Greece: The IMF Option

Jean Pisani-Ferry and Andre Sapir (two very influential economists from the Bruegel think tank) recommend the IMF option for Greece:  you can read their article here.

22 replies on “Greece: The IMF Option”

The article makes a compelling case.

The medium and long term political risks of an internal EU solution are huge.

French and German hubris, not to be underestimated, appear to be the only real impediments to bringing in the IMF.

“should urge Greece to call the Fund now”, write the authors. But there is no need at all to call the Fund just now…
What this “think tank” article overlooks is market reality….If there is ample access to cash, and syndications are still possible (if at a hefty price), the IMF can bide its time… probably a long time. So Greece has time to get its books in order over 2010.
Ireland has, it seems, a particularly advantageous cash position… that allows it easily run a budget deficit yet again this year of 11.6% GDP.. maybe the equivalent of some 15% of GNP. The EDP sees it passing to 3% of GDP by 2014.
And Greece will now be committed to hitting the SGP target two years earlier than that, in 2012, after a 9% deficit to GDP ratio this year.

==> ‘the proof of the pudding will be in the eating’…
For the smaller spendthrift countries, the effective mobilisation of domestic savings is ever more critical, as highlighted here…
as are all the numerous measures a sovereign can take to stave off the worst / buy some time, should there be no serious attempt to slash budget deficits and protect the sovereign against contingent liabilities…
One year on, and the alarm bells are louder, but just alarm bells for now.
It is also of interest to note there is a large disjoint between what can be read in the Greek press each day, and what the F T/Telegraph etc publish. Irish readers of Irish / UK press will recognise the disjoint, if in quite different contexts.

The Greek 10-year yielding about 6.50 to 6.60 recently, and no reason to believe that Greece cannot borrow at these levels, in the context of a credible fiscal adjustment programme. Why call Washington now?

Roubini put out a paper on Greece yesterday, shortened version to place in the FT tomorrow i believe. He’s also plumping for the IMF option.

“Europe has so far ruled out IMF involvement because it would signal weakness, but exploding spreads reflect perceptions of weakness that may precipitate a self-fulfilling run on Greek public debt and banks. We interpret news reports of intra-EU financing plans, an IMF program and even bilateral lending by China as trial balloons, signals and feelers to test market and political reactions to different avenues for financial assistance. Our assessment is that Greece is starting to think about the need for official financing but is not ready to take the plunge, given the optics. But we believe the onset of a refinancing crisis would trigger ECB intervention and perhaps multilateral European support through the European Investment Bank or other routes, to provide time for Plan A and contain the collateral damage to the rest of the PIGS.

Furthermore, we believe an IMF plan for Greece would be available for the asking, if Greece were to make a credible commitment to the required fiscal and structural conditionality. There are technical constraints: Most IMF programs are in the form of exceptional balance of payments financing with associated targets and constraints on central bank balance sheets. In this case, since Greece has ceded monetary policy to the supranational ECB, a traditional IMF program would not work. But there are alternatives. There could be a “Staff-Monitored Program” (SMP) in the context of an EU-financed program, with the IMF providing surveillance and monitoring and perhaps even designing conditionality. Though the IMF has tended to shy away from SMPs in recent decades, these extraordinary times call for extraordinary measures. An IMF-financed program could even be designed with direct fiscal support; after all, there have been IMF programs with direct or implicit fiscal financing for Russia, Ukraine, Turkey and Brazil. At any rate, an IMF program would effectively avoid the potential moral hazard of an EU-only program.”

@ Colm

“The Greek 10-year yielding about 6.50 to 6.60 recently, and no reason to believe that Greece cannot borrow at these levels, in the context of a credible fiscal adjustment programme.”

Yield levels are important to some degree. In their fiscal stability plan they reference (a) average funding rates of 4.2% over the consolidation period and (b) admit that having to fund all the deficit at the current rates would be disastrous. Rates staying at these levels further undermine their credibility as a result. There’s also question marks over how much demand there will be for their next issue due to the horrible follow through off the last one.

Greece appear to have a larger problem in that they have been overspending for longer. They’ve a lot of debt to rollover this year and next. In theory, Ireland doesn’t have this problem, but this is only when looking at long-term bonds. How would the Irish state cope with a loss of confidence in short-term issuance? Where is the ‘cash’ from this surplus held? Is it what is holding the banks together? If so, it is not credible to say that Ireland has a strong cash position; the cash has been pre-allocated to the funding needs of the banks with the accounting lagging. It is not a lot different from the Greek position of not counting pharma and military bills as part of the deficit, as they haven’t been paid yet…

@ YM

“Is it what is holding the banks together?”

