The IMF has once again threatened to pull out of the Troika following a warning that Eurogroup Loan Measures Not Enough for Greek Debt.
Greek debt yields had already been rising and spiked on the news.
Let’s take a look at what’s happening, culminating with an explanation of seemingly preposterous positions from all involved.
In the IMF’s baseline scenario, Greece’s government debt will reach 275 percent of its gross domestic product by 2060, when its financing needs will represent 62 percent of GDP, the report obtained by Bloomberg says. The government estimates public debt around 180 percent of GDP at present.
The IMF board is set to discuss Greece’s ability to service its debt on Feb. 6. The fund has resisted pressure from countries including Germany and the Netherlands to contribute to the bailout program, seeing it as doomed unless Greece takes further steps to rein in spending or euro-area governments ease the terms of the loans.
Europe’s aid program for Greece is credible and backed by contingency measures to handle unforeseen events, a spokesman for the European Stability Mechanism, an EU agency that provides bailout loans to Greece, said in e-mailed statement Sunday.
As in the past, the IMF is proposing that Europe extend grace periods and maturity dates on the loans. The document also calls for further deferral of interest payments and to lock in interest rates.
Greek debt is “highly unsustainable” and “even with the full implementation of policies agreed under the European Stability Mechanism program, public debt and financing needs will become explosive in the long run,” the document says. A “substantial restructuring” of European loans to Greece is required to restore debt sustainability, it says.
The IMF agrees with Greece’s euro-area creditors on one point. Both want Greece to introduce a law triggering austerity measures if the country fails to maintain a budget surplus before interest payments of 3.5 percent of GDP. Greek Finance Minister Euclid Tsakalotos last week rejected that demand as “unacceptable.”
Greek Bond Yields Soar
Reuters reports Greek Bond Yields Soar on Worries about IMF role in Bailout.
Yields on short-dated bonds spiked 300 basis points, on track for their biggest one-day jump since July 2015, while 10-year bond yields rose to their highest in almost three months.
Germany said on Monday it believed the IMF would participate and that it was too early to start thinking about other possible scenarios.
But concerns were heightened after a leaked report that the Fund expects Greek debt to explode to 275 percent of GDP by 2060, analysts said.
“There’s a bit of disquiet regarding the IMF’s role…,” said Orlando Green, European fixed income strategist at Credit Agricole.
“The bottom line is that the IMF wants debt relief for Greece and the EU has taken baby steps towards this, but it is not what the IMF is looking for long-term. When there are divisions between the EU and IMF, that arouses concerns about Greece.”
He was answering a question about a report in the Bild newspaper that said Finance Minister Wolfgang Schaeuble would argue for a Greek exit from the euro zone should the IMF withdraw from the third bailout programme.
Short-dated government bond yields in Greece rose as far as 9.98 percent, their highest level in about seven months.
Five and 10-year Greek bond yields also rose sharply, with 10-year yields climbing 50 bps to around 7.76 percent – their highest since early November.
The IMF argues correctly that Greek debt is unsustainable. Previously the IMF correctly argued Greece could not maintain a primary account surplus of 3.5 percent.
Yet the IMF now demands Greece automatically implement rules forcing it to have a primary account surplus of 3.5 percent of GDP as far as the eye can see.
Last week Eurointelligence reported that Greek officials were elated the much-despised IMF might exit the program. Although Greece hates the IMF, the IMF has at least been partially on Greece’s side, arguing for debt reductions.
Were the IMF to actually pull out to happen, Schaeuble wants Greece out of the Eurozone.
Meanwhile, Eurozone officials pretend the program is working when they know full well its not.
This is one of those WTF moments where statements from Greece, from the IMF, and also the Eurozone make no apparent sense.
Yet, despite the obviously apparent nonsense, it’s possible to piece together what’s happening.
- Neither Germany nor the Netherlands is willing to throw Greece the smallest of bones for fear of election consequences. It’s far easier for Eurozone nannycrats to pretend things are running smoothly.
- Schaeuble has long wanted Greece out of the Eurozone. But Germany does not want to take the blame. Instead, Schaeuble wants the IMF or Greece to take the blame.
- The IMF does not want the blame either, so it takes a preposterous stance that the debt is not sustainable but a 3.5% primary account surplus for as far as the eye can see is sustainable. The IMF takes this view despite having argued many times that 3.5% is not sustainable.
- By pretending to now be in favor of 3.5% perpetually, the IMF can argue it is not one-sided to Greece.
- Despite the fact the IMF is more on Greece’s side than Germany or the Eurozone nannycrats, Greece hates the IMF so much that its position of not wanting the IMF involved overrides common sense.
- As an alternative to point 5, consider the possibility that Greece wants outs of the Eurozone, but none of the politicians want to take the blame. Instead, the politicians want to blame the IMF or Germany and are just itching for the IMF to get the hell out so they could do what they wanted to years ago (exit the eurozone). In this possibility, Greece looks to place the blame elsewhere and is waiting for the right moment.
Troika Blame Game Theory
Points 1-4 are certain. Points 5-6 are pick one. Despite the apparent absurdity of conflicting views and the IMF’s changing stance, blame game theory explains all you need to know. Here is a shorter synopsis.
- Greece wants to blame the IMF and Germany
- Germany wants to blame Greece and the IMF
- The IMF wants to blame Greece and Germany
Mike “Mish” Shedlock