The game of brinkmanship between Greece and the eurozone continues, and now it is Greece’s turn to step up pressure, threatening it might turn to the IMF if the EU does not offer financial support—even after the ECB again warned Greece not to flirt with the IMF. Indeed why shouldn’t Greece call the IMF? The same fiscal adjustment already pledged would then secure generous financial support, lowering borrowing costs to more tolerable levels. Moreover, it would strengthen market confidence, as the IMF’s expertise would be essential in monitoring the implementation of Greece’s adjustment. An IMF program, in my view, would still be the first best. The current spread over Bunds is hardly a sign of market confidence in Greece’s debt sustainability. The EU’s argument so far, reiterated yesterday by Trichet, is that Greece has already been helped, as being a eurozone member guarantees ex ante financing of a sizable current account deficit. In the case of Greece, however, this is like saying, “we gave you all the rope you needed to hang yourself, free of charge”. This is clearly not enough. The EU should put its money where its mouth is and pledge concrete support to Greece. And it should do it now. In the wake of the announced fiscal package, help could now be pledged with a positive spin, whereas if markets confidence wanes again, the same help would become an admission of failure. Greece has much less to lose now, and it is clearly taking a tougher stance vis-à-vis its eurozone partners—chances of a support package seem much higher now.
At yesterday’s press conference the ECB clearly warned Greece not to seek IMF help. The warning, delivered at first unprompted by Trichet, seemed clearly aimed at Greek Prime Minister Papandreou, who a day earlier had stated to its cabinet that Greece could turn to the IMF for help if necessary. After the ECB’s press conference, Greek government officials made their position even clearer: Greece might well call the IMF if its EU partners do not provide assistance.
Indeed why shouldn’t Greece call the IMF? At this stage, it does look like both Greece and the IMF are getting the short end of the stick, while the eurozone is in a sense getting a free lunch: the IMF has clearly carried out much of the technical work behind the agreed fiscal adjustment program—Trichet admitted as much in the press conference—but gets little credit and is in fact told to stay out of the eurozone; Greece has to pay the social and political cost of a draconian fiscal contraction, but gets no money. If Greece were not a eurozone member, the IMF would have offered substantial financial assistance in exchange for the same fiscal adjustment, which could have been eased by an exchange rate depreciation.
Greece is therefore wondering, what are we getting in exchange for all our efforts? The eurozone has two answers. The first one, reiterated yesterday by Trichet, is that being a eurozone member guarantees ex ante financing of a sizable current account deficit. In the case of Greece, this is like saying, “we gave you all the rope you needed to hang yourself, free of charge”. The second, more sensible answer, is that the reward comes automatically in the form of greater credibility, market confidence, and lower financing costs. True, but of course those would also come with an IMF program.
As it steels itself to face popular protests against its austerity program, the Greek government is taking its gloves off in its dealings with the EU. Finance Minister Papaconstantinou was brutally explicit yesterday in pointing out that the EU is unwilling to put its money where its mouth is, which is what the IMF would instead do. After meeting Germany’s Merkel and France’s Sarkozy, Greek PM Papandreou will fly to Washington to meet US President Obama, and it would not be surprising if he found the time for a meeting with IMF Managing Director Strauss-Kahn.
At this stage, it is Greece that will tempted to give the EU an aut-aut: give us a concrete offer of financial assistance, or we will ask the IMF to intervene.
I have argued before that an IMF program would anyway be the first best, and I still believe it. If the IMF’s technical expertise was precious in reaching agreement on Greece’s fiscal program, it will be indispensable in monitoring its implementation, which the market will follow closely. And if money is put at stake, the IMF can more credibly threaten to interrupt disbursements if conditions are not met. eurozone’s authorities are adamantly opposed, but can offer no rationale for their opposition aside for the idea that economic policy problems should be dealt with in-house. In other words, involving the IMF would be embarrassing because it would show that the eurozone is not able to guarantee that its members will follow sustainable policies.
Does Greece need financial assistance? After all its bond issue yesterday was wellreceived, oversubscribed at a narrower spread than expected. The problem is, residual funding needs for this year are still substantial, and the EUR5bn raised cover about only a quarter of the redemptions and coupon payments between April and May; and then there is next year to think about. Moreover, the current spread over Bunds is hardly a sign of market confidence in the country’s debt sustainability—indeed, PM Papandreou has stated that while Greece does not expect a bailout, nor does it expect to borrow at the same cost as Germany, it does expect to be helped to borrow at better terms than now. Official financial support by the EU or the IMF would alleviate the financing constraint and reduce borrowing costs further.
Having strongly endorsed and praised Greece’s fiscal adjustment, the eurozone should now pledge financial support. If it wants to play the role of the IMF, the eurozone should go all the way. I realize that there is still little appetite for a rescue plan, and that as long as Greece can tap the markets, eurozone politicians may argue that Greece in fact does not need any support. But that is ignoring that contingent financial support can be helpful even for countries which have not gotten into trouble (think Poland last year), and that Greece is still under market pressure.
Having demonized the shady schemes of “speculators”, eurozone policymakers would now be well placed to explain to their voters that financial markets are treating Greece unfairly, and that it makes sense for fellow EU countries to help with either loans or guarantees, as Greece’s demonstrated commitment to fiscal discipline ensures that such support would be risk-free. And just as Greece wisely decided to ride the positive momentum of the announced fiscal package, the eurozone should do the same. Financial support now could be offered with a positive spin. If market confidence wanes again, the same financial support will come as an admission of failure.
