My question to Christine Lagarde, Eurogroup 25th June 2015 – as narrated by Landon Thomas in the NYT

During the 25th June 2015 Eurogroup, the institutions presented me, in the form of an effective utlimatum, with a comprehensive staff level agreement and funding plan (which I considered financially non-viable). It was the deal that Prime Minister Tsipras decided, on the following day, to put to the Greek people in the form of the now infamous referendum. During that Eurogroup meeting, I posed a question to Christine Lagarde: “Is it the view of the IMF that Greece’s debt is sustainable under the proposed agreement?” Ms Lagarde, when her turn came to speak, tried to skirt the issue but, in the end, conceded that Greece’s public debt “had to be looked at again”. At that point, the Eurogroup President Dijsselbloem interrupted the proceedings and addressed me with the express threat that, if the Greek government insisted on discussing a debt restructure, there would be no deal. I shall have a lot more to say on this and related matters in due course. For now, here is how Landon Thomas Jr narrates this story in his recent NYT piece.

For Landon’s complete article click here. Relevant extracts are copied below

In January of this year, the anti-austerity party of Alexis Tspiras came to power. By April, negotiations over debt repayment had stalled, the government was hemorrhaging cash, and the economy was at a standstill.

On Easter Sunday, Yanis Varoufakis, who had become Greece’s finance minister, flew to Washington to meet with Mr. Thomsen and Christine Lagarde, who became the I.M.F.’s chief in late 2013, and threatened to stop payment on more than a billion dollars in loans that were soon coming due.

Relations between fund officials and the Greeks had reached their nadir. Mr. Tsipras said that the fund had “criminal responsibility” for the crisis, and Mr. Varoufakis was telling people that Mr. Thomsen’s work in Greece would go down in history as the I.M.F.’s greatest failure.

Yet having run the numbers, the fund now accepted the central argument being made by Mr. Varoufakis: Greece was bankrupt and needed debt relief from Europe to survive.

The fund was also feeling the pressure from the non-European members of its board who questioned the huge commitment to Greece (currently about $15 billion) relative to the small size of its economy.

Ms. Lagarde and David Lipton, her top deputy, became more insistent, pressing European nations that economic reforms alone were not enough and that a debt restructuring would be needed as well.

In late April, Mr. Thomsen took up the issue once more at a critical meeting of European finance ministers in Riga, Latvia.

Two months later, Ms. Lagarde found herself at the Brussels meeting of European finance ministers, with the country’s future in the eurozone hanging in the balance.

The Europeans were pressuring Mr. Varoufakis to agree to an austerity-loaded debt deal that he was resisting.

I have a question for Christine, he said. Can the I.M.F. formally state in this meeting that this proposal we are being asked to sign will make the Greek debt sustainable?

She could not. And when Jeroen Dijsselbloem, the Dutch finance minister and lead negotiator for Europe, cut off all discussion of debt relief, the die was cast.

Back at I.M.F. headquarters in Washington, the decision was unanimous: It would go public with its assessment that Greece’s debt situation was hopeless.

‘Old Wine in a New Bottle’

The 19 countries of the euro area make up the I.M.F.’s largest shareholder base, but as the world’s financial watchdog, the fund also represents 169 other nations.

If the I.M.F. wants to be seen as an international, as opposed to a European, monetary fund, it must prove that it can speak with an independent voice. And if that means arguing that Europe, its senior partner in these talks, needs to take a loss on its loans — well, so be it.

Many have commended the fund for going public with its views. But the release of its debt reports has not yet had any practical effect.

The latest bailout is heavy on austerity measures like privatization of power companies and seaports, reduced pensions and tax increases in shipping and tourism, and says nothing about debt relief.

“This is old wine in a new bottle,” said Meghan E. Greene, chief economist at Manulife in Boston. “I see very little chance that the bailout will succeed — it’s too much like the other ones.”

Would it have made a difference if the fund had officially broken with Europe in the spring, when it began to conclude that the Greek debt had become unmanageable?

Probably not, says Susan Schadler, a former I.M.F. economist and author of a widely read paper on the fund’s Greece saga.

But she argues that by not forcing creditors to take a loss back in 2010, the pain has been borne almost exclusively by the Greeks themselves, and not by bond investors.

“The fund should have pushed for a restructuring then,” she said. “That, after all, is its job — to assess the risks and say whether or not the debt is sustainable.”

4 Comments