September 27, 2012

Troika’s Internal Strife Stalls Greek Deal

IMF pushes EU for sterner measures as Greece waits

As tensions in Greece over additional troika-decreed austerity measures mount, spurring demonstrations and protests, tensions are mounting within the troika itself as the International Monetary Fund (IMF) insists on harsher terms than the European Union is willing to accept. As a result, time passes as officials wrangle over whether Greece should be granted more time to satisfy the terms of its bailout.

Reuters reported Thursday that although Greeks are not happy with the increasingly tougher terms insisted on by the troika—the group made up of the IMF, the EU and the European Central Bank (ECB)—internally, troika members are not happy either as the IMF keeps upping the ante for Greece’s rescue. The IMF is in addition pushing for a restructuring of debts owed by Greece to public-sector foreign creditors, who are not anxious to accept another loss.

Both Greek officials and some from within the troika itself, who asked in the report not to be named, have cited the IMF’s insistence on a hard line as contributing to greater tension among the negotiators. One Greek official was quoted saying, "The problem is not between the IMF and Athens, it's between the IMF and the EU." The official’s view was confirmed, the report added, by sources familiar with thinking in Brussels and Washington.

The EU is willing to allow Athens more time to meet its budgetary objectives, but the U.S.-backed IMF is instead demanding that European governments accept losses on their holdings of Greek sovereign bonds that would amount to tens of billions of euros. EU officials, on the other hand, are not anxious to do so in an atmosphere of mounting hostility to both bailouts and austerity and amid the runup to elections in several countries.

The Greek official added, "Europe wants more time to see what will happen with Spain and Italy, perhaps even after the German election in 2013. The IMF wants Europe to come up with a comprehensive solution to its problems now."

Many of the IMF’s largest stakeholders are not European and thus are somewhat removed from the immediacy of the crisis, except as it affects the global economy. The body has a reputation for toughness in fiscal discipline and it sees that reputation as being on the line in European negotiations, with member countries that include the U.S. and Japan—its two most influential members—as well as China, Russia and Saudi Arabia seeing debt restructuring as vital for Greece to be able to meet its target: cutting its deficit to below 120% of GDP by 2020.

Even Germany, which has been staunchly insistent on Greece adhering to targets, has become impatient with the stresses within the troika. Finance Minister Wolfgang Schaeuble last week was quoted saying, "You should ask around about what the mood is like in the IMF, in having to deal constantly with these European problems and the repeated failure of the Europeans to meet agreed targets."

Greece has asked for two more years to meet its goals, and many eurozone countries are willing to give it the extra time. However, the IMF is not, and is insisting that European governments instead write down previous loans to Athens. As a result, agreement on terms has become impossible.

A senior Greek government official was quoted saying, "The IMF wants an official-sector restructuring but we can't do that. No one else wants it." Finance Minister Yannis Stournaras is reportedly so frustrated at the demands for additional cuts put forth by Poul Thomsen, the Dane who runs the IMF's relations with Greece, that he threatened to resign last week.

Another Greek official said in the report, "Nothing pleases Thomsen anymore. Last time the troika was here we agreed 5–5.5 billion euros ($6.437–$7.081 billion) would come from salary and pension cuts. Now we have come up with 7.5–8 billion, and they are not enough."

According to analysts, if Greece fails to meet its commitments, the IMF could be in the hotseat over double standards for borrowers. It could even abandon the deal altogether.

Ben May of Capital Economics was quoted saying, "In theory, the IMF could withdraw from the deal if it is not satisfied the bailout fulfilled the ... criteria. In practice, it isn't so black and white and there is obviously potential for some kind of fudge."

He added, "There is potentially quite a big standoff. I don't see the bailout lasting to the end of its duration and it could break down at any time. Lots of ... bankers in the chorus seem to indicate they would be quite happy for Greece to leave the euro."

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