In the FT, Mehreen Khan reports about the IMF’s conditional acceptance to lend to Greece.
The IMF’s “agreement in principle” (AIP) tool draws on a practice where the fund is able to greenlight its involvement in a debtor country, conditional on the government and its creditors agreeing to future debt relief measures.
Of course, the dispute about the merits of debt relief is unresolved. The IMF thinks Greek debt is ‘unsustainable’ and the European creditors should bear more losses, earlier on while some Euro area countries disagree. (For the numbers, see here).
Euro area ministers and the International Monetary Fund unveiled a deal … that will … sav[e Greece] … from default this summer. The IMF will join the bailout as a partner but withhold any money until euro area finance ministers give more detail on what debt relief they might offer Athens. …
Euro-area policymakers have been trying to reconcile competing EU and IMF visions of the €86bn programme and, crucially, whether it will make Greece’s debts sustainable.
Programme conditions set by euro area governments in 2015 included budget surplus targets that the IMF said were punishingly ambitious and unlikely to be met. The fund set out a different vision: lower primary surplus targets for Athens, coupled with comprehensive pension and tax reform and, crucially, far-reaching debt relief.
At the centre of the puzzle was Germany’s finance minister, Wolfgang Schäuble, who has insisted that the IMF must join if Greece is going to continue receiving tranches of bailout aid — but has also resisted significant debt relief commitments.
Given that the fund could not join up unless convinced that Greece’s debts were being put on to a sustainable path, the euro area and IMF had to find another solution — and it came in the form of asking Athens to do more.
To give the IMF confidence that Greece could hit budget surplus targets set by the euro area, Athens was asked to widen its income tax base and cut pensions. The measures, adopted in May, are estimated to be worth about 2 percentage points of gross domestic product.
In the meantime, Greece plans to regain market access by 2018 (FT).
The IMF has released a report with an ex-post evaluation of Greece’s 2012 Extended Fund Facility (Exceptional Access under the 2012 Extended Arrangement under the Extended Fund Facility with Greece).
A critical discussion by Charles Wyplosz on VoxEU.
The Greek authorities are more optimistic than IMF staff about the economy’s outlook.
The Independent Evaluation Office of the International Monetary Fund released a critical report on IMF supported policies in Greece, Ireland and Portugal. It questions the legitimacy of certain decisions. The executive summary states that
[t]he IMF’s pre-crisis surveillance mostly identified the right issues but did not foresee the magnitude of the risks … missed the build-up of banking system risks … shared the widely-held “Europe is different” mindset … Following the onset of the crisis, however, IMF surveillance successfully identified many unaddressed vulnerabilities, pushed for aggressive bank stress testing and recapitalization, and called for the formation of a banking union. …
In May 2010, the IMF Executive Board approved a decision to provide exceptional access financing to Greece without seeking preemptive debt restructuring, even though its sovereign debt was not deemed sustainable with a high probability. The risk of contagion was an important consideration … The IMF’s policy on exceptional access to Fund resources, which mandates early Board involvement, was followed only in a perfunctory manner. The 2002 framework for exceptional access was modified to allow exceptional access financing to go forward, but the modification process departed from the IMF’s usual deliberative process whereby decisions of such import receive careful review. Early and active Board involvement might or might not have led to a different decision, but it would have enhanced the legitimacy of any decision. …
The IMF, having considered the possibility of lending to a euro area member as unlikely, had never articulated how best it could design a program with a euro area country … where there was more than one conditional lender, the troika arrangement … proved to be an efficient mechanism … but the IMF lost its characteristic agility as a crisis manager. … the troika arrangement potentially subjected IMF staff’s technical judgments to political pressure …
The IMF-supported programs in Greece and Portugal incorporated overly optimistic growth projections. … Lessons from past crises were not always applied, for example when the IMF underestimated the likely negative response of private creditors to a high-risk program. …
The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped create the perception that the IMF treated Europe differently. … Some documents on sensitive issues were prepared outside the regular, established channels; the IEO faced a lack of clarity in its terms of reference on what it could or could not evaluate; and there was no clear protocol on the modality of interactions between the IEO and IMF staff. The IMF did not complete internal reviews involving euro area programs on time, as mandated, which led to missed opportunities to draw timely lessons.
