15 Jul 2015

Decoding the IMF: Greek deal doomed, exit likely

It’s easy to get drawn in to the detail. I spent some of yesterday in the hot corridors of the Greek parliament where the various factions and groupings within Syriza, the radical left party, were working out their postures on today’s vote.

No to the rescue deal, says the left. Abstain, say others. Vote yes while declaring it’s been done at gunpoint, says Alexis Tsipras in a live TV interview. But step away from the argument, bitter as the black coffee served in the parliament’s canteen, and the bigger picture is: the deal will pass, Syriza will vote for it.

Greece's PM Tsipras and Greek Finance Minister Tsakalotos leave a euro zone leaders summit in Brussels, Belgium


Step back further and take in the implications of the IMF’s secret report, leaked yesterday, into the dynamics of Greece’s debt. The IMF says – after the weeks of dislocation caused by the relentless bank run and the capital controls – that the austerity deal is pointless. Greece needs a massive debt write-off or large upfront transfers of taxpayers money from the rest of Europe. It needs a 30 year grace period in which it will stop repaying the loans.

Yet the entire deal done on Sunday night was premised on not a single cent worth of debt relief. Vague commitments to “reprofile” debt – pushing repayment times backwards and lowering the interest rates – were all Angela Merkel could be persuaded to do.

What this means is very simple: the third bailout agreed in principle on Sunday night is doomed to fail. First because the IMF cannot sign up to it without debt relief; second because, without debt relief it will collapse the Greek economy. This is even before you factor in issues like mass resistance to its details, or the total lack of enthusiasm for execution of the deal by the Syriza ministers who will have to do it.

IMF report

But on both sides of the Greek political class there is cognitive dissonance, and it’s being generated by the same thing: a blindness to what the Euro has become.

The Greek centre and centre right will keep Syriza in power today on the grounds of being good Europeans. Syriza will vote for a deal it opposes, and which anybody who’s read even a summary of the IMF report now understands is doomed. Again on the grounds that it is demonstrating commitment to Europe and that, as Alexis Tsipras argues, “rules out Grexit”.

The implication of the IMF report is that Grexit is inevitable. Without debt relief the Greek debt to GDP ratio will rise to 200%. It will be using 15% of its GDP simply to make interest payments and payments coming due.

So we go back to the old problem that has dogged Greece since 2010. Yes it has an inefficient, state-dominated economy that needs to be reformed; yes it has antiquated and corruption-inducing restrictions on who can run certain businesses. But you can’t modernise a place like Greece amid the relentless downward pressure on growth that austerity measures produce.

By saying this – albeit in a secret document the Europeans wanted suppressed – the IMF has shown it is a learning organism. It has abandoned the dogma that predicted austerity would bring a 4% fall in GDP and drawn conclusions from the 25% fall in GDP that actually occurred.

One of the recurrent features of this crisis is the mismatch between the speed at which political parties learn things and how people do.

I’ve found, among ordinary people who were passionate supporters of the No vote in the referendum, the widespread acceptance that – to go forward with measures on social justice or alternatives to austerity – Greece will have to leave the Euro. Most people I talk to want it done in a controlled manner, consensually and with some kind of mandate from the people.

They’ve realised that Angela Merkel’s absolute refusal to countenance debt write-offs inside the Euro, alongside the IMF’s absolute insistence that they should happen, have created a cul-de-sac no Greek government can get out of without reversing out of Euro membership.

Syriza – which was always a coalition of left social democrats, New Left marxists and a harder left communist group – is finding it institutionally hard to accept this logic.

Opponents of exit argue that, with the Euro question “solved” they can get on with prosecuting a domestic crusade against corruption, poor police methods and the dysfunctional judiciary and the state.

What nobody knows is how much of its absolute sovereignty over domestic law the Eurozone would actually use if, for example, Syriza tried to cleanse the judiciary. Would this be deemed as “politicising the state?” Nobody knows – because the European Commission and ECB have never had to have policies on such things before.

‘Third bailout will be a disaster’

Equally uncertain is: what kind of party does Syriza now become? Right now it is still, basically, an expression of the desire of large numbers of Greek people to stay in the Euro with less austerity.

The Greek electorate’s pattern over the past 5 years has been to put parties into power who say they will mitigate austerity but stay in the Euro. First Papandreou, then New Democracy – who also, now barely remembered – once opposed an austerity memorandum – and now Syriza.  By throwing successive parties into the European mincing machine, the outcome has been to shred party politics. Pasok was shredded, New Democracy was shredded and it’s possible that Syriza too will split, be vilified, denounced as traitors etc.


We know from opinion polls that about 35% of Greeks want to leave the Euro but that a further 25% of those who voted No in the referendum probably fear what Alexis Tsipras spelled out last night: €250bn has left the country over the past 5 years and if Greece leaves the Euro this “drachma lobby” would be able to return to Greece and buy out everything and everybody.

But listen to the IMF report – which implies the third bailout will be a disaster; and to the intransigence of Angela Merkel – who says no debt relief within the Euro. The more I look at it, logically and dispassionately, that €250bn waiting outside Greece for Grexit now looks like very smart money. And you the highly logical and dispassionate investment community is drawing that conclusion too.

The levels of economic pain and dysfunctional borrowing set to be inflicted on Greece mean that at some point in the next 12-18 months there is a chance that centrist 20-30% of public opinion will flip to a policy of controlled, or maybe temporary exit from the Eurozone. The only question then is: which party will offer a convincing narrative and lead it.

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