Once again the IMF is back in the news in regards to Greece.

The IMF staff told the board of directors Greece Disqualified from New IMF Program.

Yet, Germany insists IMF be a part of the program. The reason for the latter is Germany will have to pony up lots more money if the IMF is not involved. The staff presented this message to the board this week, along with the message eurozone bailout lenders first need to agree on “debt relief”.

From the above link (Financial Times) …

The International Monetary Fund’s board has been told Athens’ high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the fund will join the EU’s latest financial rescue.

The determination, presented by IMF staff at a two-hour board meeting on Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the fund will not decide whether to agree a new programme for months — potentially into next year.

The IMF’s assessment adds another source of complexity, just as Athens and its bailout monitors begin discussions to try to conclude a deal before a tight August 20 deadline.

According to a four-page “strictly confidential” summary of Wednesday’s board meeting, IMF negotiators will take part in policy discussions to ensure the eurozone’s new bailout “is consistent with what the fund has in mind”.

But they “cannot reach staff-level agreement at this stage”. The fund will decide whether to take part only after Greece has “agreed on a comprehensive set of reforms” and, crucially, after eurozone bailout lenders have “agreed on debt relief”.

[Germany] now faces the prospect of trying to move an €86bn bailout through a sceptical Bundestag in a matter of weeks, without the IMF’s imprimatur.

Some Greek officials suspect the IMF and Wolfgang Schäuble, the hardline German finance minister, are determined to scupper a Greek rescue, despite the July agreement to move forward with a third bailout.

In a private teleconference made public this week, Yanis Varoufakis, the former Greek finance minister, said he feared that his government would pass new rounds of economic reforms only for the IMF to pull the plug on the programme later this year.

According to its own rules, the IMF cannot participate in any new bailout. I mean, they’ve already violated their rules twice to do so, but I don’t think they will do it a third time,” said Mr Varoufakis. “Dr Schäuble and the IMF have a common interest: they don’t want this deal to go ahead.”

Senior EU officials have insisted that Christine Lagarde, the IMF managing director, signalled her willingness to participate in a new bailout at the high-stakes summit that agreed the new rescue earlier in July.

But Greece has become a growing source of rancour within the fund and among its shareholders. People who have spoken with senior IMF officials say Ms Lagarde is facing a unified staff view that the fund’s reputation is on the line and that it cannot agree to a new programme without significant changes.

According to the board minutes, several non-European board members — including from Asia, Brazil and Canada — gave warning over the need to “protect the reputation of the fund”, and the document says Ms Lagarde acknowledged their concerns.

“[Ms Lagarde] stressed that in their engagement they have to be mindful about the reputation of the fund,” the summary says.

According to the summary, IMF staff concluded that Greece no longer cleared two of the four requirements in the IMF’s “exceptional access criteria” — the fund framework that allows it to grant bailouts of larger-than-normal size.

Same Old Same Old?

This is essentially the same story we heard two weeks ago in another “confidential” leak.

Nathan Tankus writing on Naked Capitalism presented this view on July 16: Lagarde Distances the IMF From Implications of Leaked Debt Sustainability Report.

In general, when discussing large complicated institutions distinctions must be made between parts of this institution. The mainstream press is particularly bad at that kind of nuance because these organizations are already complicated: making further distinctions between IMF managing directors, IMF staff and the IMF executive board gets needlessly obscurant in their view. However, these distinctions are important. The report that was leaked two weeks ago and the latest update to that report was written by IMF staff and specifically “neither discussed with nor approved by the IMF’s Executive Board”. Additionally, Christine Lagarde or her title “managing director” appear nowhere in this document. Thus to say that the “IMF” is saying anything in this report is deeply misleading.

The reporting of this latest update was even more muddled because it was combined with an anonymous statement from a “senior IMF official” by the Financial Times.

In my mind this anonymous official’s statements only make sense in three situations:

  1. Christine Lagarde is both unwilling to sign on to a deal the Eurogroup would currently agree to and unwilling to overtly and strongly pressure them to create a “better” deal they could sign. Thus she is aiming for a Grexit and no deal.
  2. Christine Lagarde is willing to sign on to whatever deal the Eurogroup would currently agree to but wants to covertly pressure them to offer more debt restructuring. In other words it’s a point of contention but not a dealbreaker.
  3. Many on the IMF staff don’t want Lagarde to sign whatever deal the Eurogroup is currently considering and specifically want much more debt restructuring. They have and are willing to leak things to the media to attempt to create this outcome whether by embarrassing their own Managing Director or putting indirect pressure on the Eurogroup.

To me option three seems like the most plausible. The same FT reporters (Peter Spiegel in Brussels and Shawn Donnan in Washington) reported over three weeks ago that a “senior [IMF] official” says many staff at the IMF “would rather cut off their little finger” than continue being involved in Greek bailouts. The use of similar descriptions (“senior official” and “IMF senior officials”) implies that the same sources at the IMF that said this over three weeks ago have been leaking the Debt Sustainability analysis and interpreted them for the press. This suggests a revolt among the rank and file of the IMF that doesn’t extend to the people who will ultimately make the decision.

Options Four, Five, Six

The above analysis seemed plausible at the time. It doesn’t anymore. For starters, the report has now been presented to the executive board.

And a four-page “strictly confidential” summary appears to be in the Financial Time’s hands.

We need to now consider options four, Five, and Six.

  1. IMF executive board no longer want to be part of this mess. They cannot directly say so because it implies that Varoufakis was correct in his assertion. Rather than a staff revolt, the staff may have been authorized to leak its findings in advance

  3. The IMF executive board is willing to be part of this mess, but only if Germany goes first. The risk here is the deal blows up entirely, but Germany would likely get the brunt of blame. Again, the staff may have been authorized to leak its findings in advance.

  5. The IMF executive board is internally fighting, not just the staff. Many may be ganging up on Lagarde.

Option six is not incompatible with either 4 or 5. The staff revolt and the leak may not have been authorized by Lagarde herself, but by others on the executive board.

This brings us back to “Senior EU officials have insisted that Christine Lagarde, the IMF managing director, signalled her willingness to participate in a new bailout at the high-stakes summit that agreed the new rescue earlier in July.”

It’s possible EU “senior officials” are mincing words, not Lagarde. Willingness to participate does not imply “on German terms”. Certainly, senior EU officials have lied before.

It still may very well be that Nathan Tankus is correct, but more options are clearly in play. I suspect option six coupled with either four or five, perhaps over the wishes of Lagarde herself.

Mike “Mish” Shedlock