Among things you can find out from reading the IMF staff’s 172-page fourth review of the Greek bailout:
1) The Greek central bank is making contingency plans for providing lenders with emergency liquidity assistance outside the European Central Bank (p. 16):
2) It’s doing that because the ECB is refusing to approve €30bn of new government-guaranteed bank bonds as acceptable collateral. So the ECB was asked — pleaded really — by the Fund to hurry up (p. 33):
3) Meanwhile the very same government that says it’s “bewildered” by Fitch’s downgrade to CCC has been busy hiring legal advisers on conducting a debt restructuring (p. 27):
Interesting that the government’s priority was to hire legal and not financial advisers first. One would think that they were more taken with avoiding a credit event than ensuring that a debt restructuring would be fiscally sustainable…
But we are of course missing the wood for the trees. It’s a shocking report overall. We think one day it will be seen as the longest IMF suicide note in history, to rank alongside the infamous review of the Argentine programme completed in September 2001. Also a fourth review, funnily enough. There was no fifth. (You can see the IMF’s own post mortem of the review’s failings on pages 49 to 63 of this report. It is not happy reading.)
Note anyway that the IMF clearly supports a debt restructuring that would actually reduce debt (and the caution on creditor incentives is intriguing given the late French proposal, no?). This makes sense as the IMF is the expert on the matter, even if they have historically advised restructuring before a bailout.
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The International Monoline Fund, again
But the IMF is not an expert on dealing with the ECB, which is what interests here. The Fund asking the ECB for a guarantee on support for Greek banks is just another example of it increasingly requiring third parties to insure its Greece loans.
After all, emergency liquidity assistance by national central banks is not risk-free. It is creating a massive new contingent liability for the sovereign which is ultimately responsible for capitalising this central bank (not the ECB then), and because ELA accepts collateral that is unacceptable in any other framework, it’s not clear what assets could be recovered from borrowers which do end up going into liquidation.
ELA is also meant to be carried out only for a week or two, or at least it was until Ireland started doing it (€55bn in June, incidentally) and it’s meant to be expensive for banks, too (until Ireland started doing it). There is no way this is a long-term plan.
But, overall, a sovereign’s liabilities from ELA are a problem for its official creditors, quite simply.
The thing is, the ECB can always argue that it should only provide liquidity to solvent institutions, and it also issued a legal opinion in April on the Greek bank bond guarantees to this effect. It said that the central bank reserves the right to issue liquidity on a case-by-case basis, rather than accepting a blanket guarantee. The ECB is always arguing that banks should be “restructured” as a condition of liquidity provision, but it is interesting to see the IMF mention (on several pages of the report) that “Greek banks cannot by themselves rapidly reduce their existing level of ECB exposure, let alone peak exposure, without risking a severe credit crunch and economic collapse”, and also that the Greek government’s bank resolution regime might not be able to provide “sustained depositor access” during a wind-down.
Of course, anyone can see that the ECB has got itself into massive credit risk from having lent so much to Greek banks for so long, even with the haircuts applied to the collateral and the ECB’s claims in event of default. Naturally then, that’s led most people to assume that the ECB will simply cave in and continue to finance the Greek banking system, much as it caved in on waiving ratings criteria for government bond collateral.
Well, most people also assumed the monolines would hold. This is dangerous ground for the Fund once again.
Anyway, if it’s certainly not the ECB, and increasingly not the IMF, just who’s left to be Greece’s lender of last resort?
Related links:
IMF report on Greece displays familiar balancing act – FT
Greek credit event? Default? Who cares? Danske Bank doesn’t – FT Alphaville
The (collateral) walls of Piraeus – FT Alphaville