As the Eurozone Teeters, the IMF Does Something Weird

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Wolf here: the IMF’s job is to bail out holders of sovereign bonds issued in a currency the issuer doesn’t control and can’t devalue (Mexico issuing bonds in dollars, Greece issuing bonds in euros). These bondholders are mostly banks. In a debt crisis, the IMF bails out these banks by buying their troubled bonds and then tightens the belts around the little guys so that the country can service the debt it now owes the IMF.

What happened in Greece? The banks that used to hold Greek debt have sold most of it to the European institutions, and some of it to the IMF; they have been bailed out years ago. The IMF has done its insidious job. Now mostly taxpayers are on the hook. But the IMF doesn’t give a crap about taxpayers.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

As Europe teeters on a precipice of its own making, some people are beginning to wonder whether the IMF might have somehow discovered it has a conscience. Strange as it may sound, rumors of the IMF’s do-gooding began spreading on Friday after the Fund published a damning report on the sustainability of Greece’s finances and the Troika’s woeful mismanagement of the country’s debt crisis.

Granted, the report was deeply critical of Syriza’s negotiation strategies and governance of Greece. But the report’s real victims were the IMF’s two Troika partners, the European Central Bank (ECB) and the European Commission, both of whom had fought to prevent its publication.

The latest developments confirm what I argued four months ago in “Is the IMF About to Make Greece an Offer It Can’t Refuse?”: namely that the IMF could well prove to be an unlikely, albeit temporary, ally for Syriza. Now, by publishing its Debt Sustainability Analysis at the best/worst possible time, the Fund has massively improved Syriza’s chances of achieving a no-vote on Sunday.

Here’s more from The Guardian:

With days to go before Sunday’s knife-edge referendum that the country’s creditors have cast as a vote on whether it wants to keep the euro, the IMF revealed a deep split with Europe as it warned that Greece’s debts were “unsustainable”.

Fund officials said they would not be prepared to put a proposal for a third Greek bailout to the Washington-based organization’s board unless it included both a commitment to economic reform and debt relief (DQ: exactly what Varoufakis and Syriza have been demanding for the last five months).

According to the IMF, Greece should have a 20-year grace period before making any debt repayments and final payments should not take place until 2055. It would need €10bn to get through the next few months and a further €50bn after that.

This €50-billion figure is the exact same ball-park figure that the IMF’s Brazilian economist mentioned months ago during an interview with private Greek television broadcaster Alfa TV. Indeed, according to Reuters, the publication of the draft analysis on Thursday laid bare a dispute between Brussels and the IMF that had been simmering behind closed doors for months.

All of which strongly suggests that the IMF’s latest move is not just another variation on the tiresome good-cop, bad-cop, bad-cop routine it has honed to perfection with its Troika partners, but rather what seems like a genuine split down the middle between the two European institutions (the European Commission and the ECB) and the Washington-based IMF.

As Reuters reports:

European members questioned the timing of the report which IMF management proposed at short notice releasing three days before Sunday’s crucial referendum that may determine the country’s future in the euro zone, the sources said.

There was no vote but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, the sources said.

Mysterious Motivations

The $300-billion question is why? Why did the IMF decide to extend Syriza, a radical leftist government, a helping hand in its hour of need? Has the IMF suddenly found a conscience? Has it lost interest in destroying national economies for the benefit of the world’s largest banks and richest investors, and instead decided to dedicate itself to defending the rights and interests of the little man?

Or perhaps Washington wants to heap even further pressure on the struggling European economy and its ill-fated currency. But it makes little sense – unless, of course, it could somehow help the banks. According to Goldman Sachs, cranking up the tensions in Greece would have one obvious benefit for the banking sector: it would justify increasing the ammunition for an even bigger QE bazooka, with which Draghi could flood Europe’s foundling banks with delicious free money. It’s a simple idea: kill a country, save a bank.

Now that is much more the type of mission that the IMF of yore would lead. And there are already signs that the ECB is cranking up the ammunition.

Yet I’m still not convinced, I think there’s more. I believe the IMF’s motivations go much deeper than that, way deeper – to the very heart of Europe’s institutional structures. Lest we forget, the EU is an incomplete project. Unless it is completed, it will collapse. However, for the monster to be made whole, complete monetary and fiscal union will be needed – and the sooner, the better.

But for that to happen, the eurozone’s richest countries (Germany, Holland, Finland, etc) must accept the basic notion that part of their wealth will need to be redistributed to poorer countries, as happens in almost all advanced economies. However, that idea is not very popular right now, as shown by the rise of anti-bailout parties. Meanwhile, Merkel’s government continues to resist calls for deeper economic integration, as Der Spiegel notes in an unusually scathing critique of Merkel’s leadership in Europe:

Merkel wants a Europe of nation-states and not a deeply integrated Europe. She was concerned about Juncker running as the lead conservative candidate in 2014 European elections, worried – correctly – that it could result in a reduction of power for European heads of state and government. Furthermore, she doesn’t trust the European Parliament because majorities aren’t as dependable as they are in the Bundestag back home in Berlin.

