Why an IMF solution is most likely

By: Laurence Boone

Considering Greece may be facing difficulties raising the €20bn or so it needs by end May at a reasonable rate, and as hesitations among euro members appear important, it is time to reassess the different possible options Greece has. One element of background is that Germany is facing important local elections on the 9th of May and the German Chancellor party CDU is in a fragile position. In addition, polls demonstrate that the German population is strongly against Germany’s support to Greece (it is worth noting that the German population was also not in favour of the euro in the early nineties, when debates about the construction of the euro were tensed). As a result, official support from Germany could be postponed beyond the election results (as we detailed in the latest paragraphs of this comment). The issue however is that the schedule of bills and bond redemptions in Greece does not match the election timing of Germany: €8.2bn of bonds redeem on the 20th of April, and bills to roll on 13th, 16th and 23rd of April for €1, €1.3 and €1.6bn respectively and another €10bn by end of May. As a result, Greece may be in need of support before the German elections and some support outside of Germany needs to be found.

There will be a European council on Thursday, which may go a step further in clarifying the situation (as required b y the EC President Barroso), though Germany (now supported by JC Juncker, Head of the eurogroup, the group of economic and finance Ministers of the euro area) has repeated the Council would not necessarily present a solution. Against this background, the IMF solution, possibly with a couple of bilateral loans, may be the “easiest” way out of the maze. The reason is that the IMF is in a position to lend €10 to €15bn, while sparing member states to make significant loans before the German elections. In addition, the IMF has the expertise in guiding adjustments (and given the size and type of adjustment measures undertaken so far, additional efforts under the IMF auspices could be limited).

The next question is what this implies for other periphery countries. As we highlighted in our analysis of euro periphery public finances (1), other periphery countries do have a difficult adjustment to realise, but not on the same scale as Greece and do not face the same type of liquidity funding issues. As a result, the IMF involvement could not be so disruptive for these periphery countries.

A snapshot on Germany’s viewpoint and evolution of the euro area position: in view of the forthcoming summit on Thursday, Luxembourg’s premier and chairman of the Eurogroup J-C Junker said: “It is not absolutely necessary that the European Council finds agreement on the instrument this week”, suggesting that Germany’s unwillingness to agree to provide Greece with German taxpayers’ money is about to win. The German chancellor A Merkel has dampened expectation that the German government will agree to a financial support package for Greece. In the same vein, German Foreign Minister G Westerwelle (FDP) is reported as saying in Handelsblatt: “It cannot be that Germany for the European Union is putting money in the window and thereby lowering the reform pressure on Greece.” EU president J M Baroso had increased pressure on Mrs Merkel to agree to a “system of coordinated bilateral support”. What is more, German FM W Schäuble moved away from his hitherto held opposition against involving the IMF. Handelsblatt reports that Mrs Merkel and Mr Schäuble found agreement that the EU and the IMF together might provide support, like in the case of Lativa.

A reminder of what the likely options may be:

So far the options discussed are the following, with attached qualifications:

• Guarantees, but this is potentially an issue for Germany because it is going against "the spirit of the Treaty" of no bail-out among euro members and therefore could be challenged by the German constitutional court;
• Bilateral loans: this would be easier in this sense as they can be done through a public entity not necessarily directly from States;
• The IMF: Germany, the ECB and to a lesser extent France were initially reluctant to involve the IMF, but this seems to be changing; in addition JC Juncker is also saying that the IMF could be involved together with bilateral loans (coordinated by the European Commission) from euro member states
• Default, possibly organized within the framework or the association of euro/EU institutions: this seems to us unlikely in the current circumstances given the stakes large euro area members States banks have in Greece, and given the possible threat of contagions for rising spreads to other euro periphery members
• Leaving the euro: from a legal point of view, and as reiterated by JC Trichet , Head of ECB, leaving the euro would likely imply leaving the EU (at least there is nothing in the Treaty that allows leaving the euro without leaving the EU, though this could be negotiated at some stages) and would entail too many costs for Greece if it is not done in agreement with Greece’s creditors (as the debt in a new currency devalued vis-à-vis o the euro would dramatically inflate debt repayments)

 

Laurence Boone, Thorsten Polleit

(1) http://ecommerce.barcapint.com/research/user/article/summary?author=401979&id=258226

---