Category Archives: EU Council

14/7/15: IMF Update on Greek Debt Sustainability

Predictably... following yet another leak... the IMF has been forced to publish its update to the 'preliminary' Greek debt sustainability note from early July. Here it is in its full glory or, rather, ugliness:

As discussed in my earlier post here:, Greek debt to GDP ratio is now expected to "The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program."

Which means that "Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far."

Under the current programme (running from November 2012 through March 2016) the IMF projected "debt of 124 percent of GDP by 2020 and “substantially below” 110 percent of GDP by 2022", specifically, the projected debt at 2022 was 105%. Now, the Fund estimates 2022 debt at 142% of GDP.

Furthermore, "Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective."

Worse, on the current path "Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP threshold deemed safe) and continue rising in the long term."

And IMF pours cold water over its own dream-a-little target of 3.5% primary surpluses for Greece. "Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so." Note the word decades! Now, IMF rejoins Planet Reality raising "doubts about the assumption that such targets can be sustained for prolonged periods."

In short - as I said earlier, politics not economics drive Eurogroup decision making on Greece. The IMF is now facing a stark choice: either engage with the euro area leadership in structuring writedowns (potentially also extending maturities of its own loans to Greece) or walk away from the Troika set up (and still extend maturities on its own loans to Greece).

Little compassion for the Fund, though - they made this bed themselves. Now's time to sleep in it...

14/7/15: The Brave New World of IMF Debt Sustainability Analysis

According to the secret IMF report released to the European leaders prior to the Sunday-Monday summits, "The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date - and what has been proposed by the ESM."

This is reported by Reuters here.

Per IMF report,that completes the Debt Sustainability Analysis released earlier this month (see the link to the original published report here) and that already concluded that Greek debts were not sustainable, accounting for the effects of capital controls and other recent factors, to address sustainability of Greek debt into 2020s:

  1. The EU (euro area) will need to extend graced period on Greek debt repayments to the ECB and the euro area to 30 years from now, and (not or)
  2. Dramatically extend maturity of debt given to Greece under previous programmes and the new upcoming programme.

Barring the above - which are not in the proposed Bailout 3.0 package - the euro area member states will have to "make explicit annual fiscal transfers to the Greek budget or accept "deep upfront haircuts" on their loans to Athens". In other words - either there will have to be direct aid or direct up front write downs to the debt. These too are not in the current proposal for Bailout 3.0.

Despite this damning analysis, the IMF continues to insist that it will be a part of the new arrangement and will have a new agreement with Greece comes March 2016 when the current one ends. In other words, political arm of the IMF (aka Madame Lagarde and national representatives of the EU) are now directly, head-on, and forcefully in a contradiction to their own technical team assessment of the situation. Madame Lagarde was present at the Sunday-Monday meetings and produced no apparent progress on the what her own technical team says will be a necessary part of any sustainable solution to the crisis.

There is an added component to all of this: IMF analysis refers to a significant deterioration in banking sector situation in Greece since the introduction of capital controls. Which makes sense - there are no new deposits coming into the system and, one can easily assume, loans due are not being serviced. This, in turn, begs a question as to how realistic are the EU-own assessments that the Greek banks will require EUR12-25 billion in capital.

How dire is the situation with Greek debt?

IMF new report projects debt to GDP ratio peaking at above 200% - which is bang on with my estimates previously - up on the previous IMF estimate of peak at 177%. By 2022, IMF estimated Greek debt will decline to 142% of GDP (that is back from the previous 'secret' report linked above). Now, the Fund says debt will stay at 170% of GDP even by 2022.

As Retuers reports, "Gross financing needs would rise to above the 15 percent of GDP threshold deemed safe and continue rising in the long term".

"In the laconic technocratic language of IMF officialdom, the report noted that few countries had ever managed to sustain for several decades the primary budget surplus of 3.5 percent of GDP expected of Greece." In other words, the holly grail of massive and continuous long-term primary surpluses - the sole pillar underpinning previous positive assessments of the Greek debt sustainability by the IMF - is now gone. Realism prevails - no country can sustain such surpluses indefinitely. Surprisingly, IMF continues to insist on 3.5% primary surpluses target.

As a reminder, IMF has called for official sector debt write downs for Greece in the past. It still insists on the same (per technical team), but does nothing from the political leadership point of view.

Conclusion: IMF is now fully torn between its political wing - dominated by the EU representation and leadership - and its technical side. Unlike a unified and functional World Bank (led by the US), the IMF has fallen into the European orbit of dysfunctional politicking and funding programmes that are far from consistent with IMF-own standards. (To see some evidence of this, read this excellent essay from Bruegel). 

