White Knight Irony: IMF Threatens to Walk Away From Bailout Deal Citing Unsustainable Debt

IMF to the Rescue?

In the final minutes of the gunpoint "negotiation" between Greece and its creditors, the last two sticking points were IMF involvement and €50 billion in pledged Greek assets in return for another "bailout".

Prime minister Alexis Tsipras said he could not give in on those demand. In the end, Tsipras bowed down and kissed the feet of German chancellor Angela Merkel and her finance minister Wolfgang Schäuble on those issues, and everything else they demanded as well.

Ironically, it could very well be the IMF that comes to the rescue and sinks this inane deal.

IMF Threatens to Walk

Please consider IMF Signals it Could Walk Away from Greek Bailout Deal.

In the three-page memo, sent to EU authorities at the weekend and obtained by the Financial Times, the IMF said the recent turmoil in the Greek economy would lead debt to peak at close to 200 per cent of economic output over the next two years. At the start of the eurozone crisis, Athens’ debt stood at 127 per cent.

“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads.

Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.

According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore “Grexit” from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that “Greece will request continued IMF support” once its current IMF programme expires.

If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.

In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500bn bailout fund — was expected to put up only €40bn-€50bn.

Under the terms of IMF participation in Greece’s second bailout, eurozone officials had agreed they would take steps to ensure Athens debt fall go “substantially lower” than 110 per cent of gross domestic product by 2022. The new IMF memo said it is now projected to be at 170 per cent by 2022.

It added that financing in a new programme would make Greece’s bailout funding levels so large that they would exceed “the 15 per cent of GDP threshold deemed safe” under IMF rules, and would “continue rising in the long term”.

EU leaders have only proposed lengthening maturities on existing eurozone bailout loans rather than full-scale writedowns, which Berlin argues is against EU law.

But the IMF memo said eurozone leaders needed to look at the issue more immediately and in amounts far larger than currently under consideration.

Among the options it suggested was a “very dramatic extension” of repayment plans with a “grace period” another 30 years on the “entire stock of European debt” — meaning Greece would not make a single interest or principle payment on eurozone loans until 2053; it already has such a grace period until 2023.

Alternatively, eurozone creditors would have to make “annual transfers to the Greek budget” — meaning eurozone grants to Athens — or “deep upfront haircuts”, the IMF said.

White Night Irony

It would be fitting irony if the IMF saved Tsipras from himself.

Even if Greek parliament foolishly accepts terms that cannot possibly be fulfilled economically, the IMF may walk away, killing the deal outright.

Alternatively, the IMF may force the ball back in Germany's court.

Musical Tributes

Many songs with the word "walk" in them come to mind . In hope that the IMF does indeed walk away I offer ...

I'm Walking

Link if video does not play: I'm Walking - Fats Domino

Walk Like a Man

In contrast, Tsipras crawled like a helpless baby, at best. The next tribute is about what Tsipras should have done, but didn't.

Link if video does not play: The Four Seasons "Walk Like a Man" Music Video

Watch The Four Seasons "Walk Like a Man" music video from 1963. It features the foursome singing at a dance hall overlooking an interesting variety of energetic fans unleashing dance moves that could have only come out of the 1960s. During the recording sessions that produced the hit song, producer Bob Crewe would stop at nothing for the perfect take. After realizing that a fire had broken out in the room above the studio, he blocked the studio door and continued recording until firemen had to force their way in and pull Crewe out.

For further discussion of the gunpoint deal and humiliating cave-in by prime minister Tsipras, please see ....

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com