Category Archives: Bailout 3.0

25/5/16: IMF’s Epic Flip Flopping on Greece

IMF published the full Transcript of a Conference Call on Greece from Wednesday, May 25, 2016 (see: And it is simply bizarre.

Let me quote here from the transcript (quotes in black italics) against quotes from the Eurogroup statement last night (available here: Eurogroup statement link) marked with blue text in italics. Emphasis in bold is mine

On debt, I certainly think that we have made progress, Europe is making progress. Debt relief is firmly on the agenda now. Our European partners and all the other stakeholders all now recognize that Greece debt is unsustainable, is highly unsustainable, they accept that debt relief is needed.

Do they? Let’s take a look at the Eurogroup official statement:

Is debt relief firmly on the agenda and does Eurogroup 'accept that debt relief is needed'? "The Eurogroup agrees to assess debt sustainability" Note: the Eurogroup did not agree to deliver debt relief, but simply to assess it. Which might put debt relief on the agenda, but it is hardly a meaningful commitment, as similar promises were made before, not only for Greece, but also for other peripheral states.

Does Eurogroup "recognize that Greece debt is unsustainable, is highly unsustainable"? No. There is no mentioning of words 'unsustainable' or 'highly unsustainable' in the Eurogroup document. None. Nada. Instead, here is what the Eurogroup says about the extent of Greek debt sustainability: "The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments." Does this sound to you like the Eurogroup recognized 'highly unsustainable' nature of Greek debt? Not to me...

Furthermore, relating to debt relief measures, the Eurogroup notes: “For the medium term, the Eurogroup expects to implement a possible second set of measures following the successful implementation of the ESM programme. These measures will be implemented if an update of the debt sustainability analysis produced by the institutions at the end of the programme shows they are needed to meet the agreed GFN benchmark, subject to a positive assessment from the institutions and the Eurogroup on programme implementation.” Again, there is no admission by the Eurogroup of unsustainable nature of Greek debt, and in fact there is a statement that only 'if' debt is deemed to be unsustainable at the medium-term future, then debt relief measures can be contemplated as possible. This neither amounts to (1) statement that does not agree with the IMF assertion that the Eurogroup realizes unsustainable nature of Greek debt burden; and (2) statement that does not agree with the IMF assertion that the Eurogroup put debt relief 'firmly on the table'.

More per IMF: Eurogroup “…accept the methodology that should be used to calibrate the necessary debt relief. They accept the objectives in terms of the gross financing need in the near term and in the long run. They even accept the time periods, a very long time period, over which this debt has to be met through 2060. And I think they are also beginning to accept more realism in the assumption.

Again, do they? Let’s go back to the Eurogroup statement: “The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments.” Have the Eurogroup accepted IMF’s assumptions? No. It simply said that things might change and if they do, well, then we’ll get back to you.

Things get worse from there on.

IMF: “We have not changed our view on how the outlook for debt is looking. We have not gone back. We want to assure you that we will not want big primary surpluses.” This statement, of course, refers to the IMF stating (see here) that Greek primary surpluses of 3.5% assumed under the DSA for Bailout 3.0 were unrealistic. And yet, quoting the Eurogroup document: the new agreement “provides further reassurances that Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact.”  So, IMF says it did not surrender on 3.5% primary surplus for Greece being unrealistic, yet Eurogroup says 3.5% target is here to stay. Who’s spinning what?

IMF: “...I cannot see us facing this on a primary surplus that is above 1.5 [ percent of GDP]. I know it's just not credible in our view. And you will see that there is nothing in the European statement anymore that says 3.5 should be used for the DSA. So there, too, Europe is moving.” As I just quoted from the eurogroup statement clearly saying 3.5% surplus is staying.

IMF is again tangled up in long tales of courage played against short strides to surrender. PR balancing, face-savings, twisting, turning, obscuring… you name it, the IMF got it going here.