IMF's role in the Greek bailout 3.0 will go down in history as a direct participation in the wilful re-writing of the European system of governance to embrace politicised leadership over calm and effective economic policy structuring. As per Eurogroup, there is no longer any doubt that the euro area leadership is wilfully incapable of resolving the Greek crisis. Incompetence no longer counts - the euro area finance ministers and prime ministers had all necessary information to arrive at the only logical conclusion: debt writedowns are needed and are needed upfront. They opted to ignore these so politics can prevail over economics and finance, allowing for subsequent consolidation of the euro area systems and institutions without a clear path for any member state to deviate from such.

Greece is just the first roadkill on this path.

Update: WSJ covers the topic of IMF dilemma.

8/7/15: Latest Round of Greece Talks: Smoke, Fire, Grexit

Summit / Eurogroup takeaways:

1. No progress of any variety beyond the usual agreement to have more talks
2. Short term deal 'weighing in' for Sunday is rumoured - effectively a bridge loan based on Greek acceptance of pre-referendum proposals. One of proposals involved a 3-4 months long bridge financing deal (Bailout 2.1) followed by 3-4 year deal (Bailout 3.0). This was rejected by Finland.
3. Any 'possible' new deal being discussed is 2-3 years in duration - a can kicking of weak variety, in other words.
4. No haircuts on debt will be allowed.
5. Sunday - full EU heads summit (not euro alone), which indicates something serious brewing - at least in terms of applying pressure on Tsipras. Also, possible Grexit push. Summit can be 'avoided' if Greece presents an acceptable plan on Thursday. Decision to be finalised on Saturday.
6. Overall, Bailout 3.0 package of measures is now being pushed out to tougher conditionality for Greece than in previous talks.
7. Juncker stated that the EU Commission has prepared a detailed Grexit plan, inclusive of humanitarian aid. Juncker plan also includes balance of payments support scheme for non-euro states with big exposures to Greek banks: Bulgaria, Romania. Big questions are also about Macedonia and Serbia.
8. At least in theory (detailed theory per Juncker) we have the end of 'irreversibility' of the euro (for now - at single state level).
9. IMF is back in the Troika 'Institutions' pairing.
10. No parallel currency discussions - left to Finance Ministers discussions.

My take: Overall, Greek position is now nearly toast. Contrary to many expectations, a No vote did not produce a stronger playing hand for Greece. Possibly because Tsipras failed to deliver any new proposals. Sunday EU Council would be required for a treaty change. This implies two possibilities: haircuts (ruled out) or Grexit. We are leaning toward Grexit, heavily.

The acceleration in Eurogroup and council demands on Greece suggests that prior to the Referendum there was already a strong consensus that Grexit is the preferred direction for further talks.

Serious sidelines:

Italy position is optimistic on the deal, but no debt relief in sight. Still remains hard-line on Greece.

Merkel takes harder stance than anyone else: strikes down bridge agreement: "Bridge financing didn't play any role in our talks tonight." Stance on conditions: "The proposals we are expecting now encompass what we put forward for second programme plus more for third programme." Haircuts: "A haircut is not up for debate. That is a bailout under the treaties and that will not happen." Merkel isn't even keen on discussing ESM programme resumption. Tougher thing still: "The situation has become much worse. I have to take 3rd programme proposals to Bundestag - hence need detail." Which means serious hurdles to cover here.

France is the lead in Greek side support and Hollande is not impressed: "It is true that if there were no agreement, the situation would be serious. Other options would have to be sought."

Spain's Rajoy "New Greek programme will have conditions attached. Will have to be approved by institutions, then Eurogroup, then leaders". Meaningless, surprisingly.

Donald Tusk: "Our inability to find an agreement may lead to the insolvency of Greece and the bankruptcy of its banking system". Says the Greek government is to present its proposals by Thursday, July 9. Juncker put deadline at 8:30 am Friday, July 10. So lots of confusion.

Finland: ruled out Bailout 3.0 for Greece on any terms.

Belgium: Finance Minister Van Overtveldt: "very disappointed" by today's Eurogroup meeting. New Greek Finance Minister made "very good explanation" of situation, but "had no new proposals to show us". "I had the strong impression that everybody really feels the sense of urgency, except the Greek government." His boss: Belgian PM Michel: has “more and more difficulty to understand the logic of Tsipras. On the one hand he says 'we want to stay in the eurozone'. On the other hand, he's not taking any initiative, zero, nothing, to stay in the eurozone.”

Lastly - a link worth reading: