The IMF, rammed down Greek throats by the ECB and the EU to police the implementation of the ‘bailout’, is now saying the deal can’t work unless European creditors pledge debt relief on a scale Greece has been asking for all along
Watching the Greek debacle from an economically illiterate distance hasn’t prevented people from taking sides. News surfing, like all spectator sports, needs partisanship and I’m on Greece’s side even if it isn’t clear which side that might be. Having urged his compatriots to say ‘No’ to a harsh deal, the Greek prime minister has now successfully urged his legislators to say ‘yes’ to a much harsher one. This is ideologically confounding; the warm fuzzy solidarity created by a resounding ‘όχι!’ is hard to sustain when your rejectionist prince turns into a forelock-tugging frog.
But Alexis Tsipras’s U-turn, disorienting as it was, wasn’t the most dizzying volte-face in this long-running farce. No, that star turn was reserved for the IMF’s Christine Lagarde. On the 13th of July after Tsipras ate every anti-austerity word he had uttered and promised to undo every troika-thwarting law his government had ever passed, Lagarde blessed the surrender that Merkel and her supporting cast of hawks had negotiated. She declared that the “…deal was a good step to rebuild confidence.”
Lagarde’s support for Europe’s hardliners wasn’t a surprise. As one of Greece’s three principal creditors, she had acted in concert with the European Central Bank and the European Commission to break Syriza’s intransigence and force it to sign up to austerity. There were some murmurings when a leaked IMF report suggested that there were disagreements within the Fund about Greece’s debt, but these had subsided by the time Tsipras signed on the dotted line and Lagarde said that it was good.
To appreciate the weirdness of what the IMF did next we need to recall Tsipras’s two biggest defeats in these negotiations. First, he was forced by Merkel and other creditors to accept that Greek compliance would be monitored by the IMF. This was a bitter pill because Syriza’s political brand had been built around its rejection of the IMF and its nostrums. Then he had to sign up for austerity without Germany and the creditor nations promising to reduce Greece’s debt mountain. All talk of haircuts was taboo given the political sensitivities of the German electorate. The closest the deal came to the subject was when it gestured at the possibility of discussing the ‘restructuring’ of Greece’s debt if the country behaved itself and took its medicine.
Yanis Varoufakis, Syriza’s former finance minister, had railed against the German refusal of debt relief, arguing that servicing this debt mountain would condemn Greece to permanent recession. Loathed by his European interlocutors as a provocative narcissist incapable of engaging with Europe’s grown-ups, he was sidelined. But it was harder to dismiss his arguments if only because they seemed to have become the common sense of many economists and economic journalists.
Paul Krugman in the New York Times, Ambrose Evans-Pritchard in the Daily Telegraph and Clive Crook on Bloomberg View, to name just three, aren’t ideological soul mates. Evans-Pritchard describes himself as a Burkean conservative, Crook claims to be a centrist and Krugman identifies as a liberal on the left of America’s politcal spectrum. All of them denounced the troika’s negotiating stance as economically illiterate. Like Varoufakis, they believed that Greece’s debt was unpayable in full, that austerity without substantial write-downs would drive the country into insolvency which wasn’t in its creditors’ interest since that would mean they wouldn’t get any of their money back.
Whether they are right isn’t relevant; all we need to remember is that the troika categorically rejected their debt forgiveness argument. Greece would have to run a budgetary surplus, sell its assets, cut its pensions, raise VAT, walk the austere path of fiscal virtue and this would set it free. The IMF would be its conscience and keep it on the straight and narrow.
Then, this happened. One day after the deal was done and blessed by Lagarde the IMF circulated a three-page note titled, ‘Greece: An Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis.’
The document trashed the deal forced upon Greece in one terse sentence:
“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.”
Arguing, en passant, that the deal’s primary surplus targets, its expectations of Greek productivity and Greece’s banks were unrealistic, it concluded by detailing the debt relief options open to Greece’s European ‘partners’: deep haircuts, dramatically extended grace periods or annual transfers to the Greek budget.
So the IMF, rammed down Greek throats by the ECB and the EU to police the implementation of this deal, was saying that the deal couldn’t work and the IMF wanted no part of it unless Greece’s European creditors pledged debt relief on a scale that would, in Ambrose Pritchard’s words, “…validate what Greece’s Syriza government has been saying all along.’
Where does that leave the ECB and the EU, now that austerity’s designated nanny thinks the deal’s a dud? If this twosome (the troika minus the IMF) sticks to its guns it invites the charge that the deal’s economic rationale is bogus, that it is, in fact, a punitive, political bid to make an example of Greece. To what end? To warn the Eurozone’s southern stragglers of the fate of those who stray from German definitions of economic rectitude and austerity.
Where does this leave Greek parliamentarians, required by their creditors to vote the deal into law? In the remarkable position of knowing that they have voted to accept a deal that even the dreaded IMF thinks amounts to a long descent into hell.
Triumph of dogmatists
Where does this leave Christine Lagarde? If she disowns her organization’s country report she’ll look like a German stooge. If she stands by it, people will ask why she said the deal was a good idea just the day before. She can choose between seeming incoherent or a cat’s paw.
Lay people don’t understand the minutiae of fiscal or monetary policy because most of us are innumerate. This freely acknowledged ignorance prompts us to defer to serious people who know how primary surpluses and downside risks work. For the most part these serious people and their institutions stay in character and seem plausibly expert, but once in a glorious while there’s a massive cock-up which allows us to see how arbitrary high-seriousness can be, how austerity’s authority has less to do with economic reason than the ability of its dogmatists to stay on message.
In this Greek crisis, the IMF lost its place in the chorus and contradicted itself. Like a mirror image of the feckless Tsipras who yelled ‘No!’ when he meant ‘Yes!’, Lagarde said Yes when she meant No.
If the deal goes ahead despite the IMF’s defection – as it probably will – we will know that Germany got Greece to bend over because it could, and Greece bent over because it had to, not because serious people had agreed a plan to put the country on the road to recovery. The Greek crisis gave us a rare view of international corporal punishment in action because the IMF left the headmaster’s door ajar. For this glimpse of how salvation through suffering actually works, the lay public should be grateful.
Mukul Kesavan is a writer based in Delhi. His most recent book is Homeless on Google Earth (Permanent Black, 2013).