24/5/16: Greek Crisis: Old Can, Old Foot, New Flight

So Eurogroup has hammered out yet another 'breakthrough deal' with Greece, not even 12 months after the previous 'breakthrough deal' was hammered out in August 2015. And there are no modalities to discuss at this stage, but here's what we know:

  1. IMF is on board. Tsipras lost the insane target of getting rid of the Fund; and Europe gained an insane stamp of approval that Greece remains within the IMF programme. Why is this important for Europe? Because everyone - from the Greeks to the Eurocrats to the insane asylum patients - knows that Greece is insolvent and that any deal absent massive upfront commitments to debt writedowns is not sustainable. However, if the IMF joins the group of the reality deniers, then at least pro forma there is a claim of sustainability to be had. Europe is not about achieving real solutions. It is about propping up the PR facade.
  2. With the IMF on board we can assume one of two things: either the deal is more realistic and closer to being in tune with Greek needs (see modalities here: or IMF once again aligned itself with the EU as a face-saving exercise. The Fund, like Brussels, has a strong incentive to extend and pretend the Greek problem: if the Fund walks away from the new 'breakthrough deal', it will validate the argument that IMF lending to Greece was a major error. The proverbial egg hits the IMF's face. If the Fund were to stay in the deal, even if the EU does not deliver on any of its promises on debt relief, the IMF will retain a right to say: "Look, we warned everyone. EU promised, but did not deliver. So Greek failure is not our fault." To figure out which happened, we will need to see deal modalities.
  3. What we do know is that Greece will be able to meet its scheduled repayments to EFSF and ECB and the IMF this year, thanks to the 'breakthrough'. In other words, Greece will be given already promised loans (Bailout 3.0 agreed in 2015) so it can pay back previous extended loans (Bailouts 1.0 & 2.0). There are no 'new funds' - just new credit card to repay previous credit card. Worse, Greece will be given the money in tranches, so as to ensure that Tsipras does not decide to use 'new-old' credit on things like hospitals supplies. 
  4. Greece is to get some debt reprofiling before 2018 - one can only speculate what this means, but Eurogroup pressie suggested that it will be in the form of changing debt maturities. There are two big peaks of redemptions coming in 2017-2019, which can be smoothed out by loading some of that debt into 2020 and 2021. See chart below. Tricky bit is the Treasury notes which come due within the year window of maturity and will cause some hardship in smoothing other debts maturities. However, this measure is unlikely to be of significant benefit in terms of overall debt sustainability. Again, as I note here: Greece requires tens of billions in writeoffs (and that is in NPV terms).
  5. All potentially significant measures on debt relief are delayed until post-2018 to appease Germany and a number of other member states. Which means one simple thing: by mid-2018 we will be in yet another Greek crisis. And by the end of 2018, no one in Europe will give a diddly squat about Greece, its debt and the sustainability of that debt because, or so the hope goes, general recovery from the acute crisis will be over by then and Europeans will slip back into the slumber of 1.5 percent growth with 1.2 percent inflation and 8-9 percent unemployment, where everyone is happy and Greece is, predictably, boringly and expectedly bankrupt.


Funny thing: Greece is currently illiquid, the financing deal is expected to be 'more than' EUR10 billion. Greek debt maturity from June 1 through December 31 is around EUR17.8 billion. Spot the problem? How much more than EUR10 billion it will be? Ugh?..So technically, Greece got money to cover money it got before and it is not enough to cover all the money it got before, so it looks like Greece is out of money already, after getting money.

As usual, we have can, foot, kick... the thing flies. And as always, not far enough. Pre-book your seats for the next Greek Crisis, coming up around 2018, if not before.

Or more accurately, the dead-beaten can sort of flies. 

Remember IMF saying 3.5% surplus was fiction for Greece? Well, here's the EU statement: "Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact." No,  I have no idea how exactly it is that the IMF agreed to that.

