23/7/2012: Eurozone, Greece and the IMF - Part 2

On foot of my previous post on Greece and the IMF, the Fund has issued the following statement, quoted in full:

"We have received a number of inquiries related to the Der Spiegel report on Greece. You can attribute the following to an IMF spokesperson:

“The IMF is supporting Greece in overcoming its economic difficulties. An IMF mission will start discussions with the country’s authorities on July 24 on how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”"

Key words here are "...to bring Greece's economic programme... back on track" which is a de facto admission by the Fund that the programme is 'off track' now. Another key issue with the statement is that it does not directly reject the claims made in Der Spiegel that the IMF is considering exiting the programme funding Greece.

Now, here's a problem the Fund is facing: it has two options now:

1. Admit that the programme is off track and hope that meetings with Greek authorities will put it back on track via some new additional measures to deliver more savings. In which case Greece buys few months more until that new sub-programme gets off track again, or
2. Admit that the programme is off track and cannot be restored to any reasonable level of performance. In which case the Fund must exit the programme.

Economically, (2) is the only rational choice. Politically (1) is the only feasible option. 

So long and thanks for all the fish, as they say...

23/7/2012: Eurozone, IMF and Greece

One must treat seriously the possibility that Greece will see its funding from the IMF cut-off or suspended. For a number of reasons, extending well beyond the simple financial arithmetics of aid.

Here are the details of the report.

Assuming the report is true, the questions it raises are:

• Validity of the Troika assessment during the structuring of the 'aid' packages: Greece received two 'bailouts' including a partial debt restructuring. Both packages were heavily criticised during their structuring as being insufficient in scope and excessively restrictive / ambitious in terms of fiscal adjustments required. In all cases, Troika rejected any criticism and pursued adjustments as planned.
• Validity of the Troika monitoring: since May 2010, there were ample signs that Greece will not be able to deliver on the 'bailouts' targets due to: (1) political constraints, (2) lack of real policy enforcement by Troika, (3) structural economic failures in the economy incapable of generating growth, (4) nature of the 'bailouts' that did not correct for debt overhang, and (5) social breakdown within the Greek society. Yet, the Troika continued to insist on compliance with the programmes that were clearly misfiring.
• Validity of the Troika assessments: since May 2010 numerous Troika reports were issued, all in effect (albeit with caveats) confirming that the programme in Greece was 'on track'. There was not a single report that sounded an outright alarm. Prior to each report publication, Greece was pressured to deliver on targets, with some marginal noises from the Troika that the programme is at risk. However, every tranche of loans was delivered in the end. With every bogus report being published, Greek authorities and international markets received a wrong and purposefully deceitful signal that no matter what, Greece will be provided loans to cover its ongoing obligations.
• Validity of the Troika capacity to design functional economic programmes: since May 2010, Greek economy continued to accelerate in the rates of decline - as measured by growth, unemployment, and growth components metrics. Objective assessment of the Greek situation can only conclude that an outright and full default on the country debts back in 2010 would have by now corrected the major debt imbalances and most likely restored economy to some positive expansion path. Objective assessment of the Greek situation also clearly shows that the Troika measures have not only failed to do this, but actually made the situation far worse.

Now, given that the Troika programmes for Greece were effectively driven by European, not the IMF, structuring, the questions above clearly reinforce the view of the EU authorities as being (a) incapable of economic policy formation, (b) unwilling to be honest and transparent in the assessment of the economic, political and social conditions in the member states, and (c) completely out of touch with reality of what is happening within a member state.

And at this stage, the IMF is left with few options but to present this exact assessment of the situation to the EU counterparts in a hope that they wake up and smell the roses. Unfortunately, to do so would require the IMF to exit the programme of assistance to Greece. Doing so might rescue the IMF reputation. Or it might not. But doing so will also clearly expose the EU's failure, with implications not only for Greece, but also for the rest of the euro area 'periphery'. Contagion will, therefore, be carried over straight to Spain and Italy - the heart of the EU core.