On Tuesday July 14, a day before the Greek Parliament was set to vote through the first and critical implementing law from the Brussels Euro Summit agreement, the IMF intervened sharply in the Greek economic policy debate for a second time in less than a month, with the release of an updated evaluation of Greece’s debt dynamics. As if the earlier Debt Sustainability Analysis (DSA) which came out in the days before the Greek bailout referendum was not enough, the new “updated” DSA report http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf focuses on the devastating impact of the bank closures/capital controls on the Greek economy. It states unequivocally that Greece now needs much larger dose of debt relief than Greece’s creditors had been planning. What is not clear yet is who ordered the update barely two weeks after the previous document had been released and why. It could be routine, but those answers are critical.
Old issue with Berlin
Everyone watching the Greek meltdown recalls the extended policy debates from the early years of the bailouts, and it seems as each new book is written one luminary or another reveals a bit more about how key decisions were sealed. In essence the IMF had to circumvent a number of its own operating principles to support the Greece program at the start. As each program review proceeded, debt sustainability generally looked increasingly tenuous as Greece’s GDP dropped. Accordingly, we witnessed steady low-to-medium intensity conflict with Berlin which demanded the IMF remain engaged, we heard complaints from other IMF member countries that saw the Greek program as a diversion of resources, and we heard strong political messaging that the Greece program was too important to fail, forcing the IMF’s misgivings on the soaring public debt onto the sidelines. A fair amount has been written about the European and domestic political imperatives of French Managing Directors, Dominque Strauss Kahn (previous) and Christine Lagarde (current). Much of that has to do with the belief that the top IMF slot works well as a springboard back into French politics. After the dust settles, it will not be a great stretch to conclude that French names will not likely top the next short list when Lagarde eventually departs her position.
What does this mean for the IMF?
This writer is not an expert in the goings on at IMF Headquarters in Washington, but having worked a few blocks away at the Department of State and having steady interactions with IMF staff over the years, it’s fair to hazard a few guesses, developed in consultation with a few stateside experts:
- We know that the IMF’s participation in the Greece bailout has been a hot button issue. The exceptionally large size of the program in terms of resources, the flexible application of program conditionality and the Managing Director’s direct involvement in the program all stand out as red flags.
- The Greece program has been a deep embarrassment to the IMF’s culture of impartiality, apolitical analysis and of course its global record. It’s not yet to point where one could say the IMF “broke its teeth” on Greece, but they clearly see it coming.
- An outright failure in Greece might well cost the Managing Director her job, and could well lead to the appointment of a replacement from one of the emerging economies who have long chafed at the IMF’s overweighed voting share representation favoring Europe and the U.S, which is only gradually changing.
- While the current IMF Greece program ends in 2016, which includes both funding and heavy technical support, the IMF has been signaling from almost the start that Europe needs to much more in terms of funding Greece. The sharp deterioration of the Greek economic situation this year, pushing the country’s debt off the path towards sustainability that was clearly visible in 2014, provides the rationale the IMF has been looking for, and warning about for years, to pull out of the funding side.
Jack Lew’s travels and other interventions
The Obama Administration’s increased engagement in the policy debate over assistance to Greece has been warmly welcomed in many quarters, even if it is considered to be years too late by many and somewhat inappropriate considering the socialist flavor of Tsipras’ Syriza party and bilateral clashes on the potential release of November 17 terrorist Savvas Xiros. So what we are seeing is a gradual transformation of the U.S. position from general support of an agreement, in other words, harmless grandstanding, to more solid advocacy on behalf of a viable solution for Greece. The need for deep structural reforms in Greece is always mentioned, up-front. Secretary Lew has announced a new lighting fast set of meetings (not blitzkrieg, please) in Europe for July 15-16 with the Greece agreement as a major topic (this is basically a few stops en route home from a major development finance conference in Ethiopia). At this point, Athens has not been mentioned as an additional stop but we would not exclude it if the package holds together.
A Washington observer would simply note a few points:
- The relative activism of the Treasury Department compared to the State Department and the Pentagon. Some of this can be attributed to the pro-Greece leanings of some of Jack Lew’s key staffers and the Treasury’s direct line to Wall Street, while the rest of the Administration was more concerned about the Syriza government’s other policy preferences and potential bilateral problems.
- A Republican-dominated Congress not focused on the domestic debt debate thus less willing to spend a lot of energy on the example of “profligate” Greece, as was done in 2011-12. While things are quiet now, this does not in any way exclude Greece from becoming a significant issue in 2016 Presidential campaign.
This writer would humbly suggest Washington consider helping relieve the financial strain on Greece through a few alternatives where Washington is slightly better placed to help. Consider for example pressing Ankara on two issues that make a difference for Athens: Reducing Turkish military activity in the Aegean (which forces a costlier-than-needed Greek defense budget) and doing more to reduce the refugee flow reaching Greece’s eastern border, again, helping reduce Athens’ financial burden. If Washington really wanted to help Greece, these would be immediate, easy “action items” to take up with Ankara and would help convince Greece’s Eurozone partners that the Obama Administration is truly interested in helping Athens where it can, on pressing regional stabilization issues, and not lecturing them on the economic folly of austerity.