And if you thought I was kidding that Greece was getting money solely to repay debts due, I was not: "The second tranche under the ESM programme amounting to EUR 10.3 bn will be disbursed to Greece in several disbursements, starting with a first disbursement in June (EUR 7.5 bn) to cover debt servicing needs and to allow a clearance of an initial part of arrears as a means to support the real economy." So no money for hospitals, folks. Bugger off to the corner and sit there.

And guess what: there won't be any money coming up for the 'real economy' as: "The subsequent disbursements to be used for arrears clearance and further debt servicing needs will be made after the summer." This is from the official Eurogroup statement.

Here's what the IMF got: "The Eurogroup agrees to assess debt sustainability with reference to the following benchmark for gross financing needs (GFN): under the baseline scenario, GFN should remain below 15% of GDP during the post programme period for the medium term, and below 20% of GDP thereafter." So the framework changed, and a target got more realistic, but... there is still no real commitment - just a promise to assess debt sustainability at some point in time. Whenever it comes. In whatever shape it may be.

Short term measures, as noted above, are barely a nod to the need for debt writedowns: "Smoothening the EFSF repayment profile under the current weighted average maturity: Use EFSF/ESM diversified funding strategy to reduce interest rate risk without incurring any additional costs for former programme countries; Waiver of the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme for the year 2017". So no, there is no real debt relief. Just limited re-loading of debt and slight re-pricing to reflect current funding conditions. 

Medium term measures are also not quite impressive and amount to more of the same short term measures being continued, conditionally, and 'possible' - stress that word 'possible', for they might turn out to be impossible too.

Yep. Can + foot + some air... ah, good thing Europe is so consistent... 

23/5/16: Greek Debt Sustainability and IMF’s Pipe Dreams

IMF outlined its position on Greek debt sustainability, once again stressing the fact - known to everyone with an ounce of brain left untouched by Eurohopium injections from Brussels and Frankfurt : Greek debt is currently unsustainable.

Here are some details of the IMF’s latest encounter with reality:

Firstly, per IMF: Greek “debt was deemed sustainable, but not with high probability, when the first program was adopted in May 2010. Public debt was projected to surge from 115 percent of GDP to a peak of 150 percent of GDP, primarily because the expected internal devaluation implied declining nominal GDP while fiscal deficits were expected to add to the debt burden, but also because of the decision to forgo a private sector debt restructuring (PSI).”

Several things to note here. The extent of internal devaluation required for Greece is a function of several aspects of Euro area policies, most notably, lack of functional independent currency that can absorb - via normal devaluation - some of the shocks; lack of will on behalf of the EU to restructure official debt owed by Greece to EFSF/ESM pair of European institutions and to the ECB; and effective capture of virtually all Greek ‘assistance’ funds within the banking sector and external financing sector, with zero trickle down from these sectors funding to the real economy. In other words, there were plenty of sources for Greek debt non-sustainability arising from EU construct and policies.

Secondly, “the much deeper-than-expected recession necessitated significant debt relief in 2011-12 to maintain the prospect of restoring sustainability. Private creditors accepted large haircuts;… European partners provided very large NPV relief by extending maturities and reducing and deferring interest payments; and Fund maturities were lengthened…”

Which, of course is rather ironic. Lack of functional mechanisms for the recovery in the Greek case included, in addition to those internal to the Greek economic institutions, also the three factors outlined above. In other words, de facto, 2011-2012 restructuring of debt was, at least in part, compensatory measures for exogenous drivers of the Greek crisis. The EU paid for its own poor institutional set up.

However, as IMF notes, “European partners also pledged to provide additional debt relief—if needed—to meet specific debt-to-GDP targets (of 124 percent by 2020 and well under 110 percent by 2022). Critically for the DSA, the Greek government at the time insisted — supported by its European partners — on preserving the very ambitious targets for growth, the fiscal surplus, and privatization, arguing that there was broad political support for the underlying policies.”

