16 May 2015

IMF leak signals ‘progress’ with Greece, but threat of default in June

European negotiators have just days to conclude an agreement with Greece or a critical payment to the IMF on 5 June is likely to be missed, according to a leaked document seen by Channel 4 News.

See the full, leaked, confidential document, below.

In an memo dated 14 May, the IMF’s staff state:

“There will be no possibility for the Greek authorities to repay the whole amount unless an agreement is reached with international partners.”

They point to the €1.5bn due to the IMF in June as the first vulnerable payment.

Channel 4 News understands Greek negotiators made clear last week that the €1.56bn owed to the IMF in June, beginning with a payment on 5 June, cannot be paid without a deal.

The IMF memo confirms that there has been “some recent progress” in negotiations between Greece and its lenders: on VAT reform, tax collection and regulations that would make it easier for Greek companies to go bust and be restructured.

But the tight timetable, and growing tension between the IMF and the Europeans, mean next week’s Euro summit in Riga looks like the last chance to do a deal before Greece technically defaults on a payment to the IMF in early June.

This assessment goes further than the formal words used at the conclusion of the Eurogroup last week, and confirms there is momentum towards a deal.

‘Quick and dirty’

The IMF names the outstanding issues as: pension reform, deregulating the labour market, and the re-hiring of 4,000 former civil servants as the issues preventing a deal. The document acknowledges progress on labour reform “in the past”, signalling that the rehiring and pensions issues are what stand between Greece and a deal this week.

But the document reveals critical differences between the EU, ECB and IMF that could lead to a collapse of the negotiations. Basically, the EU is looking for a deal that papers over the cracks and takes the Greek banking system off life support, while the memo confirms the IMF’s own rules do not allow what it calls a “quick and dirty” outcome.

But the “progress” has triggered a major row behind the scenes between the EU and the IMF.

Debt default

The EU negotiators, by agreeing to drop their demands for Greece to run a 3 per cent of GDP budget surplus in the next two years, have paved the way for an interim deal that would allow them to reprieve the Greek banking system, currently on temporary life support.

But the IMF document says, “it was made clear that no disbursement will be made until a full staff level agreement on a comprehensive review is reached”. The document concludes by reiterating that the IMF has to “play by the rules and not obscure the fund’s mandate”.

In a critical passage, albeit in coded language, the IMF staff outline major differences with the Europeans:

“While staff emphasised they are not pushing the European partners to consider debt relief, at the same time staff noted the numbers need to add up. In particular it was noted there is an inverse relationship between reforms and sustainability.”

This translates as: the more austerity the Europeans demand, the bigger the chance that Greece defaults on its debts. And the IMF – unlike the EU – cannot sign off on a plan where austerity provokes a debt default. Greek government sources believe the IMF could seek to offload its loans to Greece onto the European Stability Mechanism created during the debt crisis of 2010, if its own rules leave it unable to sign off a deal done this month.

Meanwhile Greek economy and public finances are deteriorating rapidly. The IMF noted that:

“non-performing loans are at very high levels and – going forward – the system might suffer from important stress. The staff also noted a dramatic deterioration in the payment culture in the country”.

This last refers to the near gridlock of the Greek system of inter-company payments as betwen €30 and €35bn has flowed out of the banking system – into the cash economy and abroad – since Syriza came to power.


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