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IMF appears to be only one looking out for Greece's long-term future IMF appears to be only one looking out for Greece's long-term future
(about 2 hours later)
The timing was impeccable. A day after Greece and the eurozone concluded bailout negotiations, but 24 hours before the hugely contentious deal had been voted on in Athens, the International Monetary Fund dropped a bombshell: the agreement won’t work.The timing was impeccable. A day after Greece and the eurozone concluded bailout negotiations, but 24 hours before the hugely contentious deal had been voted on in Athens, the International Monetary Fund dropped a bombshell: the agreement won’t work.
In four crisp pages, the IMF’s updated debt sustainability analysis ripped to shreds the notion that Greece will be able to deliver on the promises it has been forced to make in order to keep its banks open and stay in the single currency.In four crisp pages, the IMF’s updated debt sustainability analysis ripped to shreds the notion that Greece will be able to deliver on the promises it has been forced to make in order to keep its banks open and stay in the single currency.
Three simple conclusions can be drawn from the Fund assessment. Firstly, the deal is a sticking-plaster solution. Without much more generous debt relief, Greece will be back in deep trouble before long. Secondly, it is hard to see how the Fund can be party to the deal given that it thinks it is doomed to failure. Thirdly, the schism between the Fund and Europe means the agreement could unravel even if the Greek parliament votes in favour of it. Three simple conclusions can be drawn from the fund’s assessment. First, the deal is a sticking-plaster solution. Without much more generous debt relief, Greece will be back in deep trouble before long. Second, it is hard to see how the fund can be party to the deal given that it thinks it is doomed to failure. Third, the schism between the fund and Europe means the agreement could unravel even if the Greek parliament votes in favour of it.
This is not the first time the IMF has behaved in this way. An earlier debt sustainability analysis was leaked in the days leading up to the Greek referendum, and helped harden opposition to the (less draconian) terms then on offer. Again, the Fund chose its moment well. This is not the first time the IMF has behaved in this way. An earlier debt sustainability analysis was leaked in the days leading up to the Greek referendum, and helped harden opposition to the (less draconian) terms then on offer. Again, the fund chose its moment well.
So what’s going on? Together with the European commission and the European Central Bank, the IMF forms the troika that bailed out Greece in 2010 and 2012 and is responsible for monitoring whether Athens is keeping to its side of the cash-for-reforms bargain. Why, then, is the IMF acting in a way that embarrasses the other members of the troika and threatens to make the agreement stillborn?So what’s going on? Together with the European commission and the European Central Bank, the IMF forms the troika that bailed out Greece in 2010 and 2012 and is responsible for monitoring whether Athens is keeping to its side of the cash-for-reforms bargain. Why, then, is the IMF acting in a way that embarrasses the other members of the troika and threatens to make the agreement stillborn?
The probable answer lies in the makeup of the IMF, which since its creation at the Bretton Woods conference in 1944 has been subject to a US veto. The Fund has always had a European managing director, but its policy direction has been determined by the US Treasury. Over the past few months, the US has made its misgivings about Europe’s handling of the Greek crisis known, at first quietly but increasingly more openly. The Americans are finding it hard to control their frustration at Europe’s insistence on pursuing failed policies that Washington believes risk Greece being driven out of the eurozone and into the embrace of Vladimir Putin. The probable answer lies in the makeup of the IMF, which since its creation at the Bretton Woods conference in 1944 has been subject to a US veto. The fund has always had a European managing director, but its policy direction has been determined by the US Treasury. Over the past few months, the US has made its misgivings about Europe’s handling of the Greek crisis known, at first quietly but increasingly more openly. The Americans are finding it hard to control their frustration at Europe’s insistence on pursuing failed policies that Washington believes risk Greece being driven out of the eurozone and into the embrace of Vladimir Putin.
There is both an economic and geopolitical dimension to the US critique. Put simply, the US approach to economics during the crisis and its aftermath was to put growth before deficit reduction. The idea was to get the economy moving first, then turn to sorting out the public finances. Europe, exemplified by Germany, has taken the opposite approach. The evidence suggests that the US approach works better. Even so, Greece wouldn’t matter so much to the Americans were it not for the fact that it is seen as a key member of Nato in the eastern Mediterranean, a region that the US thinks is already unstable enough. The Obama administration thinks it is worth being a lot more generous to Greece in order to ensure that it doesn’t leave the euro.There is both an economic and geopolitical dimension to the US critique. Put simply, the US approach to economics during the crisis and its aftermath was to put growth before deficit reduction. The idea was to get the economy moving first, then turn to sorting out the public finances. Europe, exemplified by Germany, has taken the opposite approach. The evidence suggests that the US approach works better. Even so, Greece wouldn’t matter so much to the Americans were it not for the fact that it is seen as a key member of Nato in the eastern Mediterranean, a region that the US thinks is already unstable enough. The Obama administration thinks it is worth being a lot more generous to Greece in order to ensure that it doesn’t leave the euro.
What’s more, it has plenty of allies among the other non-European members of the IMF. India, Brazil and China all expressed misgivings about the original bailout in 2010 and – on the basis of the debt sustainability analysis – will see the latest plan as throwing good money after bad. As things stand, it is impossible to see how the IMF could be part of a third bailout. It would have to break its own rules and go against the wishes of many of its member countries in order to back a blueprint it sees as fundamentally flawed.What’s more, it has plenty of allies among the other non-European members of the IMF. India, Brazil and China all expressed misgivings about the original bailout in 2010 and – on the basis of the debt sustainability analysis – will see the latest plan as throwing good money after bad. As things stand, it is impossible to see how the IMF could be part of a third bailout. It would have to break its own rules and go against the wishes of many of its member countries in order to back a blueprint it sees as fundamentally flawed.
The problem is, though, that without IMF support the deal will unravel and Grexit will again loom large. When Lew meets Wolfgang Schäuble on Thursday, it is not hard to predict what he will be saying: Obama says get real; cut the Greeks a lot more slack; provide deeper debt relief; keep the single currency intact.The problem is, though, that without IMF support the deal will unravel and Grexit will again loom large. When Lew meets Wolfgang Schäuble on Thursday, it is not hard to predict what he will be saying: Obama says get real; cut the Greeks a lot more slack; provide deeper debt relief; keep the single currency intact.