Oh dear, per IMF, therefore (and of course the Fund is correct here), the idiocy of shooting Greece in both feet was of not only European making, but also of Greek making. No kidding: Greek own Governments have insisted (and continue to insist) on internecine, unrealistic and outright stupid targets that even the IMF is feeling nauseous about.

“Serious implementation problems caused a sharp deterioration in sustainability, raising fresh doubts about the realism of policy assumptions, especially from mid–2014. The authorities’ hoped-for broad political support for the program did not materialize…  causing long delays in concluding reviews, with only 5 of 16 originally scheduled reviews eventually completed. The problems mounted from mid-2014, with across-the-board reversals after the change of government in early-2015. Staff’s revised DSA—published in June 2015—suggested that the agreed debt targets for 2020-2022 would be missed by over 30 percent of GDP.”

This is clinical. Pre-conditions for August 2015 Bailout 3.0 were set by a combination of external (EU-driven) and internal (domestic politics-driven) factors that effectively confirmed the absolute absurdity of the whole programme. Yes, the IMF is trying to walk away now from sitting at the very same table where all of this transpired. And yes, the IMF deserves to be placed onto the second tier of blame here. Blame is due nonetheless, as the Fund could have attempted to seriously force the EU hand on changing the programme on a number of occasions, but it continued to support the Greek programme, broadly, even while issuing caveats.

But give a cheer to the Tsipras’ Government utter senility: “Critically, …the new government insisted—like its predecessor—that it could garner political support for the necessary underlying reforms.”

And now onto new stuff.

Per IMF’s today’s note: “developments since last summer suggest that a realignment of critical policy and DSA assumptions can no longer be deferred if the DSA is to remain credible. While there certainly has been progress in some areas under the new program that was put in place in August 2015 with support by the ESM, and growth and primary balance out-turns last year were better than expected, the government has not been able to mobilize political support for the overall pace of reforms that would be required to retain the June 2015 DSA’s still ambitious assumptions of a dramatic, rapid, and sustained improvement in productivity and fiscal performance. In all key policy areas—fiscal, financial sector stability, labor, product and service markets—the authorities’ current policy plans fall well short of what would be required to achieve their ambitious fiscal and growth targets.”

Pardon me here, but I seriously doubt the primary problem is with the Greek Government inability to mobilize political support. Actually, the real problem is that the entire framework is so full of imaginary numbers, that any Government in any state of political leadership will have zero chance at delivering on these projections. Yes, the Greeks are blessed with a Government that would’t be able to replace a battery in a calculator, but now, even with fresh batteries no calculator would be able to solve the required growth equations.

So, we have the IMF conclusion: “Consequently, staff believes that a realignment of assumptions with the evident political and social constraints on the pace and scope of adjustment is needed”. In more common parlance, the IMF has to revise its model assumptions as follows:

Primary surplus (aka - austerity):  The IMF recognizes that current tax rates are already too high in Greece (that’s right, the IMF actually finds Greek tax targets to be self-defeating), while expenditure cuts have been ad hoc, as opposed to structural. Thus, with “…tax compliance rates falling precipitously and discretionary spending already severely compressed, staff believes that the additional adjustment needed to allow Greece to run sustained primary surpluses over the long run can only be achieved if based on measures to broaden the tax base and lowering outlays on wages and pensions, which by now account for as much as 75 percent primary spending… This suggests that it is unrealistic to assume that Greece can undertake the additional adjustment of 4½ percent of GDP needed to base the DSA on a primary surplus of 3½ percent of GDP.”

This is bad. And it is direct. But IMF wants to make an even stronger point to get through the thick skulls of Greek authorities and their EU masters: “Even if Greece through a heroic effort could temporarily reach a surplus close to 3½ percent of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy
making institutions and projections suggesting that unemployment will remain at double digits for several decades.” ‘Heroic’ efforts - even in theory - are not enough anymore, says the IMF. I would suggest they were never enough. But, hey, let’s not split hairs.

