Wednesday, July 15, 2015

IMF rides to Greece defence with shocking dose of reality

Legarde leads the cavalry to the rescue
Despite attempts by the top EU states to suppress its latest report, the IMF, led by managing director Christine Lagarde, has spoken truth to the powerful with a dramatic report that clearly indicates three things.

First, Greece cannot repay the crushing national debt it now has. This means the supranational lenders will have to take a huge haircut within a short time, by forgiving a large part of that debt.

Second, if a haircut is not on, as Chancellor Merkel has said (no haircut in the classic sense, were her words last week), then all the Greek debt needs to be extended for at least 30 years, and interest rates need to be lowered.

Third, the games played by the EU leaders and the strangling of the Greek banks by the grudging extension of credit but no increase in credit from the European Central Bank, have added substantial burdens to Greece. Greece is unlikely to be able to find private sector lenders, and might well need annual transfers of funds from the other Eurozone states to have a fighting chance to prime its economy and fight its way out of the austerity it now faces.

The main battleground of the past three weeks has been the fierce determination by the Greek government to force the Troika and the German chancellor to confront the need to address the huge debt load by removing repayments for decades, one way or the other, and to inject new funds into Greece to kickstart its economy.

What the Greek PM wanted was two things: a big haircut, and a mini-Marshall Plan for Greece, funded by the EU.

The German finance minister was front and centre in refusing to consider either of these two demands. It was only after the referendum results that the EU reluctantly agreed to talk about the debt load some time in the future, after Greece had met some tests imposed on it in the latest rescue package.

Now Legarde has tossed a spitting and hissing cat amongst the German pigeons.

This is what the IMF is now saying in this leaked report:

The IMF said there is no conceivable chance that Greece will be able to tap private capital markets in the foreseeable future, leaving the country entirely dependent on rescue funding.
It claimed that capital controls and the shutdown of the Greek banking system had entirely changed the picture for debt dynamics, an implicit criticism of both the Greek government and the eurozone authorities for letting the political dispute get out of hand.

The picture is now so bad the IMF might not help if the EU leaders try to ignore reality:
A flash of illumination from the IMF

The International Monetary Fund has set off a political earthquake in Europe, warning that Greece may need a full moratorium on debt payments for 30 years and perhaps even long-term subsidies to claw its way out of depression.

"The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date,” said the IMF in a confidential report.
Greek public debt will spiral to 200pc of GDP over the next two years, compared to 177pc in an earlier report on debt sustainability issued just two weeks ago.

The findings are explosive. The document amounts to a warning that the IMF will not take part in any EMU-led rescue package for Greece unless Germany and the EMU creditor powers finally agree to sweeping debt relief.

And some see the hand of President Obama in this shocking report:

The backdrop to this sudden shift in position is almost certainly political. It follows an intense push for debt relief over recent days by the US Treasury, the dominant voice on the IMF Board in Washington.

1 comment :

  1. MoS: I expect Greece to get long term bullet repayment terms (up to and perhaps over the 30 years the IMF report mentions) for a big chunk of the total sovereign debt. I also expect interest rates to be slim to zero on the outstanding amounts. The Germans will, I think, go for this because it allows the fiction of non-haircut to remain on the table. And that is true, if you don't present value the long term repayments!

    But any damn fool - apart from a politician wedded to a position rather than to interests-based negotiations, as the German finance minister seems to be - knows that present value of money calculation is essential.


    I also expect the Germans to demand clawbacks at earlier dates of the postponed repayments of principal if the Greek economy rebounds for some agreed number of years. This the Greek government can agree to if it negotiates the trigger for earlier clawbacks as some GDP growth based on the median or average GDP growth of the Eurozone nations, over say a 10 year period.


    If the Greeks were wise, they would be hiring the best brains on Wall Street to fashion wrinkles on debt repayment structures that the Germans can agree to (no classic haircuts, please!) and that preserve cashflow for the Greek nation. You can skin such cats in many ways.


    One structure they should look at is a simple one that takes some of the cash lent to them and invests it in zero-coupon bonds issued by the German government and pledged by the Greek government to the holders of a portion of its sovereign debt as security.

    A zero coupon bond is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments. When the bond reaches maturity, its investor receives its face value.

    This means the Germans and French and other Eurozone lenders to Greece get a German debt instrument, held in trust according to the laws of (you name it, any tax haven place in the EU except Greece, to keep the Germans comfortable), to secure the extended repayment schedule of the Greek debt.

    I would suggest the bullet repayment of the Greek debt that is part of this solution be extended to 50 years, not just 30.

    The zero coupon would work because the new (ECB? IMF? other?) loans that are made and are invested in the zero bond security, would bear a nominal and minimal interest rate - say 0.1% (one tenth of one percent).

    However, the interest rate on the zero coupon bond issued by Germany would be more like 3% for such a long term bond.

    How does it work? The Greek government invests $20 billion in a zero coupon bond issued to it by the German government; the bond is repayable in one lump sum in 50 years time and has a yield to maturity of 3%. In year 50 the sum of $100 billion is paid by Germany to the trustee, who turns around and pays it to the holders of $100 billion of current Greek debt in full and final repayment of that debt. The $100 billion of current debt does not earn interest (as the IMF is recommending in its new report). So $20 billion now wipes out $100 billion of current Greek debt.

    But where does Greece get that $20 billion to invest in the German zero bond? I suggest they look at two sources: a new loan for half that amount, from the ECM (low, low interest and repaid as a bullet in 30 to 50 years) and using half of the asset privatization amount of Euro 50 billion the EU tabled this week.


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