I doubt it. The Irish banks don’t have any short term liquidity issues, they’re awash with it from the ECB. The short term liquidity issue ended long ago. Its now about long term funding/liquidity issues in light of immediate solvency concerns.

This would be the liquidity issues that will have their final unlimited repo in March? (I think). And after that?

I was thinking of one bank in particular and of cash collateral on derivative contracts…

@ YM

March represents the final “long term repo” (6mths), but no suggestion as to when unlimited allottment will end yet on usual shorter term ones (1wk, 3mth). Will probably be more like the Autmn, and with the Greek and Spanish banks now coming under pressure, decent chance either unlimited or ‘very very large’ allottment will stay for some time to come.

“with the Greek and Spanish banks now coming under pressure, decent chance either unlimited or ‘very very large’ allottment will stay for some time to come.”
Maybe. They might as well not bother restricting it if that is the case. If they leave it in place, they will have entire national bank systems dependent on weekly financing. This is an impossibly dangerous consideration for the ECB to permit. I don’t see any way they can leave unlimited repo in place. The exception cannot become the norm…

Aside from any other consideration, states can continue to fund themselves through their national banking systems, so as long as there is umlimted money available, no state is going to go bust, so no state is going to have to take the difficult decisions to get within GSP parameters.

It is of the utmost importance to little countries that the EU and EMU continue to thrive and survive. The little countries as a group are an important component of the EU/EMU and the governments of Germany, France and Italy are well aware of that. How to reinforce and build a stronger EU/EMU is a pressing issue. Having EU countries go to the IMF for assistance in times of distress is a very divisive move and could bring the carefully constructed house crashing to the ground. There is no doubt in my mind but that an EU solution to an EU problem will be worked out. The alternative brings to mind conditions in Ireland prior to 1973. Do we need that?

@ YM

“states can continue to fund themselves through their national banking systems”

This is where the game is different for Greece, in that their bonds may soon no longer be accepted by the ECB for these repos. Hence the precariousness of their position.

Article doesn’t add much detail apart from the headline:
“Hidden debt of 40 billion euros revealed the findings of the Committee on the reliability of statistics which has created a Finance Minister Giorgos Papaconstantinou.” (Google Translate)

On banks and repo:
Would the Greek state be downgraded if unlimited repo was to continue? (i.e. if Greek bonds were to continue to have ECB repo at below market rates value). It is the unwinding of this carry trade that is putting pressure on ratings (i.e. desirability)…

@ YM

well the ballooning deficit and complete lack of credibility in their fiscal data are also, obviously, putting pressure on the ratings…

Ireland is already pursuing the IMF/ECB style option backed by orthodox, Irish economic ‘expertise’.

“The kinds of policies that Ireland pursued – pouring money into banks and not getting back the appropriate amount of money – and cross-the-board wage cuts in the public sector have not succeeded in improving significantly its economy or even market perceptions.” Joe Stiglitz (worlds most cited economist,-for his scholarly work, not for his commentary)


But there is a chicken and egg element to sovereign bonds. If banks are willing to buy them, there isn’t a funding problem, so the ratings remain high. Banks are willing to buy them when they can make money on them. Banks will make more money on them if the ratings are high. As long as the ratings remain high, the ratings will remain high.

I think the ECB are going to have a serious problem on their hands with their best, second best rating system…

@ YM

i broadly agree with where you are coming from, but i suppose i would see it more as a situation where the worries over the ECB/ratings agencies has exasperated an already troubled situation, or more like it brought it to a head.

At the end of the day, if Greece was running a 3% deficit they wouldn’t have to worry about the ECB withdrawing the umlimited repo, and likewise if they had a 20% deficit (its quite possible!) than all the repo in the world wouldn’t hold their bonds up in the long term.

Yep, that’s fair enough.

And their absolute level of debt is probably already at the limit of their carrying capacity (which must surely be the other corner in the sovereign calamity triangle (deficit and rating being the other two)). Mind you, those beliefs put us at odds with neo-classical economists and their whiggish views on ever expanding debt that never needs to be paid back…

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