May 05, 2015

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IMF tells truth to power - Greek debt is not sustainable

Now we know that the real agitation in Riga was not about Yanis Varoufakis after all but the new debt sustainability analysis from the IMF. Poul Thomsen told the eurogroup meeting last week that according to the IMF's latest data analysis Greece is running a primary deficit of 1.5% rather than its 3% surplus target for this year. Thomsen threatened that the IMF could pull out of the negotiations if European lenders are unwilling to write off a significant chunk of Greece's sovereign debt, according to the FT. This would cut down the tranche Greece can hope for by €3.5bn and would pose a serious problem for Germany in particular, as it always insisted on the participation of the IMF. So we are likely to end up in another standoff similar to the one in 2012, when the IMF only agreed to stay after the eurogroup agreed on "taking further steps," e.g. writing down, their bailout loans to reduce Greece’s debt to “substantially lower” than 110% of GDP by 2022. Nothing of this sort has happened since. So why would the IMF insist on a writedown this time?

And what does this mean for the ongoing negotiations? According to Greek Reporter, Alexis Tsipras no longer expects a deal under the current agreement but puts all his efforts to get reform talks folded into a comprehensive deal by the end of May. The government sees this as a two stage process, first to get creditors to accept an increase in the T-bill ceiling to ease the pressure on liquidity and second to negotiate a final reform deal by the end of May. Tsipras already started a series of telephone conversations with top European officials from the European Commission, the ECB and IMF, trying to reach a deal on a political level, despite the pressure from lenders to reach an agreement on a technical level. There is also a flurry of meetings. Yiannis Dragasakis and Euclid Tsakalotos are to meet with Mario Draghi in Frankfurt today, and Yanis Varoufakis is to meet Michel Sapin in Paris before meeting Pierre Moscovisci in Brussels. The IMF's forecast of a primary deficit this year and a revision of overly optimistic primary surpluses in the future will certainly impact on this process. Senior officials have initially projected a new programme at €30bn-€50bn, but rising deficits could change that calculation, write the FT.

So for Monday's eurogroup meeting the best hope is that there is enough agreement to give more time for a deal by the end of May. The FT quotes some EU officials saying they hope to agree a statement that would allow the ECB to relax the cap it has imposed on Greek sales of short-term debt. Still, even with the delay granted, we don't see how creditors will all of a sudden accept the red lines of the Greek government unless Tsipras gets a new mandate for this. Labour Minister Panos Skourletis told Mega TV that the IMF was unyielding in demands for pensions cuts, rules to ease mass layoffs of private sector workers and opposition to a government plan to raise the minimum wage, Reuters reports.  

No doubt, Athens will need some cash. In the first government press conference in 3 years government spokesman Gabriel Sakellaridis said the government needed fresh funds before the end of the month, though intends to meet its obligations towards the IMF until then. According to Greek Reporter, the government plans to give journalists an update twice a week, Greek journalists first, then foreign correspondents.  

Jean Claude Juncker suggested that if Athens makes a major step towards the creditors, they could respond in an adequate way so that Greece has no choice not to take up the offer, Reuters reports. He said Grexit is not an option, otherwise the "Anglo-Saxon" world would try to break up the single currency area.

ECB's Vitor Constancio also made this clear as he told Dutch newspaper Het Financieele Dagblad in an interview published on Monday: 

"I am ... absolutely convinced that the worst-case scenario will be avoided"

which sounds more like hammering the message down through the media rather than giving a forecast based on possible scenarios.

Our other stories

Today we also have stories on a crisis at the top of German politics; the comeback of the FDP; Italy’s new electoral law; an analysis of what Spain’s new multi-party system means for elections; and a possible coalition deal in Finland.

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