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Tuesday, July 14, 2015

IMF Declares War On Germany: In "Secret" Report Lagarde Says Greece Will Need Massive Debt Relief

IMF Declares War On Germany: In "Secret" Report Lagarde Says Greece Will Need Massive Debt Relief

Tyler Durden's picture

Submitted by Tyler Durden on 07/14/2015 08:13 -0400


Update: Europe now looks to be in damage control mode. Here's Reuters:
  • EU SOURCE SAYS EURO ZONE LEADERS KNEW OF LATEST IMF DEBT ANALYSIS FOR GREECE BEOFRE AGREEING ON THIRD BAILOUT TERMS
A divide between the IMF and Europe (read: Germany), regarding writedowns on Greece’s debt to the EU has been brewing for quite some time and recently returned to the international spotlight when, a few months back, the Fund indicated debt relief was a precondition for its participation in any further aid for Athens.
More recently, the IMF released a report on Greece’s debt sustainability just prior to the referendum. The timing appeared to be strategic and may have helped secure the "no" vote for Tsipras.
Unfortunately, the IMF didn’t appear to anticipate the PM’s complete capitulation and now, the subject of debt relief has again been put off, this time until Greece officially passes the new "deal" through parliament and legislates its terms.
Today, another "secret" IMF document on the sustainability of Greece’s debt burden has surfaced and not surprisingly, the Fund is once again pounding the table on a haircut. One is certainly left to wonder if the US (and its veto power) are pulling the strings behind the scenes and orchestrating "leaks" at opportune times. Here’s more from Reuters:
Greece will need debt relief far beyond what euro zone partners have been prepared to consider due to the devastation of its economy and banks in the last two weeks, a confidential study by the International Monetary Fund seen by Reuters shows.

The updated debt sustainability analysis was sent to euro zone governments late on Monday, hours after Athens and its 18 partners agreed in principle to open negotiations on a third bailout programme of up to 86 billion euros in return for tougher austerity measures and structural reforms.

"The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date - and what has been proposed by the ESM," the IMF said, referring to the European Stability Mechanism bailout fund.

European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept "deep upfront haircuts" on their loans to Athens, the report said.


Greece debt/GDP to reach 170% by 2022 vs 142% expected two weeks ago, and peak near 200% in next two years - updated IMF analysis

IMF report on Greece seen by Reuters

  • Says Greece needs debt relief far beyond what Europe has been willing to consider so far
  • Updated debt sustainability analysis projections are subject to considerable downside risks
  • Greek borrowing at anything below AAA rates would cause an unsustainable debt dynamic for decades
  • Eurozone creditors alternatives is either annual transfers to Greek budget or deep upfront haircuts
  • Debt expected to peak at 200% of GDP in next two years
  • Greece's Gross financing needs to rise above 15% GDP threshold deemed safe
The IMF have been for bigger haircuts to Greece throughout the saga




In other words, the IMF is now openly at war with Germany (and its sound money compatriots like Finland) over debt forgiveness, which futher underscores the split in Europe between the German bloc and the those who favored leniency for Greece, and, by extension, a relaxation of the doctrine of strict fiscal discipline that has dominated EU politics (in word if certainly not in deed in the periphery) since the onset of the European debt crisis.
Of course any debt haircut for Greece will only serve to embolden other periphery debtor states, especially those where Syriza sympathizers enjoy growing support ahead of elections. In short, if parties like Podemos in Spain perceive that Germany has blinked on debt relief they too will push for writedowns, something we outlined in detail after the last IMF "leak" in "Did IMF Just Open Pandora's Box." 
*  *  *
Summing up the US/IMF message to Germany:

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