IsThe IMF Profoundly In Love With Pandora

Germany so far held its negotiating position with Greece because the German government knows that if it agrees to a sovereign debt cancellation (rather than a ‘haircut’ on privately held debt held which would affect mostly banks, financial institutions and hedge funds as happened in 2012), then more of the PIIGS nations (Portugal Italy, Ireland, Greece, Spain,) will demand the same.

It is the IMF that has finally opened Pandora’s box and let all the troubles previously contained within the European Union’s secretive governance mechanisms escape into the public domain.

While the Greek crisis has been containable, the problem posed by the other PIIGS is on a different scale, it took the EU 5 years to transfer around €200 billion in Greek debt exposure to the public balance sheet but in the end it looks as if Greece’s debt problem has overwhelmed both the EU’s ability to kick the can down the road and the faith of German taxpayers in “ever closer union” has been exhausted.

Should the first victim of the common currency pass through the exit door as early as next week however, nobody in Europe believes that the same exercise can be repeated with Italy, or Spain, or even Portugal. Their economies are too big (and their at-risk loans run to €hundreds of billions). Today, we saw the first public evidence of the schism within the IMF/ECB/EU Commission Troika, when the IMF in a press release explicitly stated that Greece is no longer viable unless there is both additional funding provided to the country, which can only happen if there is another massive debt haircut. Here’s the tasty bit:

” Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through end–2018, the debt-to-GDP ratio is projected at about 150 percent in 2020, and close to 140 percent in 2022 (see Figure 4ii). Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets. With debt remaining very high, any further deterioration in growth rates or in the medium term primary surplus relative to the revised baseline scenario discussed here would result in significant increases in debt and gross financing needs (see robustness tests in the next section below). This points to the high vulnerability of the debt dynamics.” [ … ] “”these new financing needs render the debt dynamics unsustainable.” (Read what the IMF said in full:)

That is precisely what Tsipras and Varoufakis have been claiming since day one. Unsurprisingly Greek government officials promptly said that the IMF report is in line with the Greek government’s views on debt. What makes the IMF report even more odd is its timing; three days before the Sunday referendum, Tsipras now has prima facie evidence to present to Greek voters as he tells them “see, we were right all along.”

Looking forward to the next Eurozone crisis, what the IMF’s “debt sustainability analysis” has just done is open the door for every single other comparably insolvent peripheral European nation (and it goes way beyond the PIIGS) to knock on the IMF’s door and say: “Mme Lagarde, if Greece is unsustainable, then why aren’t we?”

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