new bailout “is consistent with what the Fund has in mind”. 


But they “cannot reach staff level agreement at this stage.”

EURUSD is not reacting well...


FT goes on to note that "the IMF decided last week that its existing bailout programme ... needed to be scrapped because it could no longer achieve its stated goal of helping Greece recover to the point where it could return to private debt markets." That, in turn, "forced Athens to request a new IMF programme, which requires board approval, necessitating Wednesday’s meeting."

All of this comes at a decisively inopportune time. As discussed extensively earlier, PM Alexis Tsipras has now called for a Syriza referendum on the bailout, a move which marks the culmination of weeks worth of political infighting. The fractious relationship between the PM and Syriza hardliners might well unsettle creditors and the IMF's refusal to commit until the debt relief issue is solved only adds to the confusion. 

Back to FT:

According to the summary, IMF staff concluded Greece no longer clears two of the four requirements in the IMF’s "exceptional access criteria" – the Fund framework that allows it to grant bailouts of larger-than-normal size.


Under the criteria, a bailout recipient must be able to prove it has the “institutional and political capacity” to implement economic reforms, and that “there is a high probability that the member’s public debt is sustainable in the medium term”.

Between Syriza's internal problems and Europe's indecisive stance on debt relief, it's clear that neither of these conditions have been met, which throws the IMF's participation into question because after all - and here's the punchline - Lagarde has to "be mindful about the reputation of the Fund."