And perhaps that’s why the IMF is what appears to be doing what might appear to be an enormous favor for Syriza in Sunday’s referendum. By stoking fears of chaos, it helps to force the hand of Europe’s richer economies. If, thanks in part to the IMF’s intervention, Greece votes NO in Sunday’s referendum and economic uncertainty and panic spread to other periphery nations, it won’t be long before even the most stridently anti-bailout government is begging for a negotiated solution.

And when (or perhaps better, if) the calm settles, the governments of Spain, Italy and Portugal will be lining up around the block for much of the same. And provided it doesn’t bankrupt the eurozone, they’ll probably get it. And that, dear reader, is how the basic concept of the euro zone’s transfer union will be born.

The fact that another bailout of Greek debt (including a $60-60bn haircut) will allow the ECB and IMF to return most of the malinvested funds their risk-averse friends from Wall Street and the City of London ploughed into Greece would just be an added bonus, the little cherry on top. By Don Quijones, Raging Bull-Shit.

Now WikiLeaks got its hands on part of the secret trade pact for services. Read….  LEAKED: How the Biggest Banks Are Conspiring to Rip Up Financial Regulations around the World

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  16 comments for “As the Eurozone Teeters, the IMF Does Something Weird

  1. beergas
    Jul 4, 2015 at 8:09 pm

    Finland & Denmark poormouthed Krugman article. France gets better marks from him. Perhaps he’s wrong though?

    http://www.nytimes.com/2015/07/03/opinion/paul-krugman-europes-many-disasters.html
    It’s also in the eighth year of a slump that has cut real gross domestic product per capita by 10 percent and shows no sign of ending. In fact, if it weren’t for the nightmare in southern Europe, the troubles facing the Finnish economy might well be seen as an epic disaster.
    And Finland isn’t alone. It’s part of an arc of economic decline that extends across northern Europe through Denmark — which isn’t on the euro, but is managing its money as if it were — to the Netherlands. All of these countries are, by the way, doing much worse than France, whose economy gets terrible press from journalists who hate its strong social safety net, but it has actually held up better than almost every other European nation except Germany.

    • Finn
      Jul 5, 2015 at 4:14 pm

      Yes, I’m real sorry on the behalf of Finnish people. We are not all like Stubb and few other hardcore right wing dummies.

      Finland also needs demand and when you are in austerity, growing is a bit hard and should come from outside, but it ain’t working if everybody are doing austerity. Its just beggar thy neighbor and will lead somewhere, what Fisher talked about 100 years ago, which is called today as debt deflation, which means even less purchasing power.

      I would also like to know, what the bleep is the motive behind IMF…

  2. Gee
    Jul 4, 2015 at 8:15 pm

    It’s just CYA for the Troika. The ECB sure as shate can’t do it. Who else of the three is going to step up and pretend they aren’t really just hell bent on destruction of the puny Greeks so that they can avoid any consequence (because, as you know, it’s all contained now.)

  3. Jul 4, 2015 at 9:59 pm

    It doesn’t matter what the ECB, the IMF or the BGMFIMG do, the outcome is the same.

    Austerity is here to stay, it will engulf all of Europe and the rest of the world. The problem is a shortage of resources and nothing the bosses can do will put new resources back into the ground. Resources are capital, capital = purchasing power. As capital is depleted so is purchasing power. This is underway right now, the more ‘growth’ and progress in one place or another such as China, the less there is for everyone. At some point the purchasing power is gone and the people are destitute … regardless of how much ‘money’ or ‘assets’ they have. A car is worthless without fuel … so is a suburb (so is a farm for that matter).

    What is coming is conservation: the voluntary variety where everyone shares the burden to one degree or another and decline is managed … leaving a bit of a tattered but functioning future for the human race.

    The alternative is ‘Conservation By Other Means™’ where the Continent is de-industrialized violently … by the force of events: war, plague, credit collapse, crop failures, desertification, generalized ruin. Look to Syria and see the future of Greece … and Germany. In a hundred years there will be no more Europeans, only a few straggliong survivors wondering what … the heck … happened?

    Step one … get rid of the cars. Get rid of the imported fuel and borrowed money at the same time.

    • Graham
      Jul 5, 2015 at 10:17 am

      Well said.

    • steve
      Jul 6, 2015 at 1:46 am

      I dont think there is currently a shortage of resources, its the opposite.

  4. NotSoSure
    Jul 4, 2015 at 10:05 pm

    “Massively improved”? I wouldn’t call a 0.5% lead “massive” (http://www.reuters.com/article/2015/07/04/us-eurozone-greece-idUSKBN0P40EO20150704). Please show me any info that shows the “No” vote winning conclusively today.

    I bet you, most Greeks don’t even understand the implication of the IMF doing A, B, C, etc.

    As usual, it’s all down to who has the most to gain and lose:
    1. Yes. The old guards, etc win. The young, etc stands to lose.
    2. No. If the country turns around and that’s a big if, the young probably will have some future, otherwise they’ll just repeat their old history. The old and poor are pretty much destroyed.

