A few days ago, major efforts were undertaken by top officials representing The Institutions (a.k.a. troika) to present a unanimous front regarding current bailout efforts for Greece. Even though creditors still disagree on the level of budget surplus that Greece must attain, as well as the economic overhauls it should undertake, there was an agreement on February 20th at the Eurogroup meeting that these institutions would return to Greece to review its current bailout package worthup to EUR 86bn. The agreement implies further negotiations on the country’s pension and tax system, as well as its labour market.
The IMF’s Christine Lagarde seems to have suggested a shift in the IMF’s position: while debt forgiveness no longer seems part of the IMF’s demands, Lagarde emphasized that Greece’s debt needed “significant” restructuring in terms of maturity extensions and interest rate capping, in exchange for reforms. This comes after months of uncertainty about the IMF being on board with the current bailout for Greece. While the IMF sees Greece’s debt as unsustainable, European partners differ. It seems highly unlikely that the IMF should suddenly reverse its hestitant position, especially as the metrics have remained the same. So what might be going on behind the scenes?
To answer this question, it is worth reflecting on the mounting political pressure that the topic (Grexit) will inflict in the months ahead in the run up to the German elections. Quite possibly, Merkel will have put her point across to Lagarde, stating that under no circumstances will Germany grant a debt cut within the EZ. Both Lagarde and Merkel may have agreed that a falling out over the Greek cause may still hold uncontrollable ramifications, be they political or in the form of spill over effects to other countries in the periphery. Quite obviously, Merkel has a strong incentive to keep a lid on the whole situation. Likewise, the IMF probably still believes that Greece has the potential to cause major disruptions should it default on its debt and ultimately pose a systemic risk.
To sum up, the conflicting views and strategies of the IMF and its European partners indicate that below the surface there really is no unanimous voice, in contrast with Merkel’s and Lagarde’s ‘orchestrated’ statements last week. Furthermore, speaking to the IMF on February 21st, 2017, U.S. Treasury Secretary Steven Mnuchin suggested that the Trump Administration seems to be encouraging the IMF to stay out of a third bailout programme for Greece.
Given this background, all these developments point to another showdown this summer. And while in 2016 Brexit was an excuse to postpone the crucial decision of whether the IMF should remain on board or not, it is the German general elections later this year that appear to be the current excuse. In the meanwhile, Greece’s economic health has not improved, not least because of prolonged austerity measures and this will only make the stakes even higher when push comes to shove in July 2017 when a number of bond payments are due.