At loggerheads over role of the IMF

The Greek coalition government’s plan for a clean exit from the European Union / International Monetary Fund program was dealt a deadly blow by the markets last week on the back of rising political risk and repeated government mistakes, undermining market confidence. It is now clear Greece has little option but seek a precautionary credit line to access the markets again. The role of the IMF is not yet clear in the new landscape but it looks as if the government and at least some in the opposition SYRIZA party view it in a different way.

We argued recently that the markets had been Prime Minister Antonis Samaras’s closest ally over the last two years or so but that he was risking losing their trust if the government did not act fast on the privatization and reform front to reassure them. Well, it didn’t. A combination of a broader risk-off move prompted by market concerns about weak EU growth and Greek specific political risk coincided with the government’s stated intention to leave the EU/IMF prematurely, sending bond yields soaring.

According to analysts and others, the confidence vote which the two-party government won in Parliament played a significant role in shaping market expectations. The administration got 155 votes in the 300-seat House, reinforcing the impression that the coalition government does not have the minimum 180 votes needed to elect a new president next February or earlier, paving the way for early elections a month later. This, coupled with rising support for the leftist SYRIZA party in the polls, prompted market participants to start discounting the SYRIZA risk as a senior banker called it.

The yield on the 10-year bond even exceeded 9 percent last week from 5.58 percent on September 5 and the 5-year bond yielded more than 7 percent from 3.8 percent early last month, essentially shutting Greece out of the markets. Following this cold shower, the government has changed its tone, pointing to a precautionary credit line, most likely from the European Stability Mechanism (ESM), and the remaining funds from the Greek bank bailout fund (HFSF) after the ECB’s stress tests to access markets again. Bankers estimate the share capital exercise for all four banks will be below 1.5 billion euros, meaning at least 10 billion euros could be made available as a buffer, assuming the lenders agree.

However, there is something which has not changed. By talking to government officials and others, one continues to get the impression they would like to see the IMF out of any new arrangement put in place. “What matters to the markets is the EU, not the IMF. The IMF must leave and will leave,” a senior official told us recently. It is obvious the government cannot sell an exit from the current economic policy program to the electorate if there is a new setup – i.e. a precautionary credit line – with the IMF in. It is easier to sell an EU program, assuming there is lighter surveillance, because Greece belongs in the league. Of course, there are also a few ideologues who claim the IMF should not have been involved in Greece or any other European affair under any circumstances.

Interestingly enough, there seems to be a different approach taken by government officials and some market people sympathetic to the SYRIZA leadership about the role of the IMF from an economic point of view. The difference centers on what they view as the best way to deal with Greece’s debt burden. Government officials claim the EU will not accept anything other than a debt relief plan based on the extension of maturities, lower spreads and/or the conversion of floating interest rates into fixed ones.

In their view, securing low debt servicing costs and a longer redemption debt profile is the only realistic alternative. So the presence of the IMF does not add anything but rather complicates things because its debt sustainability analysis does not take into account that 80 percent of the Greek debt is in official hands, mainly the EU, which does not want to bankrupt the country.

On the other hand, market participants sympathetic to the SYRIZA leadership see things differently. They claim the Greek economy will not be able to enter an era of sustainable growth to combat high unemployment and tackle poverty unless there is a large haircut on the high, unsustainable public debt stock. So, negotiating a haircut with the EU should have been the government’s first priority. To that end, they see a potential ally in the IMF, which has advocated similar action in the past, in future negotiations with the EU. This perhaps explains their silence on the IMF matter although SYRIZA has repeatedly said it wants to do away with the current adjustment program and austerity.

It is unfortunate the government did not act in time to reassure markets about its commitment to overhauling the economy despite all the signals they kept on sending via higher bond yields in the last few weeks. By failing to do so, it let the political risk dominate and borrowing costs rise sharply. In the unfolding situation, the role of the IMF is as yet unclear but government officials are not hiding their intentions while some others in the opposition view it as a potential ally in future debt negotiations.

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