It lists the following recommendations:
… should develop procedures to minimize the room for political intervention in the IMF’s technical analysis. … should strengthen the existing processes to ensure that agreed policies are followed and that they are not changed without careful deliberation. … should clarify how guidelines on program design apply to currency union members. … should establish a policy on cooperation with regional financing arrangements. … should reaffirm their commitment to accountability and transparency and the role of independent evaluation …
In her response, the IMF’s Managing Director emphasizes that the IMF-supported programs did work in the cases of Ireland and Portugal (and in Cyprus) while Greece was a special case. She supports the report’s last four recommendations but disagrees with the premise of the first.
The IMF’s debt sustainability analysis paints a bleak picture … about previous IMF assessments and about the prospects for Greece.
On the FT’s Alphaville blog, Matthew Klein reports about discrepancies between IMF and Greek (and EU) assessments of Greek net indebtedness. The IMF appears to report lower Greek financial asset holdings than the Greek Central Bank.
Matthew Klein quotes the Greek Central Bank:
We would like to clarify that the Bank of Greece compiles its financial accounts, from which data on the general government’s net debt are derived, according to European standards. The Bank of Greece’s data are compatible with the ECB’s and Eurostat’s rules (ESA 2010) regarding financial accounts and are used as an integral part in the production of the Monetary Union’s Financial Accounts. These data can also be accessed through the ECB’s Statistical Data Warehouse at http://sdw.ecb.europa.eu/reports.do?node=1000002429.
The IMF’s series on the general government’s net debt come from its WEO database and are not necessarily based on official statistics provided by Greek Statistical authorities. We understand that they may be compiled by IMF’s desk economists (and not its Statistics Department) and we cannot vouch for their accuracy, since they are adjusted according to the programming needs of the IMF. At first glance, they appear to be based on outdated information contained in past EDP [excessive deficit procedure] documentation.
In the FT, Mehreen Khan offers a “Greek debt dilemma cheat sheet.”
Last year, the IMF has joined the MOOC movement. On edX, the online education platform founded by Harvard University and MIT, the IMF contributes a set of “IMFx” courses developed by its Institute for Capacity Development. Courses cover
- Debt sustainability analysis;
- Energy subsidy reform; and soon
- Financial programming and policies (analysis and program design) as well as
- Macroeconomic forecasting.
In a Study Center Gerzensee working paper, Pinar Yesin argues that the IMF’s Equilibrium Real Exchange Rate model (ERER) helps predict medium term exchange rate changes. The reduced form equation relates the real effective exchange rate to macroeconomic fundamentals.
… one of the models, namely the ERER model, outperforms not only the other two in predicting future exchange rate movements, but also the (average) IMF assessment. … the IMF assessments are better at predicting future exchange rate movements in advanced economies than in emerging market economies. Controlling for the exchange rate regime does not yield different results. … the IMF assessments have higher predictive performance in open economies than in closed economies. … safe haven currencies close the misalignment gap predicted by the models faster than other currencies.
… To assess exchange rates only a modified version of the ERER model is being used since 2012. The modified versions of the MB and ES models, while still being utilized, do not have a direct link to the exchange rate anymore. That is, the IMF ceased making a direct link from equilibrium current accounts to equilibrium exchange rates for now.
In the FT, Jim Brunsden reports about the end of Cyprus’ 2013 bailout program.
The eventual deal saw Cyprus become the first eurozone nation to impose capital controls as regulators set about restructuring the country’s two largest banks, with heavy losses to bondholders and depositors.
Cyprus is exiting its bailout having borrowed only about €7.5bn of the €10bn allocated in the programme. Its economy returned to growth last year and it is outperforming on its budgetary targets. While the EU component of its bailout was scheduled to end this month, it is exiting the IMF part two months early.
