The IMF in Greece: Marking New Territory

Editor’s Note: This piece is translated and adapted from Domenico Lombardi’s biweekly column “Pennsylvania Avenue” in the Italian daily Il Foglio.

Next week we will find out whether or not the growing political gap that has distanced the International Monetary Fund from its key European shareholders for months can be partially bridged.

The need to reach a common agreement for Greece—a major agenda item at the Eurogroup meeting in Brussels next Monday (December 3rd)—reflects the “joint” nature of the Greek assistance program. This implies that a veto by even one of the creditors, like the IMF, would make the disbursement of the subsequent tranches of the Greek bailout program technically impossible.

In fact, there has been significant tension for some time at the heart of the Troika. Their report on Greece, due this past summer, has still not been finalized, so as not to make public the stark differences between the IMF’s position and that of the European creditors. The apparent source of friction is the sustainability of the Greek public debt. The IMF maintains that debt should be on the order of 120 percent of GDP by the end of 2020, as previously agreed, and expects that further resources be mobilized, if necessary, for the credible attainment of this objective.

The Europeans, however, would like for the application of this threshold to be postponed to 2022, with the possibility that the threshold might even be increased by a few percentage points, all of which would considerably weaken the scope for another debt restructuring. In this scenario, then, a reduction in the interest rate, together with other marginal interventions politically acceptable for creditor countries, would make it possible to postpone the issue of a new debt restructuring.

Currently, the Greek public debt is being held in good part by official European creditors, including the European Financial Stability Facility, the European Central Bank and some national central banks. For the EFSF, the write-off of any credit claims to Greece would presumably trigger a parliamentary procedure in Germany (for the German share of the potential write-off), which appears to be out of the question before the German elections next September and probably afterward as well.

But not even this fully explains why the distance, above all analytical, between the macroeconomic projections of the European creditors and the more independent projections of the IMF, has evolved into a significant political distance the likes of which have never been seen during the eurozone crisis.

There are, in fact, at least two reasons behind the dynamics of this recent tension: one internal to the institution and one external. The IMF is marking its territory, delineating the perimeter of its own independence with unusual firmness because it has come to realize that the outcome of these negotiations will define the power relationships within the Troika when Spain, and possibly Italy, ask the ECB to intervene in the context of its new Outright Monetary Transactions program.

In exchange for the purchase of government bonds—potentially unlimited—that the ECB will agree to make, the requesting country will have to agree to a conditionality framework that the IMF itself could help formulate and monitor during implementation.

Thus, a non-compliance assessment by the IMF would compel the ECB to immediately suspend its program of bond purchases with consequences easily imaginable for the stability of the bond market, not just in the country in question but in the entire eurozone.

Considering what’s at stake, it could be tempting at the last minute to exercise undue pressure on the IMF to bend its assessment, making it “fit” better with the preferences of this or that government of the eurozone. But if the IMF bows to its European shareholders now, in the case of Greece, what would happen in the near future when the stakes are even higher? How would this affect Spain or Italy—countries at the very heart of the eurozone and its fate?

To be credible, the IMF’s more assertive position vis-à-vis its leading European shareholders needs an injection of political capital, which is coming just now from the reelection of Barack Obama. The aim of the reelected president, fresh from a new electoral mandate, is to force the Europeans to face the seriousness of the Greek situation and to redirect their political leverage and financial resources toward a credible strategy to stabilize the free-falling Greek economy (and society) and encourage much-needed growth prospects.

Building on these developments, there are some, in Athens, who are even wondering whether the Greek authorities shouldn’t refuse the next disbursement tranche altogether in order to precipitate an immediate and definitive face-off with European creditors on the fate of the country.