    It’s pretty much a generational war I think. And will be repeated all over the place.

    • NotSoSure
      Jul 5, 2015 at 2:35 pm

      Looks like yours truly is wrong and as such my humble apologies. The “No” has it!!!!

  5. rick
    Jul 4, 2015 at 11:49 pm

    I think the Greek people will vote yes. That is the best way of turning the atm machines back on so they can eat and pay their bills.
    All that is required is a simple majority and the majority will avoid abstract political analysis and do what is expedient.

    • Mark C.
      Jul 5, 2015 at 3:31 am

      and be enslaved to the banks for years from now?

    • Gil Obrero
      Jul 5, 2015 at 4:10 am

      What makes you think that’s the best way to get the ATM.s turned on, by voting yes?

      I think it is highly unlikely to get the ATM’s turbaned on ans instead they will be subject to theft bank robbery and worse including waiting until Syriza is wiped out and new dictator from Brussels and GS installed first

  6. Owl
    Jul 5, 2015 at 12:50 am

    This is a well written piece on ZH. I’m glad they posted it. But I wonder why they didn’t gray it out and give it some persistence.

    http://www.zerohedge.com/news/2015-07-04/one-heretic-and-not-so-simple-view-greek-referendum

  7. MC
    Jul 5, 2015 at 4:53 am

    We like to think international bodies such as the IMF and the ECB to be monolithic in their composition and completely bent on whatever their goal of the moment may be but in reality, very much like the Chinese Communist Party, there are many currents and factions inside them, often in disagreement with what is seen as the policy of the moment.
    These “leaks” are very likely the work of one of these factions, or even of a single powerful member disagreeing with current policy: always remember Deep Throat was Mark Felt, an FBI Associate Director, a powerful man few people ever heard about even at the time.

    I am absolutely sure inside the IMF there are many who have long maintained the idea of Greece and Portugal maintaining their obligations to the Fund was a pipe dream. Already in 2006 there were rumors ECB officials, chiefly from The Netherlands and Austria, were voicing their concerns about the long-term unsustainibility of the Greek and Portuguese “miracles”, built upon artificially low interest rates which had allowed a debt-fueled spending binge.
    These nay-sayers are invariably proven correct but, and here’s an extremely important lesson international bodies learned from the Soviet Union, their concerns remain in internal memos and reports because the IMF, the ECB or whatever has to give the idea of an absolutely monolithic body completely embracing a given policy.

    But at a given point these people have about enough and find ways to leak their truth to the outside world.
    These leaks should be very carefully examined. The people behind them have access to the pure unadulterated data, not the heavily distorted and largely useless statistics fed to the press to work the marks into thinking either things are better than they appear or the ECB is valiantly fighting to keep an imaginary boogeyman such as deflation at bay.

    It’s beyond doubt the IMF as a whole sees the EU and the ECB with little sympathy. Every single policy they have implemented in the past seven years has been aimed at keeping bankrupt governments solvent (if barely so), propping up every single bank under the sun (if Spain’s Bankia and Italy’s MPS are putrid carcasses kept alive by continuous cash injections, Deutsche Bank is perched atop a mountain of toxic derivatives that makes what brought down Lehman look like an anthill), and the deeply flawed exporter-consumer economy model going.
    At a moment when deleveraging and liquidation should be the top priorities for everybody, from governments to ordinary families, the central planners in Brussels and Frankfurt doubled down on policies aimed at making liquidation impossible and actually increasing leveraging. As corrupt as the IMF may be, at least they are sane crooks. Their European counterparts increasingly look like psychotic crooks.

    I’d say may God help us all but there ain’t no God that’s gonna save us now.

  8. Gil Obrero
    Jul 5, 2015 at 6:22 am

    Seems not many people yet have made the connection with Russia.
    Europe and especially Germany are backtracking on supporting the half wits at the State dept with regard to their totally despicable spat they started through the Ukraine over Russia, that they are so desperate to start a war with.
    That trumps anything as trivial as Greece, and this ensures that Europe are on the hook for a bail out themselves as the ponzi voucher disintegrates.

    What price now disobeying their masters in Washington

  9. Jul 5, 2015 at 7:37 am

    Keep in mind the IMF does not want to be blamed for ‘breaking the world economy’.

    The IMF by its actions indicates that either a yea or nay will result in the same … calamity.

    The Greeks will vote ‘YEA’ b/c the euro = gasoline. The Greeks have already indicated their willingness to sacrifice literally anything — pensioners, workers, jobs, children and grand-children — so that they might drive aimlessly in circles from gas station to gas station.

    The banks cannot get blood from a stone, a YEA vote is futile. Sooner or later the Northern European banks will fail just as the Greek banks have failed already. There are no national boundaries to insolvency … and the IMF knows it.

  10. hoop
    Jul 5, 2015 at 8:56 am

    Greece is also direct/indirect member from the IMF. This report was already made months ago. Is there not an Greece official, who knew about this report ? Does the Greek government also not know about this already for months too ?

Comments are closed.