In the FT, Chris Giles, Gillian Tett, Elaine Moore and Benedict Mander report about the negotiations between Argentina and the country’s creditors that are about to start, now that the new government has taken office.
Argentina’s finance minister has announced that the country intends to honor the face value of outstanding debt but wishes to negotiate interest payments.
As a sign of support from the international community, Jack Lew, Treasury secretary, announced that the US had ended its formal opposition to the World Bank and other multilateral development banks’ lending to Argentina.
Observers expect that the IMF will soon be involved to provide technical assistance.
In an FT blog, Charles Blitzer argues that successful negotiations should start with a non-disclosure agreement. He links to the Institute of International Finance‘s Principles for Stable Capital Flows and Fair Debt Restructuring.
In the FT, Elaine Moore and Neil Buckley report that Ukraine secured a restructuring deal with its creditors. The deal includes a 20% haircut on some bonds as well as new GDP-linked securities. The FT writes:
The IMF alluded to the uncertainty in early August when it reiterated that although it expected Ukraine’s debt operation to be completed, it was willing to support the country even if debt discussions failed and a moratorium was imposed. However, the repercussions of Ukraine defaulting on its debt would have been severe. Ukrainian bonds, issued under English law, contain cross-default clauses that mean missed payments on one can trigger default on all, allowing bondholders to demand repayment, drag a country into lengthy legal battles and exacerbating existing economic problems. … If Ukraine succeeds in a debt restructuring it could plausibly return to international debt markets within a yea r… Market prices for Ukrainian bonds have recovered in recent weeks as hopes rose that the country would avoid default …
The Economist (Free Exchange) reports about prospects of a resolution of the Ukrainian debt crisis. It remains unclear whether the planned haircut on some debt tranches will suffice to satisfy IMF demands.
In a Vox column, William Cline argues that
it is important to recognise that the headline debt figure overstates the true burden of Greek debt. Because most of the debt is owed to official sector partners at concessional interest rates, the interest burden is much lower than would usually be associated with the same gross debt. Under the Fund’s own criterion for sustainability in these circumstances (ratio of gross financing needs to GDP), Greek debt should remain within an acceptable range at least through 2030. It is questionable to base debt relief policy on problems that might or might not materialise beyond such a distant horizon. Moreover, most of the projected sharp increase in debt could be avoided by carrying out bank recapitalisation directly from the European Stability Mechanism (ESM) to the banks, rather than through the Greek government as an intermediary.
There is still an important potential role for using interest rate relief, for two purposes. First, if fiscal balances fall below target because of lower than expected growth (rather than policy slippage), a portion of interest otherwise accruing could be forgiven to avoid the need for additional fiscal tightening and its recession-aggravating consequences. Second, because Greek unemployment is at depression levels (26%), special employment programmes would seem appropriate, and forgiving a portion of the interest due could provide a significant source of funding for this purpose.
Cline also discusses the claim that Eurozone loans mainly saved Eurozone banks:
- not true, they received only one-third of the official sector support;
that the Troika called for too much austerity:
- true, the cyclically adjusted primary balance swung from -13.2% of GDP in 2009 to +5.3% in 2014, much more than in Portugal, Spain or Ireland;
- but Greece was cut off from financial markets;
- and Eurozone support as a share of GDP exceeded 100% in Greece compared with roughly 30% in Ireland and Portugal or 5% when the US supported Mexico;
- “even at the upper bound of the IMF’s upward-revised multipliers (1.7), smaller spending cuts would not have boosted GDP and revenue by enough to pay for themselves;”
- and the adjustment mostly occurred in the early years when spreads were high and would have been even higher with less adjustment.
Cline estimates that the third rescue package will raise Greek net debt by 10-15 billion Euros.
In the FT, Duncan Robinson and Christian Oliver report about Eurozone finance ministers’ approval of the third bailout for Greece, amounting to 86 billion Euros.
