Submitted by Tyler Durden on 07/02/2015 15:33 -0400
By now it should be clear to all that the only reason
why Germany has been so steadfast in its negotiating stance with Greece is
because it knows very well that if it concedes to a public debt reduction (as
opposed to haircut on debt held mostly by private entities such as hedge funds
which already happened in 2012), then the rest of the PIIGS will come pouring
in: first Italy, then Spain, then Portugal, then Ireland.
The problem is that while it took Europe some 5 years
to transfer a little over €200 billion in Greek private debt exposure to the
public balance sheet (by way of the ECB, EFSF, ESM and countless other ad hoc
acronyms) at a cost of countless summits and endless negotiations, which may or
may not result with the first casualty of the common currency which may prove
to be reversible as soon as next week, nobody in Europe
harbors any doubt that the same exercise can be repeated with Italy, or Spain,
or even Portugal. They are just too big (and their nonperforming loans are in
the hundreds of billions).
And yet, today, in a stunning display of the schism
within the Troika, it was the IMF itself which explicitly stated that Greece
is no longer viable unless there is both additional funding provided to the
country, which can only happen if there is another massive debt haircut.
This is what the IMF said:
Even with concessional financing through 2018, debt
would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through
end–2018, the debt-to-GDP ratio is projected at about 150 percent in 2020, and
close to 140 percent in 2022 (see Figure 4ii). Using the thresholds
agreed in November 2012, a haircut that yields a reduction in debt of over 30
percent of GDP would be required to meet the November 2012 debt targets.
With debt remaining very high, any further deterioration in growth rates or in
the mediumterm primary surplus relative to the revised baseline scenario
discussed here would result in significant increases in debt and gross
financing needs (see robustness tests in the next section below).This points
to the high vulnerability of the debt dynamics.
And the kicker:
- "these
new financing needs render the debt dynamics unsustainable."
Bingo, because that is, in a nutshell, precisely what
Tsipras and Varoufakis have been claiming since day one. As expected, a
Greek government spokesman promptly said that the IMF report is in line with
the Greek government's view on debt.
What makes the IMF report even more odd, is not so
much its content and position which have been largely known for quite some time
now, but its timing: just three days before the Sunday referendum, Tsipras now
has prima facie evidence to wave in front of the Greek people
and say "see, we were right all along."
It is exactly the case that only a
"No" vote at this point would allow Greece to continue a negotiation
which has already seen one of the three Troika members side with the Greek
position. Should Greece vote "Yes", it will make any future
negotiation with the Troika impossible, and while the country will get a few
months respite the resultant bank run after the bank reopen with the ECB's
blessing will mean that all Greece will do is buy itself a few months time. Only
this time all the debt will still be due.
And, should hey vote "Yes", this time the
Greeks will only have themselves to blame for all the future pain, pain which
will continue well after the mid-point of this
century.
But ignoring Greece for a minute, what the IMF's
"debt sustainability analysis" has just done is open the door forevery
single other comparably insolvent peripheral European nation to knock on
Christine Lagarde's door and politely ask: "Mme Lagarde, if Greece
is unsustainable, then why aren't we?"
Because as the chart below shows, the debt situations
of all the other peripheral European nations is just as"unsustainable."
In this way, while the outcome of the Greek situation
is currently unknown, it has also become moot, because at this very moment, politicians
from Spain's Podemos to Italy Five Star movement are drafting memos demanding
that the IMF evaluate their own debt sustainability. Or rather unsustainability.
Perhaps more importantly, these same politicians will
now dangle the prospect of an IMF admission that they, too, deserve a haircut
as the catalyst to be elected into power. After all who can refuse that their
life would be made so much better if only the country was permitted to
selectively "default" on €50, €100, €200 billion or more in debt?
Just elect this politician, or that, and watch your living standard soar..
.
And since the IMF has no choice but to agree that just
like Greece all these nations are accordingly drowning in debt, Syriza's
sacrifice (assuming Tsipras fails to outnegotiate Merkel) will not have been in
vain. In fact, it may very well end up that today the IMF opened up the
Pandora's box, one which, more than a Grexit, will destroy Merkel's
"united Europe" legacy.
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