Neither the IMF, Greece, or European leaders have confirmed a deal to resolve Greece’s debt crisis ahead of Thursday’s European Union summit. Greece needs some €20bn of funding available over the next 18 months or no.
However, Goldman’s chief European economist Erik Nielsen believes a solution is on the table, and that it would have emerged by Thursday – which happens to be Greek Independence Day. How ironic.
As Nielsen argued in a note on Wednesday:
The point of today’s meeting was clearly to settle the issue of the IMF’s role ahead of the EU-wide summit, given that this would be the last opportunity for the leaders to discuss the matter before Greece might be running out of cash. The Greek head of their debt office has said that they might be down at EUR7bn by the end of March.
Not quite. The Hellenic Debt Management Agency always retains a stand-by cushion of €7bn in funds, although it is true that it must raise €11bn by the end of April alone – as reported by the FT.
Anyway, to return to Nielsen:
If I am right on this, then a decision on Greece would most likely have been reached today, which means that an announcement could come already tonight [Wednesday], or relatively early tomorrow, Thursday, ahead of the EU summit. And based on the news flows, one would have to expect that Merkel has gotten her way. If so, this would constitute quite a defeat for what I have called the “fiscal federalists”.
While, there was no announcement on Wednesday night, news flows did indeed remain flooded with pro-IMF talking points from various German officials as Thursday dawned.
See Les Echos’ (en français) interview with Michael Meister, a finance spokesperson from Chancellor Merkel’s party in the Reichstag, for an example. According to Herr Meister, translation ours:
[It would] naturally weaken the euro if a member was in default. But it would also be detrimental to assist that country in a totally unconditional way. For bad behaviour would be not punished but rewarded.
Between these two dangers, what to do?
The only body that has the skills to help in this case, is the IMF.
Not exactly subtle. And then French voices appeared to fall behind the IMF too. As Le Figaro reported on Thursday (aussi en français), translation and emphasis ours:
Angela Merkel committed “forcefully” with her European partners to an aid plan for Greece on Thursday. France has had to accept IMF intervention in order to rescue the agreement in principle…
…Nicolas Sarkozy had to accept, on Wednesday, the principle of IMF intervention in the euro area, which he opposed, in order to convince Angela Merkel to join support for Greece.
Le Figaro did not cite its sources however, while the same Merkel speech insisted that any Greek bailout would be a last resort, as the FT reported on Thursday.
Still, Nielsen appears to be on to something. Is that something a good idea? As his note continues:
In summary, I now expect a formal announcement by the EU – probably ahead of the formal EU summit tomorrow, Thursday – that if an Euro-zone member needs financial help, then the IMF will be asked to take the lead, both in terms of financing and with respect to policy conditionality. Other EU countries might provide some co-financing like they have done to EU countries outside the Euro-zone, but this would be secondary.
It is not clear when Greece will formally approach the IMF, but it might happen within weeks, and very likely during the next few months. I think negotiations – when they get under way – will focus on a program of about EUR20bn over 18 months. Stay tuned.
Stay tuned? Strap yourself in, more like. The FT’s markets overview has already noted investor concerns that Greek default risk could increase, not go down, under IMF intervention.
After all, we’d also note that many of the usual policy tools that come attached to IMF lending aren’t applicable to Greece’s eurozone status, such as currency depreciation. Even euro-pegged currencies such as Latvia’s have posed problems for Fund oversight in the past.
And that all assumes the summit won’t come to the relative cop-out of asking the Fund to provide ‘enhanced surveillance’ of Greece’s austerity finances, rather than any actual funds. Reuters considered this possibility way back in February.
At least Greek prime minister George Papandreou seems to be fairly sure what he thinks of IMF rather than European financial aid. Via Reuters on Thursday:
RTRS – GREEK PRIME MINISTER SAYS GREEK CHALLENGE IS A EUROPEAN ONE
Not a [Washington-based] IMF one, in other words. Developing…
Related links:
Greece, the IMF — a timeline – FT Alphaville
The Greek bailout-o-meter swings again – FT Alphaville
The Greek boy who cried (no) wolf — and a €25bn bailout – FT Alphaville