Contrary to Germany’s recent demands, the approval came in spite of the fact that the IMF has not committed to participate in the new program. In fact, the IMF has committed not to participate unless Greece’s debt burden is further reduced. Finance ministers effectively promised such further cuts in the future.
The deal falls short of what the German government had hoped to secure (see also this previous blog post).
In a Vox column, Matthias Schlegl, Christoph Trebesch, and Mark Wright document an implicit seniority structure of external sovereign debt: IMF > Multinational > Bonds > Bilateral > Banks > Trade Credit (see the figure).
They argue that Greece’s recent default on the IMF constitutes an outlier.
… Greece in 2015 is clearly an outlier case, having defaulted on the most senior creditor (the IMF), while continuing to service historically more junior creditors. The evidence also suggests that the Eurozone rescue loans, which are essentially bilateral (government-to-government) credit, are likely to be a junior creditor class going forward. The evidence also rationalises why Greece may have an interest in exchanging the debt it owes to the IMF and the ECB into loans to the European Stability Mechanism, which is likely to be junior debt in the future, as discussed in the run-up to the July Eurozone summits. Policymakers should be aware of the associated changes in seniority and repayment incentives.
In a Vox blog post, Olivier Blanchard addresses four critiques against the IMF’s engagement in Greece. He argues that
- the 2010 program did help Greece; without it, Greece would have undergone much harsher “austerity;”
- the financing given to Greece did not only benefit foreign banks; the 2012 PSI amounted to debt relief on the order of 10’000 Euro per capita;
- “[m]any … reforms were either not implemented, or not implemented on a sufficient scale … [m]ultipliers were larger than initially assumed … [b]ut fiscal consolidation explains only a fraction of the output decline”;
- conditionality also reflects political constraints on the part of the lender countries.
Olivier sees the Fund on the sidelines, in particular after Greece’s default against the IMF:
The role of the Fund in this context is not to recommend a particular decision, but to indicate the tradeoff between less fiscal adjustment and fewer structural reforms on the one hand, and the need for more financing and debt relief on the other.
At the 9 May 2010 meeting at which the IMF board approved the first bailout program for Greece, not all members approved. In fact, many members, including the Executive Director representing Switzerland, challenged the proposal, suggested less optimistic scenarios and asked for modifications. The Wall Street Journal published excerpts of the minutes in October 2013, see below.
Sebastian Bräuer in the NZZ am Sonntag also reports on the issue. He points out that the Swiss Executive Director asked what would happen if the Greek government were not to implement the agreed reforms; and if IMF and European commission were to disagree. Bräuer also reports that some European banks would have been prepared to bear losses resulting from their Greek exposure, see below.
The WSJ writes:
Swiss executive director Rene Weber in a prepared statement to the board for the May 9, 2010 meeting: We have “considerable doubts about the feasibility of the program…We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term…Why has debt restructuring and the involvement of the private sector in the rescue package not been considered so far?”
“The exceptionally high risks of the program were recognized by staff itself, in particular in its assessment of debt sustainability.”
“Several chairs (Argentina, Brazil, India, Russia, and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement (PSI) to avoid, according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions.’ The Argentine ED was very critical at the program, as it seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to the Argentina’s crisis of 2001. Much to the ‘surprise’ of the other European EDs, the Swiss ED forcefully echoed the above concerns about the lack of debt restructuring in the program, and pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism.”
“The Swiss ED (supported by Australia, Brazil, Iran) noted that staff had ‘silently’ changed in the paper (i.e., without a prior approval by the board) the criterion No.2 of the exceptional access policy, by extending it to cases where there is a ‘high risk of international systemic spillover effects.’”
The NZZ writes:
[Swiss ED Weber asked:] “Wie reagiert der Fonds, wenn die Behörden die Sparmassnahmen und Strukturreformen nicht umsetzen?”
