03 April 2016

SPIEGEL: Endgame for the IMF-EU Feud over Greece's Debt

Greece hasn't been saved just yet - and the conflict between the IMF and Europe is sharpening. Greece's former Minister of Finance Yanis Varoufakis expects a showdown between IMF and Germany.

The feud between the International Monetary Fund (IMF) and the European side of Greece's troika of creditors is old news. However, Wikileaks' publication of a dialogue between key IMF players suggests that we are approaching something of a hazardous endgame.

Ever since the first Greek 'bailout' program was signed, in May 2010, the IMF has been violating its own "primary directive": the obligation not to fund insolvent governments. As a result, the IMF's leadership has been facing a revolt from its staff members who demand an exit strategy arguing that, if the EU continues to obstruct the debt relief necessary to restore the solvency of the Greek government, the IMF should leave the Greek program.

Five years on, this IMF-EU impasse continues, causing a one-third collapse of Greek GDP and fuelling hopelessness to a degree that has made real reform harder than ever. [...]

What new light does the leaked dialogue between Thomsen and Delia Velculescu (the IMF's Greek mission chief) throw on this saga? It reveals the following state-of-play, as assessed by the IMF:

• The EU Commission seeks another fudge to be agreed during the IMF's mid-April Spring Meetings that will allow European leaders to celebrate (again!) the end of the Greek crisis
• The IMF will block this, unwilling to go along with yet another fudge that violates its no-lending-to-insolvent-governments directive
• The Greek government is ready to capitulate on new austerity measures demanded by the IMF and amounting to between 2.5 percent and 3 percent of GDP, involving: (a) pension cuts, (b) reduction in income tax credits for the poor, (c) a shift of basic foodstuffs from the 11% to the 23% VAT band, and (d) salary cuts for many public sector workers
• The Greek government is still holding out on these concessions because the Commission is offering Athens false promises of a 'softer' austerity package
• The IMF is furious with the Commission, not for being 'kinder' to Greece but because the Commission's own "numbers" are pointing to even harsher future measures than the IMF's
• The IMF regrets not having negotiated a common position with the Commission first, before the Commission started misleading the Greeks
• To concentrate the Europeans' mind sufficiently to force them to come to a 'decision point', Greece 'must' come close to another catastrophic 'Event' (default to one of the troika lenders)
• Because of the sensitive UK referendum, on 23rd June, the IMF predicts that its "hostilities" with the Commission will be suspended until July when, just like last July, the Greek "Event" will loom
• At that point, in July, the IMF plans to corner Chancellor Merkel into choosing what costs her less politically: Continuing with the Greek program without the IMF? Or granting the Greek state substantial debt relief?
• As long as Mrs Merkel chooses one of these two options, the IMF will be out of the woods: Either it will exit or the debt write-off will have rendered its Greek program consistent with its "primary directive".

[...] Are the IMF's numbers any better? Regarding the primary budget surplus target (a crucial number that must be kept under 1.5 percent of GDP to give Greece any chance of recovery) Thomsen and Velculescu embrace precisely the number that I was proposing to the troika last year.

Why then did the IMF not back me in 2015 but are adopting the same 1.5 percent surplus target now? Because they also wanted something that I would never grant: crushing new austerity which is inhuman and unnecessary but which, today, the Tsipras government (according to Velculescu) seems ready to accept, having already surrendered once in July 2015. [...]

To recap, the Wikileaks revelations unveil an attrition war between a reasonably numerate villain (the IMF) and a chronic procrastinator (Berlin). We also know that the IMF is seriously considering bringing things to a head next July by dangling Greece once more over the abyss, exactly as in July 2015. Except that this time the purpose is to force the hand not of Alexis Tsipras, whose fresh acquiescence the IMF considers in the bag, but of the German Chancellor. [...]

Full article on Spiegel

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