2

Greece: The Troika Needs To Dump The IMF

Well, the Greek mess is still unresolved. The ECB has been stepping on Greece’s oxygen tube to force the Greeks to capitulate to all of the Troika’s demands, in exchange for another EUR 30 billion. The government has complied by jamming through compliant legislation (at great political cost). But that is not enough to unlock the Troika’s money box.

Europe, for reasons that are unclear to me, won’t keep the money pumps going unless the IMF is on board as a full participant. The IMF says that Greece’s debt trajectory is unsustainable, the understatement of the century. The IMF wants Greece’s official debt to be reduced to a sustainable level. (Greece’s private bondholders have already been whacked). In other words, the challenge is not only finding a way to come up with more money, but also persuading somebody to forgive debt at the same time. The IMF and the ECB can’t forgive debt, and the Germans refuse to forgive debt.

It would seem to me that the simplest solution would be to leave the IMF behind, and just lend Greece the EUR 30 billion from the ESM. Clearly no one really cares whether or not Greece's debt situation is sustainable. But for whatever reason, Europe wants to keep the IMF on board. Therefore, Europe (the EFSF/ESM) will have to write down its claims on Greece. Merkel and Schaueble say no to this because they wish to maintain the illusion that the German taxpayer is lending and not donating to the Greeks (who don’t need to pay taxes).

We’ve been through so many Greek crises before that it is hard to get too excited about this one. In every case in the past, the geniuses in Brussels have come up with a way to prevents the Pandora’s Box of an uncontrolled Grexit. Now they have a simple choice: either kick the can down the road for another six months, or come up with Plan B for a controlled, non-catastrophic Grexit.

As I have discussed before, the IMF cannot be “fixed” by Europe because Europe doesn’t control it. The US (Obama and Boehner) has to agree to whatever Lagarde wants to do. That suggests to me that if Europe wants to forestall Grexit, she will have to jettison the IMF and change the Troika into a Duo.

If it were up to me, I would be moving toward Plan B, with a fully developed plan to allow Grexit while feedingthe Greek people and preventing a European banking crisis. If the Germans would allow the ESM to recapitalize banks directly, this could be accomplished without exacerbating the sovereign debt crisis.