[IMF-deputy John Lipsky said:] “Es gibt keinen Plan B. Es gibt einen Plan A und die Absicht, dass Plan A erfolgreich ist.”
“Ich kann die Direktoren informieren, dass deutsche Banken Unterstützung für Griechenland erwägen”, sagte der deutsche IMF-Direktor Klaus Stein. Sein französischer Kollege Ambroise Fayolle ergänzte, auch die Banken seines Landes würden ihren Job tun.
A recent IMF draft debt sustainability analysis for Greece, written just before the recent turmoil, foresaw that Greece (or its creditors) needs additional 50 billion Euro plus bailout money, as well as maturity extensions or another haircut. Now it needs more of that.
Peter Spiegel comments in the FT.
In the FT, Willem Buiter proposes a 5 point plan for a way out of the Greek debt crisis:
- Greece effectively regains sovereignty and can do whatever it pleases, with some exceptions, see below.
- Greek debt held by the ECB is bought by the ESM: The ESM extends long-term, low-interest financing to Greece which Greece uses to repay the ECB debt. “Since most of Greece’s other sovereign liabilities have long maturities and deferred interest payments, payments to creditors would fall sharply.”
- No further financing by the IMF, the ESM or other official sources is extended to Greece.
- The ECB does no longer accept any Greek government debt paper as collateral or for purchase.
- Commercial banks in Greece are recapitalized or restructured using funds from the Hellenic Financial Stability Fund and other sources. The ECB bars Greek banks from accepting any Greek government debt paper.
The plan would require additional European taxpayer money for the ECB-ESM debt swap and the bank recapitalization. It would isolate the Greek banks from the mayhem triggered by government default.
Update: 7 July 2015
A related proposal by Willem Buiter and Ebrahim Rahbari.
Ashoka Mody argues in an Econbrowser blog post that recent IMF research should guide a Greek deal. According to Mody this research shows that debt overhang is very costly; “austerity” can be self defeating; and structural reforms generate uncertain payoffs. He therefore recommends
- large scale debt relief, resulting in a debt quota of 50%,
- a scale down of the banking system, and
- a primary surplus quota of 0.5% over the coming years.
Olivier Blanchard, IMF chief economist, disagrees.
An iMFdirect blog post by Olivier Blanchard outlines the IMF’s perspective on the standoff between Greece and her official creditors. According to Blanchard, last week’s offer extended to Greece is realistic. On the part of the Greek government, it requires
truly credible measures to reach the lower target budget surplus … [and] … commitment to the more limited set of reforms.
On the part of the creditors, it requires
significant additional financing, and … debt relief sufficient to maintain debt sustainability. … debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.
Blanchard also explains why the IMF deems pension cuts unavoidable:
Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.
Blanchard recalls the 2012 agreement between Greece and her creditors:
Greece was to generate enough of a primary surplus to limit its indebtedness. It also agreed to a number of reforms which should lead to higher growth. In consideration, and subject to Greek implementation of the program, European creditors were to provide the needed financing, and provide debt relief if debt exceeded 120% by the end of the decade.
How will European governments, parliaments and taxpayers interpret the proviso “In consideration, and subject to Greek implementation of the program”?
Kerin Hope and Peter Spiegel report in the FT that Greece will delay payment of the first tranche of June payments it owes to the IMF:
Following a rarely used procedure permitted under IMF rules, the Greek government intends to bundle all the payments it owes in June totalling €1.5bn and transfer it at the end of the month.
In a Vox column, Olivier Blanchard distills ten takeaways from an IMF conference on “Rethinking Macro Policy. Progress or Confusion?’” He lists them under the following headings:
- What will be the ‘new normal’?
- What the new normal will be matters a lot for policy design
- Can we hope to limit systemic financial risk?
- Should monetary policy go back to its old ways?
- Instrument rules
- Macroprudential tools or financial regulation
- Should central banks keep their independence?
- Little progress on the design of fiscal policy
- The complex effects of capital flows
- How much can the international monetary system be improved?