Policy Research in Macroeconomics

Greece’s debt: so just what joint advice did the IMF and European Commission give?

The mystery grows as to precisely what advice was given on debt sustainability to the Eurogroup and Euro Summit for their meetings on 11th and 12th July.  This evening (15th July) the FT has run a story by Shawn Donnan and Peter Spiegel entitled “Latest IMF debt relief push baffles eurozone creditors” which casts new doubt on  the affair.  They say:

What baffled European officials was that IMF appeared to be sitting on an explosive document at the very moment when its contents could have changed the course of the weekend’s marathon bailout talks, although IMF staff insist the new assessment was widely distributed.

In my last blog, I pointed out that the ESM Treaty requires there to be, amongst other things, a debt sustainability assessment by the European Commission 

Wherever appropriate and possible, such an assessment is expected to be conducted together with the IMF.

On 8th July, Jeroen Dijsselbloem, wearing his hat of Chair of the Board of Governors of the ESM, wrote to EU Commissioner Pierre Moscovici and to the ECB President Mario Draghi, asking the European Commission, in liaison with the European Central Bank:

to assess, together with the International Monetary Fund, whether public debt of the Hellenic Republic is sustainable. (My emphasis).

So this request matches the terms of the Treaty correctly.

The EU Council’s website tell us this about the Eurogroup meeting of 11th July:

 The Eurogroup held an in-depth discussion on the Greek authorities new request for financial assistance from the European Stability Mechanism (ESM) and their new proposals for a reform agenda. Greece submitted the new reform plan on Thursday, 9 July 2015.
Ministers agreed to adjourn the meeting until 11.00 on 12 July 2015. 
The discussion was based on the first assessment of the Greek proposals by the three institutions – the European Commission, the European Central Bank and the International Monetary Fund. The institutions also evaluated risk to the financial stability in the euro area, Greece’s financing needs and its debt sustainability. The assessment was sent to the Eurogroup President on the eve of the meeting.” (My emphasis).

So there was an assessment provided in writing (it was “sent” to the President) by the three institutions – including the IMF. The assessment must have been a joint one, as the above note only refers in the singlular to “the assessment”. 

The Institutions had only a very brief time to compile this “first” assessment – and one cannot but strongly doubt whether this quick preliminary report could ever be an appropriate and conclusive vehicle to reach such far-reaching and detailed conclusions, even apart from legal and procedural breaches involved, which I outlined in my last article.  The assessment, however, remains unpublished, despite its evident centrality.

But now we have seen the IMF’s “Update of IMF Staff’s Preliminary Public Debt Sustainability Analysis” published yesterday, which highlights the unsustainability of Greece’s debt burden and concludes:

The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance…

Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.

It is hard to imagine that this strong position published on 14th July was not made available, in some similar form to the above,  on 11th July to the European Commission and ECB, and that it was not included in their joint sustainability assessment to the Eurogroup and sent on to the Euro Summit.

Yet this evening’s FT story appears to say that the Europeans were qute unaware of the IMF’s view – an utterly bizarre situation.

It is now of paramount importance that the debt sustainability assessment, provided on 10th July to the Chair of the Eurogroup, be published immediately – so that the world can see what advice was before the politicians when they discussed what to do, and how far they followed or rejected it. (Politicians are not bound to follow professional advice, but they should articulate cogent reasons for rejecting it).

If the IMF’s clear advice was before them, the participants in the Eurogroup meeting and Euro Summit should at minimum have publicly disclosed the advice, and explained to the world why they were minded to reject the IMF’s view on sustainability. The Summit Statement does no such thing.  

If, on the other hand,  the IMF failed to give their advice to the meeting, in line with that published just a couple of days later, it is they who are at grave fault – it would mean there is something very, very wrong in the way the Fund is operating if it does not transmit its advice to the key meeting.

It’s high time for total transparency on this crucial issue for the European Union and the future of its economic and monetary union.  The debt sustainability assessment must now be published. Depending on its contents, the decisions reached by the Euro Summit (I leave aside its lack of legal power to make binding decisions!) may well be judged to be fatally flawed and vitiated  – whether due to neglect, or to non-receipt, of the IMF’s advice, or because the sustainability assessment from all three institutions was too thin – in the time available – to form the basis of rational decision-making. 

One Response

  1. ……whether due to neglect, or to non-receipt, of the IMF’s advice, or because the sustainability assessment from all three institutions was too thin – in the time available – to form the basis of rational decision-making…….

    There is a third reason, isn’t there? That the advice was inconvenient?

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