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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 7 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. Imagine you are Barack Obama looking at events in Greece from the other side of the Atlantic. Your European allies have been telling you for the past five years that they can sort out their own problems and there is no need for Washington to get involved. But Angela Merkel and François Hollande have not delivered. What do you do?
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. The answer is that you start to flex your muscles. You use American influence over the International Monetary Fund to ensure that a document highly critical of Europe’s latest botched attempt to sort out Greece enters the public domain. What’s more, you choose your moment well. Just 24 hours before the hugely contentious deal is voted on in Athens, you arrange for the IMF to drop a bombshell: the agreement won’t work.
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. So when Jack Lew, the US Treasury secretary meets his German counterpart Wolfgang Schäuble today, Berlin will be ready for the message from the White House: the president says enough is enough; cut the Greeks a lot more slack; provide deeper debt relief; keep the single currency intact.
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. The decision by Obama to drop the softly-softly approach has been coming for some time. There have been pointed comments about the need for a growth plan for Greece. There have been telephone calls to Berlin and Paris. There has been pressure on the Europeans at meetings of the G7 industrial nations and the broader G20 gathering of major developed and developing countries. 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. Again, the fingerprints of the US treasury were all over it.
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? But it didn’t work. Europe has insisted on foisting upon Greece an agreement the US thinks is doomed to fail. So now Washington has made it clear that it is prepared to use its influence to ensure that the fund does not take part in a third bail out unless there is enough debt relief to make the “cash for reform” package add up.
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 assumption when the deal between Greece and its creditors was agreed in principle on Monday was that the IMF would provide around 20% of the money required - just over €16bn. But this is far from guaranteed. Following the release of its demolition job on the plan drawn up after the marathon talks at the weekend, an IMF official said “a concrete and ambitious solution to Greek debt problem” is a prerequisite to the IMF taking a new programme to its board.
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. Few were in any doubt about what the official meant, nor about who was really speaking. This was the US treasury saying that Europe had a decision to make. It could wait 30 years for Greece to start paying its debts; it could provide more financial support to Athens to allow it to meet its debt payments; or it could write down part of the debt. If it did none of these things, the fund would wash its hands of Greece.
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. Obama can do this because the US dominates the IMF and has done so ever since the organisation was created at the Bretton Woods conference in 1944. Europe has always had the right to choose the fund’s managing director, currently France’s Christine Lagarde, but nothing can be done without American approval. 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 has been 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.
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. 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. Washington is worried about the conflict in Ukraine. It is worried about the civil war in Syria. It is worried about Turkey. It is worried about the possibility that a Greece outside the euro and desperate for foreign cash would cosy up to Moscow and Beijing. All things considered, Obama thinks it is worth being a lot more generous to Greece in order to ensure that it doesn’t leave the euro.
The US 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. The US probably doesn’t need to use its veto power to block IMF involvement in a third bailout: the organisation would have to break its own rules and go against the wishes of many of its member countries in order to do so.
Various tensions have been exposed by the Greek crisis. There is the schism between Greece and its eurozone partners. There is the split between Germany and France. The latest rift to emerge is between the US and Europe. Lagarde, a European at the head of an institution that the US directs, will need all her famed charm to smooth things over.