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May 26, 2016


What the debt relief agreement really means

On day 2 after the eurogroup meeting, there follows a barrage of communication on what it all means. And the differences among the readings could not be starker.

The IMF published the transcript of a conference call in which an unnamed senior official of the fund made clear that they have not changed their position - except for accepting that debt relief won’t happen upfront - nor have they changed the assumptions of their debt sustainability analysis. They still recommend a 1.5% primary surplus target, and they won’t give a green light for the IMF’s financial participation in the third bailout - at least not for now. The staff will do another DSA after the eurogroup provides some quantification of what the debt relief measures mean, especially the "targeted EFSF reprofiling" mentioned under the medium-term measures. Then, eventually, at the end of the year, when there is enough clarity, they will go to the IMF board. The IMF official expects that the quantified debt relief will be in line with their debt sustainability analysis and that the new DSA will be based on those quantified measures adopted at the end of the programme. 

The Europeans wanted the IMF to rubberstamp the deal with a positive assessment on debt sustainability, but they did not get this. If the Europeans cannot quantify the debt relief measures, both sides will have to sit down and talk about alternative measures, so the senior official.

Answering the question of how debt can be considered sustainable in the IMF framework if relief is contingent, conditional and not upfront, the senior official said that debt sustainability will always depend on Greece implementing its programme, even if debt relief would be paid unconditionally and upfront, so there is no difference here. 

The WSJ blog makes the point that saying the IMF intends to contribute more cash - even if this is not going to happen any time soon - serves only to appease German voters, and that endorsing a deal that many consider as a charade is undermining the IMF's credibility among its members. The real test of the fund’s credibility may come later this year when they have to quantify under what debt-relief conditions the IMF finances a third bailout for Greece. For us this looks like the IMF's equivalent of saying 'if necessary,' a term so dear to the German government. This conditionality of engagement will be hard to keep credible.

There are no newspapers in Germany this morning due to a holiday, but the internet reporting on the outcome of the summit sees it as a humiliation of the IMF and a victory of Wolfgang Schäuble. Die Welt writes that Schäuble is getting away with a promise that nobody in Germany is taking seriously - that you have to consider debt relief for Greece, but only if necessary and after the elections. These are cost-free concessions. Never has the IMF been more humiliated. The article then quotes a diplomat - we presume a senior German government source - who says that the "IMF is an organisation we own". In other words, the IMF does what the Europeans want it to do. 

Our other stories

We also have stories on how the eurogroup deal will be received in Greece; on the prospect of the ECB restoring the waiver on Greek debt; on a crippling strike against France's labour law reform; on what Keynes might have thought of unconventional monetary policies; on the need to turn the Juncker plan on its head; on why Germany does need more public investment; and on the emerging consensus that the Eurozone can survive without political union.

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