Last night at 11 pm British Summer Time saw an event which the last five years have been building up to. From the International Monetary Fund or IMF.
I confirm that the SDR 1.2 billion repayment (about EUR 1.5 billion) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.
Thus Greece finds itself in arrears to the IMF but I can confirm that the world has not ended!
However there are a lot of implications which in the IMF has implicitly admitted by the use of the word “arrears” as it avoid the word default. Some have argued that this is like missing a credit card payment but there are quite a few differences to that. For example penal interest-rates on the whole sum and missed payment fees and so on. Also credit card companies like you to run into arrears because as long as you actually repay they can rub their hands in anticipation of making a substantial profit out of you. The longer you take to repay the more money they actually make.That is not the business model of the IMF which lest we forget is supposed to put a country back on its feet so that both it and the individual country concerned can live happily ever after.
The IMF’s leadership now finds itself facing a problem I have warned about since June 2010.
Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong.
There is of course a supreme irony that the current head of the IMF Christine Lagarde is an ex-politician.
Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.
She now heads an organisation facing the largest non-payment in its history as a direct consequence of the way that she and her predecessor Dominique Strauss-Khan twisted the organisation into helping with Euro area fiscal problems.
We also face the consequence of some recent can-kicking as several IMF payments due earlier this month were bundled up in the hope that “something wonderful” might happen by the end of the month. Right now the IMF is left wondering about the 32 billion or so Euros it has lent in total. Due to the economic recession which of course was turned into a recession by a plan supported by the IMF it is unlikely to be able to repay those funds either.
So let is leave the IMF mulling how it is going to explain is largest ever arrears to its shareholders. In case you are wondering the UK is a little over a 4% shareholder.
The IMF is a “preferred creditor” in that it is supposed to be repaid first. As it has not been in this instance that poses questions for the vehicle the Euro area uses to loan to Greece called the European Stability Mechanism or ESM. Not so stable looking today is it? Theoretically it is also a “preferred creditor” which seems now a bit like tilting at windmills.
European Central Bank
It now has an extra problem as it mulls the amount of Emergency Liquidity Assistance or ELA it has given to Greek banks. It imposes a haircut on the collateral it receives from the Greek banks in return for this and the obvious consequence of last nights default is that it should increase the haircut. Here we see an example of a rock meeting a hard place as there is not only doubt about whether Greece has enough collateral for current ELA levels its banks would like more of it.
There were all sorts of strange stories yesterday. Perhaps the most bizarre was a claimed offer of help from Turkey! The Greek government also got in on the act as Prime Minster Tsipras made a new proposal to the Euro area. According to the Financial Times he has taken this a step further today.
Mr Tsipras’ letter says Athens will accept all the reforms of his country’s value-added tax system with one change: a special 30 per cent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained.
On the contentious issue of pension reform, Mr Tsipras requests that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He also requests that a special “solidarity grant” awarded to poorer pensioners, which he agrees to phase out by December 2019, be phased out more slowly than creditors request.
So it appears that he has blinked first but as I pointed out only last Thursday there is a problem with such a move.
However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year!
So we return to a problem which so far in the Greek crisis has failed to find a solution. In return for the loans and credit Greece needs the creditors always want more austerity which shrinks its economy and makes it ever less likely the loans will be repaid. It also leads to more demands for austerity in a cycle which so far has been endless.
If the media wires are any guide this body seems to be singing along to Tom Petty and the Heartbreakers.
Well, I won’t back down
No, I won’t back down
You can stand me up at the gates of hell
But I won’t back down
No, I’ll stand my ground, won’t be turned around
They are formally meeting at 5:30 pm Brussels time but it is hard not to wonder why? After all they show no sign of changing their position. It does not seem to bother them that its very nature is not only destructive it is self-destructive.
This saga continually plumbs new depths. On the one side we have the institutions or creditors insisting on programs which will further shrink the Greek economy. They of course do their best to deny this and are willing to rewrite history to do so. From the head of the ESM Karl Regling.
Due to the economic policies adopted under the EFSF programme, the country was on a good path towards strong growth until the second half of 2014. The many sacrifices which the Greek people had to make were paying off…… According to the OECD and World Bank, Greece was a reform champion until 2014, with encouraging growth prospects.
“Reform champion”? “Encouraging growth prospects”? That is before we consider his omission of what the “economic policies” have done to Greece’s economy. They will do it again.
As to the Greek government it now faces the problem of people wondering exactly what its modus operandi is? It badged itself as anti-austerity but now is willing to give a lot of ground on that front.
The losers yet again are the Greek people who I feel dreadfully sorry for as this shambles will affect them materially and they have already suffered on a grand scale. Let us hope that Tom Petty was right below.
Baby, even the losers get lucky sometimes
Even the losers keep a little bit of pride
They get lucky sometimes