Markets Fear the End Game for Greece as IMF Gives Ukraine a Free Pass

Markets Fear the End Game for Greece as IMF Gives Ukraine a Free Pass

Until a few days ago, the Greek and Ukrainian debt crises looked like twins: Two sovereigns with immense debts, creditors at their throats, looming deadlines, and deep fiscal and economic problems. One of the biggest guns among the creditors is that toughest of taskmasters, the International Monetary Fund.  

As of last week Greece and Ukraine look like mirror images. And it’s not a pretty reflection.  

In the Greek case, I.M.F. negotiators abruptly broke off talks Thursday with the Tsipras government in Athens, accusing it of failing to make a meaningful commitment to meeting the fund’s famously austere conditions for debt relief, notably the targets for budget surpluses.

Related: Stocks Fall on Greece, Rate Concerns; US Dollar Slips

No succor for the long-suffering Greeks unless Alexis Tsipras, their anti-austerity prime minister, does things our way: This is the fund’s message. With the collapse of last-ditch talks Sunday, Greece now teeters at the edge of a calamitous default and an exit from the European currency union.

The next day, Christine Lagarde published an open letter to Ukraine’s creditors. In it, the I.M.F.’s managing director castigated investors holding Ukrainian debt for not offering the Poroshenko government in Kiev the kind of debt relief the fund says Athens must not have. Astonishingly enough, Lagarde committed the fund to ladling out its $17.5 billion bailout even if Kiev defaults on its debt, as Finance Minister Natalie Jaresko now threatens.

“The I.M.F., in general, encourages voluntary pre-emptive agreements in debt restructurings,” Lagarde’s letter said, “but in the event that a negotiated settlement with private creditors is not reached and the country determines that it cannot service its debt, the fund can lend to Ukraine consistent with its Lending-into-Arrears Policy.”

Related: Wall Street Falls as Greece Crisis Unresolved

The schedules pressing on these two crises are now critical. Of Ukraine’s $70 billion in sovereign debt, $23 billion must be either paid or restructured this month. Greece has payments of $23 billion due this year; this month it owes the I.M.F. $1.8 billion and private lenders $1.7 billion.

One seriously doubts Lagarde and her colleagues celebrate this weird coincidence, given the very unflattering light it casts. In 40 years of I.M.F.-watching, I’ve never seen it behave in so nakedly political a fashion. Take this as a tale of two debtors and there’s no shred of virtue in the fund’s part in it.

Some economists acknowledge that Greece’s task now is to recover not from the financial crisis that took hold in 2009 but from the strict austerity policies imposed as conditions of its 2010 and 2012 bailouts. Nonetheless, the I.M.F. and Greece’s other major lenders—the European Central Bank and the European Commission—insist that Greeks must swallow more of the same medicine to gain access to further assistance.

Tsipras and his finance minister, Yanis Varoufakis, have proposed alternatives to the most stringent of these conditions, especially those affecting wage earners and pensioners, but these have gone nowhere in Brussels and Frankfurt.

Related: IMF’s ‘Never Again’ Experience in Greece May Get Worse

Five-to-twelve talks collapsed in less than an hour on Sunday. Sources well connected in European financial circles tell me the principal sticking point is the set of targets governing Athens’ surpluses in its primary budget, which is the revenue left after all expenditures other than debt service.

Greece’s lenders had previously insisted on surpluses of 3.5 percent this year and 4.5 percent in 2016. Given that these targets are universally acknowledged to be unrealistic, the lending institutions have now come down to one percent and are sticking adamantly to it. “Athens is holding out for less than 0.5 percent,” one of these sources wrote Sunday morning.

It’s mostly politics now, in my read, but this is starting to cut two ways.

One, the E.U. doesn’t much want a left social democracy of Greece’s stripe in its midst—especially given the rise of similar parties in Spain and elsewhere. Syriza, the governing party, was elected by a huge margin last January on a platform four-square opposed to Europe’s neoliberal norm.

Two, the Obama administration, which has always urged a settlement that will keep the eurozone intact, is now weighing in more heavily. But the pull’s in the opposite direction, which complicates matters further.

“During the G-7 meeting in Germany last week,” a source wrote over the weekend, “the U.S. was strident in pushing the E.U. to compromise further with Greece, as Washington is starting to panic that the entire southern flank of NATO could crumble at the very moment Libya, Syria, Iraq, and Yemen are in flames.”

That’s Greece. The end is near, but we don’t know it yet. “A credible proposal needs to be tabled by the Greeks in the next 24 hours,” Mujtaba Rahman, who heads the European desk at the Eurasia Group, told the Financial Times Sunday afternoon European time. “Otherwise, it’s looking like ‘game over’ for Athens.”

Related: Despite IMF Walkout, Greece Hopes for Deal on June 18

As to Ukraine, this column predicted a couple of weeks ago that creditors would accept Kiev’s restructuring exercise known as a haircut. They still may, but Lagarde’s surprise move Friday isn’t a good sign: Why would she effectively give Finance Minister Jaresko dispensation to default if talks with lenders were going well?

Defaults are always one degree or another of horrific. What we’ve got in Ukraine is a geopolitical circumstance that apparently overrides the mess in Lagarde’s mind.

Yet there are political risks all around. If Tsipras gives too much away in last-minute talks, the potential for instability in Greece is perfectly obvious. If he stands his ground on behalf of his electorate, as he said over the weekend he must, the instability would be the E.U.’s.

In Ukraine, one reason the I.M.F. is willing to keep lending, apart from the geopolitics, is that the Poroshenko government is implementing the austerity measures the fund requires. But their severity is a miscalculation, and when the effects are felt, last year’s revolution in Kiev may prove not its last.

Inflation in Ukraine now hovers at 60 percent—and higher for many foodstuffs. Citing a locally conducted poll last week, Bloomberg News put Poroshenko’s popularity at 13 percent. For Arseniy Yatsenyuk, the prime minister carrying the ball on the austerity program, it is 1.6 percent. This is not a stable situation.

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