The next big round of extend and pretend for Greece isn’t set to take place until July, yet serious jockeying between the key actors, the IMF versus the European countries acting as lenders, is underway now. Why? The politicians and Eurocrats are keen to get a deal, at least in general terms, agreed now so as to keep Greece out of the headlines as much as possible for an upcoming series of European elections.
Of course, the European view of “getting to a deal” means knuckling the IMF into joining a new round of financing. As we’ve discussed since 2015, the Fund’s staff has been in open revolt, and has leaked important internal documents to the press more than once, making clear the agency’s view that Greek debts are not sustainable (note that these leaks may have been sanctioned at a more senior level). By the Fund’s own rules, that means it cannot provide additional loans. The latest Financial Sustainability Report reached the same conclusion, although it did uncharacteristically say that some fund directors (as in board members) did not agree with that view.
If the IMF does not provide more dough, the consequences are serious, as we’ve stressed and Wolfgang Munchau underscores in a comment at the Financial Times:
A much overlooked part of the Greek bailout programme is that Germany made its participation conditional on IMF involvement. That gave the fund leverage. If the IMF now pulls out of Greece, one of two things will happen. Athens will either default on its debt this summer and be forced to quit the eurozone, or Berlin will accept debt relief just a few months before the elections. Either way, this is a fight in which someone ends up on the floor.
Mind you, under either scenario, German voters will be outraged. If Greece defaults, Germany and all the other countries that loaned to Greece will have to recognize a loss under their budget rules, which means they will have to “pay” for it out of the current budget by increasing taxes and/or cutting spending. Given how creative the Eurocrats have been, they will presumably find a way to spread out the loss recognition, probably via financial engineering. Nevertheless, a Greek default would be front page news and debated heavily, so there would be no way to pretend that voters hadn’t been lied to for many years.
Germany is unlikely to regard “debt relief” as palatable, since that means knuckling under to the IMF and writing down the principal value of loans. The IMF has deemed that further extension of loan maturities and interest rate reduction won’t make enough of a difference. But writing down debt also hits national budgets on a current basis, again forcing tax increasing and spending reductions.
The normal assumption would be a rerun of what we’ve seen since 2010: lots of headlines, grand-standing, and drama, with an 11th hour deal that provides at most 2 years of kinda-sorta breathing room. However, things are different this time.
As we wrote last weekhttp://www.nakedcapitalism.com/2017/02/will-trump-administration-let-imf-escape-next-greek-bailout.html:
Normally, IMF participation would be a given because, if all else failed, pressure would be brought to bear at the board level. European countries have about 1/3 of the votes, and the US, 1/6, which together gives them a majority.
But will the US break with its past pattern? Trump is hostile to Germany as a trade competitor. His advisers have also been trying to pursue bi-lateral trade deals with EU members even though that is against EU rules. Trump is seen as so hostile to the EU that Theresa May’s first meeting included a pitch for a strong NATO and Europe.
Thus it isn’t hard to imagine that the Trump Administration won’t pressure the IMF to continue to participate in the upcoming rescue. Admittedly, Steve Mnuchin is likely to take the point of view that market disruption is too high a price and will persuade his boss.
Once the Trump administration sends its representatives to the IMF board, expect the climate to become even more hostile. My expectation is that the IMF will ultimately pull out of the Greek programme, leaving the Europeans free to mismanage the ongoing Greek crisis on their own.
Munchau also points out that Germany’s current coalition could be arm-twisted to vote through debt relief, but that will be pretty much impossible after the fall elections. However, this will all come to a head before then.
The one offsetting consideration is that Christine Lagarde would not want to be charged with breaking up the Eurozone by refusing to participate in the next Greek bailout. However, the most likely course of action is for the European leaders to stump up enough to fill the hole that would be left by the IMF exodus. There is a separate problem that the German parliament believes that IMF participation is necessary, not just for financial reasons, but for its expertise in acting as gaoler running these programs. Finance minister Wolfgang Schauble will have to figure out how to talk his way out of this little problem.
The other factor in Lagarde’s calculus is that there are enough Eurozone-disrputing events already scheduled before the July funding date that if the IMF simply keeps the negotiations in play, the rising tide of pressure is likely to make history regard an IMF refusal as at most a contributing event to a Eurozone crack-up rather than the trigger. And let us not forget that the original sin was refusing to impose losses on banks and their investors and instead shifting them onto citizens via austerity.
The key election dates are:
The Dutch Parliamentary election, Wednesday March 15. The right wing nationalist, anti-Muslim Party for Freedom has a strong lead in polling. Its head, Geert Wilders, has said he would leave the Eurozone and EU. However, even if his party performs as well as expected, Wilders is unlikely to become Prime Minister because Party for Freedom will not get a majority and other parties will not join it in a coalition. The likely results are a weak “most everybody but the Party for Freedom” group or a failed coalition, which would trigger new elections.
Serbian Presidential election, expected for April 30, possible second round on May 14. This post has little real power but will get more play that it would otherwise warrant as yet another reading of populist/nationalist versus EU sentiment.
French Presidential election, April 23 and May 7; parliamentary elections June 11 and 18. Marine Le Pen, who has said she would exit the Eurozone and EU, is expected to win the first round of polling on April 23. The assumption of the punditocracy and Mr. Market is that she will lose the second round by virtue of everyone else ganging up on her, in particular the French left, which has no horse in this race and is presumed to regard her racism and anti-Europe positions as unacceptable. However, Mark Blyth, who was one of the few who called a Trump victory, thinks Le Pen will win. He pointed out that (starting at 26:45):
…if you actually go to their website and look at their economic policies, I find it much more progressive than anything else that’s on offer and the mainstream French left have completely collapsed…What’s meant to happen is that the entirety of the French left voting public is meant to get behind their equivalent of Mrs. Thatcher who thinks that what France needs is a healthy dose of more markets and austerity to get things going again. And to vote for that person to stop the Front. Now on every issue apart from immigration, you actually agree with the Front’s policies. And you disagree with everything this guy’s got except immigration. That has, “I’m not going to show up” written all over it. And that’s how the National Front gets in.
German Parliamentary elections: before October 23. Conventional thinking is that despite having taken a big hit in popularity due to backing a generous refugee policy, that Merkel’s party is still stronger than that of her main coalition partner, the Social Democrats, and even a very strong showing by the hard core right Alternative for Germany does not pose an existential threat. But October is a long way away.
And even with Merkel still in charge, parliamentary support for the Eurozone and EU projects is sure to erode. As Munchau points out:
The “grand coalition” led by Chancellor Angela Merkel commands about 80 per cent of the seats in the Bundestag. But with the September elections, I would expect the Free Democrats, the liberal party, to re-enter the parliament after they failed to clear the hurdle last time. Their leader, Christian Lindner, said last week that the best way forward is for Greece to leave the eurozone, and for Greek debt to be forgiven afterwards.
Alternative for Germany, the rightwing anti-European party, not only wants Greece out of the eurozone, but Germany as well. Together those two parties will probably account for some 20 to 25 per cent of MPs. If you add the large group of Eurosceptics from Ms Merkel’s Christian Democratic Union and its Bavarian sister party, the Christian Social Union, it is not hard to see why the window for debt relief will close permanently this autumn.