For all the talking they seem to do, it really doesn’t look as though the chief participants in the negotiations to bail out Greece’s moribund economy do much listening – even to themselves. As a result, the deal to bail Greece out for a third time and prevent its leaving the Eurozone is again imperiled.
Two weeks ago, as negotiations on a bailout plan were being completed and the Greek parliament was preparing to vote on whether or not to accept it, an International Monetary Fund staff paper was circulated to the financial press. It was a damning assessment of the proposal that concluded that the only way to revive the Greek economy to a point at which it could sustain itself without constant infusions of foreign cash was to forgive a large amount of the country’s outstanding debt.
The paper said that the assumptions underpinning the deal were rosy to the point of being absurd.
For example, “Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so.”
Also, “Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms.”
So, it should have surprised nobody when, late Thursday, it was revealed that the IMF will refuse to extend any credit to Greece under the terms being considered.
IMF Managing Director Christine Lagarde reiterated the Fund’s concerns in a “virtual” press conference on Thursday.
“We are currently looking at a situation where we have analyzed the debt as unsustainable,” she said. “I think I have repeatedly said that for Greece to succeed and for any program to fly, a significant debt restructuring should take place. So I don’t think that we have varied. And we will stick to that position because that’s really becoming a commonly accepted view that with a debt that climbs from 170-ish and might peak at 200 percent with the track record of the country, it’s inevitable that there is an element of debt restructuring.”
Lagarde went on to note that in addition to addressing the debt, Greece also had to make substantial fiscal, regulatory and structural changes.
Later in the day, though, an unnamed IMF official who briefed reporters on a conference call was more specific. The IMF staff and its board of directors will only support a plan that results in “medium-term sustainability” for the Greek economy.
“You cannot have medium-term debt sustainability while other parts of the program are not sustainable,” the official said. “So, it's the overall program that needs to be sustainable, but this indeed comes down to a test of whether the debt is sustainable.”
The official continued, “[M]anagement will clearly not want to submit to the Board, and I'm sure the Board will not want to approve, a program that does not meet the normal criteria for access to the Fund's resources, and the normal criteria is that there is medium-term sustainability.”
The IMF’s unwillingness to participate in a bailout package that doesn’t include substantial debt relief is potentially deadly to the deal. Germany, one of the key players in the discussion, has warned that it is unlikely to get the deal through its legislature without the IMF’s participation.
It also puts in jeopardy Athens’ ability to make a scheduled debt payment of 3.2 billion euros on August 20. Failure to make that payment would trigger yet another crisis in the Eurozone -- something everyone says they want to prevent but which now looms as a distinct possibility.