The American Interest
Analysis by Walter Russell Mead & Staff
IMF Has No Taste for Greek Eurofudge

Greece is still driving Europeans bananas. For the umpteenth time, international talks about a Greek rescue package have come to an impasse, this time regarding a dispute between Brussels and the IMF over the size of the package and how the burden should be divided. Northern European lending countries like Germany have already ruled out taking losses on previous loans under the IMF’s plan, and now the ECB and IMF are digging in their heels. The Financial Times reports:

The IMF remains more pessimistic about Greece’s ability to return to economic growth, the amount it will collect in its €50bn privatisation programme, and how much money is needed to recapitalise the country’s teetering banking system.

As a result, Brussels and Washington are 5-10 percentage points apart on where Greece’s debt will stand by 2020, the target date in the rescue programme for returning Athens to sustainable debt levels. . .

Mario Draghi, the ECB president, said on Thursday he had agreed to allow the profits to be passed back to Greece, but added he was unwilling to take further measures to help lower Athens’ debt burden, putting additional pressure on eurozone governments to take the hit.

“The ECB is by and large done,” Mr Draghi said.

The reality is that the various bailouts and the accompanying conditions that the EU has imposed on Greece have comprehensively and consistently failed. In some cases the Greeks have stalled implementation. In others, the downward spiral of the Greek economy—driven by austerity, a lack of confidence, and capital flight—has made old agreements irrelevant. Every time the economy shrinks “more than expected,” government tax revenues decline “more than expected” and the debt-to-GDP ratio goes up “more than expected.” This sparks another round of crisis talks, another round of austerity, and another cycle of falling GDP.

It is all very tedious—except for the millions of Greeks whose livelihoods and hopes are slowly being ground to bits by this grotesque failure of governance.

The problem now is that the EU needs to rope the IMF into providing more funds and support to manage the results of the latest round of stupid and destructive policy. It has been accepted that Greece cannot handle a long-term debt-to-GDP rate of more than 120 percent, and the goal of the bailout programs is to get the ratio down to that level by 2020. Those participating in the bailout have to provide Greece with enough debt relief and funding from now until 2016 so that Greece can, theoretically, get through the next few years without debt levels going up astronomically. If that works, Greece could ultimately begin reducing its debt level and growing its economy, and hit the magic number by 2020.

Now it falls to Europe and the IMF to figure out just how much bailout money Greece needs. This involves making assumptions and projections about how fast it can grow, how effective its reforms will be, and how much money Greece itself can raise by doing things like selling off government assets and property. This is no easy task.

What the EU desperately wants to do is to use the rosiest possible assumptions—anything to keep the headline number down so that national governments, especially Germany’s, don’t have to announce that they are sending billions of euros to Greece once again.

The IMF, on the other hand, is an old hand at bailouts and has learned a lot of expensive lessons. It isn’t willing to throw money into Greece without an actual, credible plan, as opposed to the tissue of optimistic assumptions and politically conditioned forecasts that the EU habitually uses to disguise the true state of affairs from itself and the voters.

But telling the truth about Greece would mean looking honestly at where its debt-to-GDP ratio will be in 2020, for example, and that would force the Europeans to make precisely the painful choices they would like to fudge for a while longer. European governments just want to kick the can down the road, but the IMF doesn’t want to lend its reputation or commit its money to a plan that is as doomed to fail as all the other fudged European “solutions” have failed thus far.

And so yet again we have another crisis, more financial brinkmanship, and another showdown. None of this is contributing to putting Europe’s troubled economies on the road to recovery and real growth.

Another element in play: The ECB is also worried about the consequences of more bogus Greek “rescues” for its balance sheet. Like the IMF, the ECB doesn’t want to end up with a huge bill just for the sake of giving eurozone politicians the opportunity to lie to their citizens for a few more months. The IMF and the ECB both feel that the eurozone authorities want to play them for patsies.

The heads of these institutions know they will be responsible if they undermine the financial health of the Fund and the Bank, and both are telling Europe’s leaders that it’s time to get real. Since reality is the last thing the eurozone wants right now, there is yet another impasse in the world’s slowest crisis.

Published on November 9, 2012 2:40 pm