So to make things more ‘realistic’, the IMF estimates that primary surplus long run target should be 1.5 percent of GDP - full half of the previously required. Still, even this lower target is highly uncertain (per IMF) as it will require extraordinary discipline from the current and future Greek governments. Personally, I doubt Greece will be able to run even that surplus target for longer than 5 years before sliding into its ‘normal’ pattern of spending money it doesn’t have.

Growth (aka illusionary holy grail of debt/GDP ratios):  “Staff believes that the continued absence of political support for a strong and broad
acceleration of structural reforms suggests that it is no longer tenable to base the DSA on the assumption that Greece can quickly move from having one of the lowest to having the highest productivity growth rates in the eurozone.”

Reasons for doom? 

  1. “…the bank recapitalization completed in 2015 was not accompanied by an upfront governance overhaul to overcome longstanding problems, including susceptibility to political interference in bank management. …in the absence of more forceful actions by regulators, and in view of the exceptionally large level of NPLs [non-performing loans] and high share of Deferred Tax Assets in bank capital, banks will be burdened by very weak balance sheets for years to come, suggesting that they will be unable to provide credit to the economy on a scale needed to support very ambitious growth targets.” There are several problems with this assessment. One: credit creation is unimaginable in the Greek economy today even if the banks were fully reformed because there is no domestic demand and because absent currency devaluation there is also no external demand. Two: despite a massive (95%+ of all bailout funds) injection into the banking sector, Greek NPLs remain unresolved. In a way, the EU simply wasted all the money without achieving anything real in the Greek case.
  2. lack of structural reforms in the collective dismissals and industrial action frameworks “and the still extremely gradual pace at which Greece envisages to tackle its pervasive restrictions in product and service markets are also not consistent with the very ambitious growth assumptions”.

So, on the net, “against this background, staff has lowered its long-term growth assumption to 1¼ percent… Here as well the revised assumption remains ambitious in as much as it assumes steadfastness in implementing reforms that exceeds the experience to date, such that Greece would converge to the average productivity growth in the euro-zone over the long-term.”

So how bad are the matters, really, when it comes to Greek debt sustainability?

Per IMF: “Under staff’s baseline assumptions, there is a substantial gap between projected
outcomes and the sustainability objectives … The revised projections suggest that debt will be around 174 percent of GDP by 2020, and 167 percent by 2022. …Debt is projected to decline gradually to just under 160 percent by 2030 as the output gap closes, but trends upwards thereafter, reaching around 250 percent of GDP by 2060, as the cost of debt, which rises over time as market financing replaces highly subsidized official sector financing, more than offsets the debt-reducing effects of growth and the primary balance surplus”.

A handy chart to compare current assessment against June 2015 bombshell that almost exploded the Bailout 3.0

As a result of the above revised estimates/assumptions: a “substantial reprofiling of the terms of European loans to Greece is thus required to bring GFN down by around 20 percent of GDP by 2040 and an additional 20 percent by 2060,…based on a combination of three measures..:

  • Maturity extensions: An extension of maturities for EFSF, ESM and GLF loans of, up to 14 years for EFSF loans, 10 years for ESM loans, and 30 years for GLF loans could reduce the GFN and debt ratios by about 7 and 25 percent of GDP by 2060 respectively. However, this measure alone would be insufficient to restore sustainability.
  • …Extending the deferrals on debt service further could help reduce GFN further by 17 percent of GDP by 2040 and 24 percent by 2060, and …could lower debt by 84 percent of GDP by 2060 (This would imply an extension of grace periods on existing debt ranging from 6 years on ESM loans to 17 and 20 years for EFSF and GLF loans, respectively, as well as an extension of the current deferral on interest payments on EFSF loans by a further 17 years together with interest deferrals on ESM and GLF loans by up to 24 years). However, even in this case, GFN would exceed 20 percent by 2050, and debt would be on a rising path.
  • To ensure that debt can remain on a downward path, official interest rates would need to be fixed at low levels for an extended period, not exceeding 1½ percent until 2040. …Adding this measure to the two noted above helps to reduce debt by 53 percent of GDP by 2040 and 151 percent by 2060, and GFN by 22 percent by 2040 and 39 percent by 2060, which satisfies the sustainability objectives noted earlier”.

