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New IMF Report Shows Greece’s Debt Crisis Is Even Worse Than Previously Thought

As the Greek philosopher (not talking about the current Greek-Euro crisis, but he might have been) said, all is flux.

After the marathon (!) negotiations on Sunday night/Monday morning in Brussels, it seemed as if a brutal compromise had been reached: Greece agreed to place its economy under the control of its “European” creditors within the Euro but was given in return a bailout of $86 billion plus the modest possibility of further debt cancellation once it had begun to deliver the program of tax hikes, spending cuts, and privatization receipts. Even as commentators were still figuring out whether this was a victory for Greece or Germany or France or Brussels, or all of the above, or none, the news suddenly changed.

An IMF report was released yesterday — or perhaps, like an earlier report, it escaped from the captivity of the IMF leadership — to the effect that Greece’s debts were far larger than had been realized the day before. Instead of owing billions of dollars amounting to 142 percent of its Gross Domestic Product today rising to 177 per cent in few years before returning to 142 percent in 2022 — figures which were already pretty vertiginous — Greece is now estimated to have a debt that is about 177 per cent of GDP today, rising to 200 per cent of GDP in the next few years, before returning to 170 per cent in 2022! By comparison with this towering inferno, the proposed bailout package of $86 billion is quite modest and, as the IMF thinks today, clearly inadequate as a means of repaying Greece’s mounting indebtedness. Indeed, the Fund suggests that this debt is “unsustainable” so that Greece’s creditors now face a choice of either making annual transfers to the Greek budget or of simply cancelling a large part of the debt here and now.

#related#Bear in mind also that these figures are not a worst-case scenario. Greece’s debt could rise even higher in the opinion of the IMF. In other words, the European bill for settling Greece’s debts is growing high and fast.

Not only that, but under the IMF’s own rules, it cannot lend to a country whose debt is unsustainable (and its previous lending to Greece already looked like an expression of French foreign policy rather than IMF stewardship.) Which means that it may not be able to make its own contribution of $16.4 billion to the agreed bailout. All of which suggests that Greece’s other European creditors — namely, the European Central Bank and the European Commission and behind the curtain the German taxpayer — will face higher bills from the Greek debacle than they calculated on Sunday in Brussels and even higher bills than that if the IMF report turns out to be correct.

So it is no surprise that the European Commission, while denying that the IMF report is of any importance, is seeking to take money for the bailout from non-Eurozone funds. These are supposed to be the property of all European Union states and not only of the Eurozone nineteen. The U.K. and the other eight EU states outside the Eurozone were given an explicit promise that these funds would not be raided for such purposes. Prime Minister David Cameron told the House of Commons in 2010 that “both the Council conclusions and the decision that introduces the treaty change state in black and white the clear and unanimous agreement that from 2013 Britain will not be dragged into bailing out the Eurozone.” The recent Tory manifesto repeated these claims. If the raid goes ahead, therefore, such a violation of trust would make Cameron’s arguments for staying in the EU look anything from naïve to slippery to downright dishonest. But such is the need for money for Greece that the Commission is pursuing it through the route of “qualified majority voting.” And it seems likely to go ahead.

It is, of course, highly suspicious that the IMF report contradicts what the IMF had itself signed onto the previous day. Unaccustomed as I am to sympathizing with the European Commission, it is true—as its aggrieved European spokesman complained — that the bailout document was the work of the IMF as much as of the other creditors. Its figures were IMF figures. How could Greece’s estimated debts have mushroomed so dramatically in a single day? The Telegraph’s indispensable Ambrose Evans-Pritchard, who is more sympathetic to Greece than most commentators, suggests that this report reflects the influence of the United States, which wants Europe to cough up and pay the “two dollars.”

Maybe, maybe not. But one may imagine how the IMF report, with its suggestion that Greece cannot climb out of its debt trap without far greater help, will be received in the parliaments of Greece and Germany. Greek MPs will feel that they are being asked to make massive sacrifices in return for plainly inadequate help, and German MPs that they are being asked to shovel money pointlessly down a bottomless pit. And there are several hurdles still before the bailout is secure—and Grexit kept at bay.

So, as the Greek said, all is flux.

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