The Wall Street Journal: IMF’s stand on Greek bailout unnerves Europe

As a new Greek debt crisis gathers pace, one of the major players in the drama has remained remarkably calm: the International Monetary Fund.

European governments and institutions are desperate to resolve a months-old standoff over the next phase of Greece’s bailout program. The window for a deal is fast closing with the imminent start of the Dutch election campaign and may not reopen until after the French election in May. But the IMF is proving impervious to political pressure.

Some European governments have said they won’t give any more money to Greece unless the IMF gives it money too. But the IMF is sticking to its mantra that it won’t participate in any new Greek bailout unless it is satisfied the numbers add up. As things stand, it is far from satisfied.

Meanwhile the clock is ticking toward two major bond redemptions in July that Greece is unlikely to be able to meet without aid.

A crisis meeting in Brussels on Friday failed to break the impasse. The IMF and European institutions did agree to demand further austerity measures equivalent to 2% of gross domestic product to be legislated now to ensure Athens hits its short-term budget targets.

But it isn’t clear whether Athens is willing or able to deliver; meanwhile the creditors are no closer to a deal on what Greece’s medium-term austerity targets should be, nor how much relief is needed to put the country’s debts on a sustainable footing.

For many Europeans, the IMF is the villain of this crisis.

Eurozone officials accuse it of using overly pessimistic forecasts and being unfairly gloomy about Greece’s capacity for reform. They point to recent data that show Athens on track to deliver an unexpectedly robust primary budget surplus before interest payments in 2016 of at least 2%. As far as the European Commission was concerned, this was evidence Greece could hit its 3.5% primary surplus target in 2018 and maintain it thereafter with no extra fiscal tightening.

Some European governments would be happy to go along with the Commission’s forecasts, not least because there is little appetite for imposing further belt-tightening on Greece after years of depression.

But the IMF counters that the budget data are provisional and flattered by one-off factors including a very substantial cash inflow in December. It also notes that Greek budget figures are invariably revised down every quarter—and that the average revision is a whopping 2.5%. If the eurozone wants to insist on tough targets, the IMF will insist they are credibly met.

The IMF’s critics are on stronger ground when they accuse it of inconsistency. After all, the fund has been vocal with doubts that Greece can ever achieve a primary surplus of 3.5%, or sustain such a surplus for any period, or that it would be in Greece’s interests to do so. So why not simply rule out any program with such unrealistic targets?

The IMF’s problem is there is no reason in theory Greece can’t deliver such a surplus. Other countries have managed it, and indeed some in the eurozone will need to do so for many years to avoid their debts becoming unsustainable.

The IMF considers Greece a special case because of the weakness of its governance and political system. But the fund also accepts that it is hard for the eurozone to acknowledge this publicly.

The fund’s response instead has been to accept such tough surplus targets only if accompanied by far-reaching reforms of its pension and tax systems as well as growth-friendly overhauls of its product and labor markets, legislated in advance as a condition of financial aid. That is a very high political bar in a country that has consistently resisted such reforms.

Not surprisingly, many Europeans—not least in Athens and Brussels—would like nothing more than to get rid of the IMF altogether. But this has proved politically impossible too.

The German and Dutch governments have promised their parliaments that the IMF would participate, and its absence would send a clear signal the numbers don’t add up. Nor will the IMF simply walk away from Greece and refuse to back any future bailout, as some Europeans have hoped. Greece is an IMF shareholder, and a core IMF principle is that it never hangs up the phone.

If the IMF is relaxed, it is because there is nothing Europeans can do to force its hand. IMF staff and management appear to be strongly united in the view their position is analytically robust and in accordance with the IMF’s core principles.

Indeed, fund staff believe their hand has been strengthened by the election of President Donald Trump, since they believe the new U.S. administration is likely to look unfavorably on a sweetheart deal for Europeans.

European officials complain the IMF is failing to take account of the implicit solidarity the eurozone continues to provide Greece. But if the eurozone wants the IMF on board, it will have to make that solidarity explicit. If it wants another short-term fudge designed to kick the can safely down the road again until after this year’s elections, it will have to find a way to do so on its own.

Source: The Wall Street Journal