So, in the nutshell, to achieve - theoretical - sustainability even under rather optimistic assumptions and with unprecedented (to-date) efforts at structural reforms, Greece requires a write-off of some 50% of GDP in net present value terms through 2040. Still, hedging its bets for the next 5 years, the IMF notes: “Even under the proposed debt restructuring scenarios, debt dynamics remain highly sensitive to shocks.”

In other words, per IMF, with proposed debt relief, Greece is probabilistically still screwed.

Which, of course, begs a question: why would the IMF not call for simple two-step approach to Greek debt resolution:

  • Step 1: fix interest on loans at zero percent through 2040 or 2050 (placing bonds with the ECB and mandating the ECB monetizes interest on these bonds payable by EFSF/ESM et al). Annual cost would be issuance of ca EUR 2 billion in currency per annum - nothing that would add to the inflationary pressures in the euro area at any point in time;
  • Step 2: require annual assessment of Greek compliance with reforms programme in exchange for (Step 1).

Ah, yes, I forgot, we have an ‘independent’ ECB… right, then… back to imaginative fiscal acrobatics.

One has to feel for the Greeks: screwed by Europe, screwed by their own governments and politically ‘corrected’ by the IMF. Now, wait, of course, all the upset must be directed toward getting rid of the latter. Because the former two cannot be anything else, but friends…

14/8/15: IMF on Two Unfinished Bits of Greek Bailout 3.0

IMF's Ms. Christine Lagarde statement on Greece:

Key points are:

1) Per Lagarde, “of critical importance for Greece’s ability to return to a sustainable fiscal and growth path", "the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail." In other words, the path to Eurogroup's 3.5% long term primary surplus target on which everything (repeat - everything) as far as fiscal targets go, hinges is not yet specified in full. The Holy Grail is not in sight, yet...

2) "…I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical …that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far." In simple terms, for all the lingo pouring out of the Eurogroup tonight, Greece has not been fixed, its debt remains unsustainable for now and the IMF - which ESM Regling said tonight will be expected to chip into the Bailout 3.0 later this autumn - is still unsatisfied with the programme.

"Significant debt relief" - off the table so far per Eurogroup - is still IMF's default setting.

17/7/15: Eurogroup tightens screws on Greece: Bridge v MoU

Eurogroup statement on Greece (h/t @FGoria):

  • Bridge finance via EFSM (as rumoured, so no surprise here);
  • Bridge finance security cushion via SMP profits being moved to an escrow account (unexpected) clearly to ensure Denmark's and UK agreement to use EFSM. Bad news: SMP profits should be rebated back to Greece to alleviate debt burden, not 'securitised' to increase debt burden;
  • Good bit - SMP profits are to be returned to Greece unless used as EFSM bridge loan cushion. So at some point in time, Greeks will get these funds to, presumably, cover a part of bridge finance funding;
  • The bit "...he risks of not concluding swiftly the negotiations with the ESM remain fully with Greece" (emphasis mine). This amounts to setting pressure very high on Greek Government to basically accept MoU conditions unaltered, as presented to them and, thus, makes the very idea of 'negotiations' a farce. Given that EFSM cover (bridge) is only for July, at most for first week of August, this statement basically puts Greece on notice: either agree immediately to ESM (Bailout 3.0) conditions or face a loss of SMP funds on top of everything else.
In effect, Eurogroup is driving home the tactical advantages gained by over-extending Bridge loan negotiations into the last minute and from Tsipras' total surrender at July 12-13 meetings. Greece has no where to go, but to ESM at this stage, so my suspicion is that MoU will be tougher than Bailout in Principle position of July 12-13.