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Analysis
Three times unlucky for hapless IMF

Three times unlucky for hapless IMF

Fissures undermine Greek debt deal

by David Marsh

Fri 31 Jul 2015

Something is going badly wrong in relations between Christine Lagarde, the International Monetary Fund’s managing director, and the staff of the institution. Three times this month, in politically fraught negotiations over a Greek debt package, the IMF staff has disavowed its management over providing more loans to Greece as part of the third bail-out deal of €82bn-€86bn that euro leaders stated they sealed on 13 July.

As Oscar Wilde might have said, to show one such contradiction might be a misfortune, two appears like carelessness, while three looks downright hapless.

The fissures, as well as reinforcing uncertainty over the Greek imbroglio, cast doubt on Lagarde’s utility in attending European debt meetings, where she appears to endorse decisions later rejected in Washington. The bizarre nature of IMF divisions may influence a top-level government decision about whether to renew Lagarde’s five-year term at the Fund that ends in July 2016. Although Lagarde has some support for her incumbency, she is coming under criticism from inside and outside the organisation for displaying style rather than substance.

The latest setback, revealed yesterday by Peter Spiegel of the Financial Times, is the most damaging. The IMF’s board was told on Wednesday that Greece’s unsustainably high debt and shortcomings in realising reforms preclude a third IMF bail-out. This could fatally unhinge the package, since German Chancellor Angela Merkel has ruled out further funding unless the IMF participates in new loans from European governments.

The big question is whether legislators in Germany and other restive north and central European creditors will start to walk away from a deal that is bound up with so many onerous and mutually incompatible conditions as to be well-nigh unrealisable.

The latest news from Washington vindicates the analysis of Yanis Varoufakis, the former Greek finance minister, who said in an OMFIF teleconference on 16 July, ‘According to its own rules the IMF cannot participate in any bail-out. They have already violated their rules twice to do so. But I don’t think they would do it a third time. I think they are kicking and screaming that they are not going to it a third time.’

Varoufakis’ comments, in a telephone conversation with OMFIF that formed part of a ’Greek day’ of briefings for international investors, were made under the Chatham House rule, under which the source of shared information should not be reported.

In the interest of transparency, and in line with the organisation’s structured policy on information transmission, OMFIF published the Varoufakis recording on 27 July. On 28 July OMFIF published on its website the full transcript – along with recordings of the other ‘Greek day’ conversations (with Gikas Hardouvelis and Plutarchos Sakellaris) – after parts of the conversation appeared (in accurate form but without OMFIF’s authorisation) in the Greek press on 26 July.

In the 16 July telephone conference, with Lord (Norman) Lamont, former UK chancellor of the exchequer and an OMFIF senior adviser, and myself, Varoufakis said, ‘There is a very serious danger here that the Greek parliament … will push through parliament these prior actions [for a loan] but then, at the end of the day, the ESM [European Stability Mechanism] and the IMF will not be able to coordinate so as to provide that huge loan.’

Varoufakis continued, ‘Not that I want that huge loan to be provided … but I think there is a major tussle between the institutions: the ESM, the European Commission, the IMF and [German finance minister] Dr [Wolfgang] Schäuble. Dr Schäuble and the IMF have a common interest, they don’t want this deal to go ahead. Wolfgang quite clearly said to me he wants Grexit [Greek exit from the euro], he thinks that this ‘extend and pretend’ is unacceptable and this is the one point where he and I see eye to eye. I agree with him, but for completely different reasons of course. The IMF does not want an agreement, because it does not want to have to violate its charter again and to provide new loans to a country whose debt is not viable. The commission really wants this deal to go ahead, Merkel wants this deal to go ahead, so what has been happening over the last five months is now projected into the very short term – only it is on steroids, and that is this complete lack of coordination between the creditors.’

The IMF already demonstrated fault lines with the other creditors when a Fund official briefed journalists on 2 July that Europe should agree massive and necessary Greek debt relief. The statement, just a few days before the Greek referendum on a former (and less draconian) bail-out package, backed Athens’ own policy views on debt, and strengthened the No vote in the following referendum. As I commented on 6 July, ‘The IMF guillotined itself.’

The divisions were again manifest when an IMF debt sustainability analysis surfaced on 14 July stating that the latest deal would push Greek debt to 200% of GDP and that it could not participate unless the Europeans offered debt relief.

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