IMF analysis – bailouts without relief will push Greece further into debt

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece’s debt burden which confirm what Syriza has been saying ever since they came to power 5 months ago.

The document released in Washington on Thursday said Greece’s public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers.

It also said Greece will need at least 50 billion euros (36 billion pounds) in additional aid over the next three years to keep itself afloat.

Publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.

Greek Prime Minister Alexis Tsipras cited the report in a televised appeal to voters on Friday to say ‘No’ to the proposed austerity terms, which have anyway expired since talks broke down and Athens defaulted on an IMF loan this week.

“Yesterday an event of major political importance happened,” Tsipras said. “The IMF published a report on Greece’s economy which is a great vindication for the Greek government as it confirms the obvious – that Greek debt is not sustainable.”

At a meeting on the International Monetary Fund’s board on Wednesday, European members questioned the timing of the report which IMF management proposed at short notice releasing three days before Sunday’s crucial referendum that may determine the country’s future in the euro zone, the sources said.

There was no vote but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favour of publication, the sources said.

The Europeans were also concerned that the report could distract attention from the picture of a reckless and irresponsible Tsipras government they try to present to the Greek voters before the referendum.

“It wasn’t an easy decision,” an IMF source involved in the debate over publication said. “We are not living in an ivory tower here. But the EU has to understand that not everything can be decided based on their own imperatives.”

The board had considered all arguments, including the risk that the document would be politicised, but the prevailing view was that all the evidence and figures should be laid out transparently before the referendum.

“Facts are stubborn. You can’t hide the facts because they may be exploited,” the IMF source said.

IMF spokeswoman Angela Gaviria declined comment on this report.

Political anathema

Greek Finance Minister Yanis Varoufakis said in a blog post the IMF had upheld the Syriza party government’s contention for the last five months that debt relief should be at the centre of the negotiations.

“Puzzlingly, all this fine research by the good people at the IMF suddenly evaporates when IMF functionaries coalesce with their ECB and the European Commission colleagues in order to impose upon our government their chosen policies,” he wrote.

The IMF argues that Greece’s debt burden of nearly 185 percent of gross domestic product can only be made sustainable if the euro zone provides considerable extra financing through a mixture of new loans and a debt restructuring.

In Brussels, the way the IMF communicated the findings was seen as confusing, misleading and politically unhelpful.

The European Commission had produced its own debt sustainability analysis, based partially on IMF data, which is less pessimistic in its scenarios and is one of the documents mentioned on the Greek referendum ballot paper.

Germany and its north European allies have said the IMF’s presence is indispensable both to win parliamentary backing for aid for any euro zone partner, and to keep the European institutions honest. Berlin suspects the European Commission of being too soft on Greek efforts to wriggle out of reforms of pensions, taxation, public sector wages and labour law.

The European Central Bank, the third partner in what used to be called the “troika” of bailout enforcers, is also keen to keep the IMF involved.

The IMF knew back in 2010 that the first bailout would push Greece even further into debt, which is the exact opposite of what it was supposed to do.

The 2010 bailout was the one that allowed private French, Dutch and German banks to transfer their liabilities to the Greek public sector, and indirectly to the entire eurozone‘s public sector. There was no debt restructuring in that deal.

Serious scrutiny needed

Several voices have been heard in the few days since the report was released that demand the Troika negotiators should face very serious scrutiny for having deliberately kept secret information that should have been crucial in any negotiation with Greece.

It would appear that Christine Lagarde has been instrumental in keeping the analysis under wraps. In doing that, she has done the IMF a lot of reputational damage, and it’s getting hard to see how she could possibly stay on as IMF chief. She has seen to it that the Fund has lost an immense amount of trust in the world.

ECB chief Mario Draghi who this week all but shut down the Greek banking system, stretching the boundaries of the ECB’s role as a central bank whose function is to make sure banks are liquid, not to consciously and willingly strangle them, also must have known about the IMF’s assessment.

The actions and motives of people like Jean-Claude Juncker and Jeroen Dijsselbloem who must also have known about the IMF’s assessment, and still have insisted there be no debt relief on the negotiating table, although the analysis says there cannot be a viable deal without it must also be questioned.

Angela Merkel too must have known what the IMF analysts knew. And yet she decided to squeeze hard the people of Greece, rather than be forced to explain at home that her earlier decisions (2010) failed so dramatically that her voters would now have to pay the price for them.