This guest post is from Peter Doyle, a former IMF staffer…
Who could think so? Greek government bonds have been on a tear for a year; staff-level agreement on policies has been reached and, behind double-digits in polls, Syriza MPs are set to swallow the lot this week; so the €7bn July maturities look good.
So, what fly, what ointment?
Markets presume that Lagarde and Merkel will fudge their differences on this again.
There is much scope for doing so. Virtually anything could meet Lagarde’s demand that creditors provide “appropriate” debt relief — with the size of the IMF financial contribution adjusting to the size and formulation of reduction as it “stays in”. If gaps on that prove un-bridgable, further fudges could be found in the strength of the IMF Board’s endorsement for the content of the program, even as the IMF “pulls out”, to help Merkel get the program disbursements through the Bundestag “sans IMF”.
And in the back of the markets’ mind is that, back in 2015, Tsipras huffed and puffed and blew his own house down, so … buy!
But this time really is different.
For the sake of exposition, assume that Lagarde recommends that the IMF stays out and wins Board support for that, with Greece fully program-conditionality-compliant, and with the Troika of inspectors saying so.
Well, since mid-2015, Tsipras has done as he was told for one reason alone: to secure big debt relief. So he now has every reason to pick a fight on this issue.
If he, conditionality-compliant, were now to default in protest at Merkel’s “sometime later, perhaps”, he could do so while affirming, with IMF endorsement, that his sole purpose in doing so is to eliminate risk of Greece ever leaving the Euro.
That would put the ECB in a completely different position from 2015. Then, whether one agreed or not, it justified capping ELA on grounds of Greece’s conditionality non-compliance and devaluation risk. But in this context, its only grounds for capping ELA would be in support of Mrs Merkel’s reluctance to deliver full debt reduction now — in the face of formal IMF assertion that it is essential, now. The ECB would thus ‘out’ itself as the political vehicle it is. Perhaps this conundrum explains Draghi’s recent unprecedented outburst on debt relief.
And, with default motivated by securing Greece’s euro membership, this line itself may contain risk of bank deposit flight, thereby diminishing need for ELA in default.
Further, to Tsipras’ (and others’) surprise, Greece now runs a big primary surplus — over 3 percent of GDP in 2016, up from balance in 2015, and still running strong into 2017, even if some of it reflects temporary factors. Sure enough, that scorching fiscal withdrawal is accompanied by output declines, yet again. But in that context, Tsipras doesn’t need new finance for the budget as is if deposit flight is contained or if ELA is uncapped. Only if deposits flee and ELA is capped will Greece spiral….