The leaked remarks of International Monetary Fund officials suggesting the lender may threaten to pull out of Greece's bailout are eliciting anger in Athens and could jeopardize debt negotiations.
The Huffington Post exclusively obtained a private letter on Saturday from Greek prime minister Alexis Tsipras to IMF managing director Christine Lagarde, demanding answers for some of the controversial comments in a March 19 teleconference between Poul Thomsen, IMF European director, Delia Velculescu, IMF chief of mission in Greece and IMF official Iva Petrova.
Wikileaks released a transcript of the phone conversation earlier on Saturday in which Thomsen and Velculescu indicate that only a new crisis would prompt both Greece and Germany to fulfill their obligations under the bailout agreement. Velculescu raises concerns that while more time may be needed to push the parties toward an agreement, postponing a meeting could be a "disaster."
Tsipras wants to know whether Thomsen and Velculescu’s apparent belief that the IMF must rely on another crisis-inducing “credit event” to force Greece’s hand “reflects the official IMF view.” If so, Tsipras challenges the IMF to defend the policy, given accepted norms of negotiation.
“Using a credit event as a means to pressurize Greece and the other member states is clearly beyond the bounds of the negotiation process as we understand it,” he wrote.
The prime minister also questions whether Greece "can trust" the IMF to negotiate in “good faith” given what he sees as Thomsen and Velculescu’s suggestions that they would like to delay negotiation in order to precipitate such a “credit event.”
“I sincerely hope that the IMF position is to reach a quick, successful and sustainable conclusion of the review and I am sure you will take all the necessary measures to make sure the negotiation process will remain on track,” Tsipras wrote.
Greece has accused Thomsen of effectively sabotaging talks in the past when the IMF refused to compromise on Greek pension cuts after the government proposed alternatives with an equivalent fiscal impact.
But while the Greek government views Thomsen and Velculescu’s conversation as yet another sign of bad faith by the IMF, the transcript reveals that the IMF officials doubt European nations’ readiness to agree to debt reductions. The remarks are consistent with the IMF’s insistence in the past that it is a broker between the European Union and Greece, both of which are irresponsible.
“What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?” Thomsen said.
“Right!” Veculescu affirmed.
The previous “decision point” Thomsen refers to is when Greece relented to IMF and EU austerity demands last July when it was faced with economic collapse. The European Central Bank’s shutdown of emergency lending forced the Southeastern European country to impose capital controls limiting citizens’ bank withdrawals. That ultimately led the Greek government to agree to the 86-billion euro bailout deal with terms that were much harsher than anything they had previously accepted. That bailout deal was the third such austerity-for-loans program aimed at addressing the Greek debt crisis since 2010.
Thomsen speculates in the leaked conversation that if such a “decision point” occurs again, it would take place in July, when EU officials would be focused on keeping the United Kingdom in the union. British voters will decide in a June 23 referendum whether to leave the EU, in what has been dubbed the Brexit.
“Clearly the Europeans are not going to have any discussions for a month before the Brexits,” Thomsen posited.
The Greek government interpreted this component of Thomsen and Velculescu’s talks as an indication that the IMF plans to precipitate crisis-like conditions before the Brexit referendum to avoid drawing out the process.
Using a credit event as a means to pressurize Greece and the other member states is clearly beyond the bounds of the negotiation process as we understand it.Greek prime minister Alexis Tsipras
“The Greek Government asks the IMF for explanations whether pursuing the creation of bankruptcy conditions in Greece, just before the British referendum, is the Fund's official position,” Olga Gerovasili, a spokeswoman for prime minister Tsipras, said in a statement.
But Thomsen and Velculescu make clear elsewhere in their discussion that they are equally wary of European nations’ unwillingness to reduce the Greek debt burden, particularly Germany, Greece’s largest sovereign creditor, and the eurozone’s most powerful nation. German finance minister Wolfgang Schaüble expressed his opposition to providing Greece with debt restructuring earlier in March.
Thomsen suggested that if the IMF threatens to withdraw from the Greek bailout program, it could exert enough pressure on German prime minister Angela Merkel to agree to the necessary debt relief, especially in light of the political challenge she is facing as a result of the refugee crisis. The IMF’s participation and role as a monitor helped make Germany’s emergency loans to Greece more palatable to the German public.
Thomsen described the ultimatum he would give Merkel.
“Look, you Mrs. Merkel, you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say, ‘The IMF is not on board’? or to pick the debt relief that we think that Greece needs in order to keep us on board? Right? That is really the issue,” Thomsen said.
We will not allow anyone to play with fire and blackmail Greece or Germany or Europe.
A senior Greek official told the Financial Times the leak was evidence the IMF was "blackmailing" Germany on the debt relief issue. "We will not allow anyone to play with fire and blackmail Greece or Germany or Europe," the official said.
As part of last July’s bailout agreement, European leaders agreed to discuss reductions in the debts Greece owes individual European nations, which the IMF and the majority of economists believe Greece will never be able to repay in full -- and risk preventing the Greek economy from recovering over the long term.
In addition, Velculescu and Thomsen were not in total agreement that Greece had completely failed to enact the spending cuts and tax increases asked of it by creditors.
“They are not getting close” to meeting the IMF’s full demands, Velculescu said. “What is interesting though is that... they did give a little bit on both the income tax reform ... the tax credit and the supplementary pensions. They are doing something but it is very small.”
“Well, if they come around to give us the 2.5 percent and not on Mickey Mouse stuff, we should be fully behind them,” Thomsen replied, referring to a compromise budget surplus target of 2.5 percent of GDP.
The IMF released a statement in response to the leaked transcript that neither confirmed, nor denied the authenticity of the transcript, claiming it does “not comment on leaks or supposed reports of internal discussions.”
“We have stated clearly what we think is needed for a durable solution to the economic challenges facing Greece--one that puts Greece on a path of sustainable growth supported by a credible set of reforms matched by debt relief from its European partners,” an IMF spokesperson said.
Even if the transcript of the conversation is consistent with the publicly stated views of the IMF it is likely to stoke the kind of suspicion in Greece and Germany that has long created political hurdles to progress in the Greek debt crisis.
Greece, and many international observers sympathetic to its predicament, will see the IMF officials’ remarks as more evidence that the Fund and the European Union have little regard for Greece’s sovereignty.
The massive spending cuts and tax increases Greece has already implemented in recent years in order to repay its debts have contributed to a massive uptick in poverty and the highest unemployment rate in the European Union.
Meanwhile, the IMF's potential threat of withdrawal could exacerbate German suspicion of the bailout process. The German public has long been wary of additional lending to Greece, which it believes has failed to reform its profligate government finances or adequately liberalize its economy.
It is also unclear what implications another potential Greek financial standoff will have on the European refugee crisis, of which Greece has been on the front line. Greece is the first entry point for the thousands of refugees flowing into Europe from Turkey and other countries. Tens of thousands of refugees with hopes of reaching more prosperous European nations have been stranded in Greece as neighboring European nations close their borders.
The European Union reached a deal with the Turkish government on March 18 to return asylum seekers trying to reach the continent by sea in exchange for additional aid to Turkey. They also agreed to an increase in the number of Turkey-based refugees Europe would resettle through a formal absorption process. The plan goes into effect on Monday.