Who Said that the IMF is not Flexible?

The IMF reduced its demands with regard to the Greek debt relief until the end of 2018, helping Berlin ahead of Germany’s elections and opening the negotiations towards the conclusion of the second review.

This is an unofficial view of the IMF’s step back from its demand for a debt relief for Greece. The official one is demonstrated by the IMF through an article written by Sean Hagan, Maurice Obstfeld, and Poul M. Thomsen today. The article “Dealing with Sovereign Debt—The IMF Perspective” is available in the IMF’s blog here.

It is not the first time that the IMF changes opinion about the Greek debt sustainability.

Do you remember its analysis in 2015 (pdf file), 2016 (pdf file), and what did it finally do?

Yes, you are right. The IMF had said that the Greek debt was “highly unsustainable” (2015) and “the implementation of debt relief should be completed by the end of the program period” (2016). In February 2017, the IMF cited Blanchard: “The role of the Fund in this context is not to recommend a particular decision, but to indicate the tradeoff between less fiscal adjustment and fewer structural reforms on the one hand, and the need for more financing and debt relief on the other.

You understand that the IMF prefers debt relief from austerity? After the meeting of Lagarde and Merkel earlier this week, the IMF said the debt relief can be done after the end of the program.

OK, this could be an evidence of flexibility. Or not?

Background

The outcome of the meeting with Germany’s chancellor, Angela Merkel, and the IMF’s chief, Christine Lagarde, yesterday, was a positive step for Greece. However, it consists of a temporary solution which postpones all difficult decisions for the future.

The IMF insisted on its position for debt relief but accepted that there is no need for an immediate action until the end of 2018. After then, Greece needs debt relief through an extension of the maturities and a lower interest rates cap than current levels.

The IMF did not step back from its demand for tough reforms in pensions, taxation and the labour market.

The combination of the postponement of a decision for the debt and the need for tough reforms in fields with high political cost (pensions, taxes, labour market) has caused a big headache in Athens.

Yesterday’s decision of Merkel and Lagarde has also created political problems in the government as members of SYRIZA accused the Minister of Finance, Euclid Tsakalotos, of insufficiency in the negotiations.

At the same time, Eurozone officials, taking with reporters, confirmed yesterday that the Eurogroup’s decision on Monday includes an extensive list of open issues, and the review may last until May.

The Future

In our view, all of the above will compound the problematic environment in Greece by increasing political and economic uncertainty. The first positive reaction of the government and the markets following the Eurogroup’s outcome on Monday has not yet been faded out by the political problems and the liquidity shortage until May or June.

We expect difficulties in the negotiations during the second review.

The IMF

The article published today by the IMF attempts to explain the Fund’s step back from its position with regard to the postponement of the Greek debt relief. Earlier, the IMF’s spokesperson said that reforms and debt relief remain preconditions for the IMF’s participation in the program; however, reforms have the first priority until the end of the MoU in 2018. Then, the Greek economy should be evaluated and the outcome of the evaluation will determine the amount of the debt relief.

What is the official opinion of the IMF? We believe that the answer is assumed here: “The IMF uses two main methodologies to assess whether debt is sustainable. The first methodology asks if, by the end of the IMF program and with debt serviced on the original terms, debt ratios to GDP will be sufficiently low or on a clear enough downward path to restore lender confidence and allow the government once again to tap financial markets. The second, which is especially relevant when debt has a long maturity and particularly low interest rates, is to ask whether the country’s annual financing needs—to cover gross payments of interest and principal as well as its primary fiscal balance—can reasonably be met by the markets going forward.

Thus, Greece should conclude the “treatment” (bailout program or third MoU). Next then, the IMF can re-estimate the need for a debt relief. To put it simply, the IMF said: Greece should take additional austerity measures first, and debt relief later. Contrary to its rhetoric so far…


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