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Thursday, July 02, 2015

A Game-Changer for Greece?

The IMF's debt sustainability analysis (DSA) for Greece has been leaked (full copy here, courtesy of FT), and it may well prove a game-changer. It basically confirms what Greek PM Alexis Tsipras and Finance Minister Yanis Varoufakis have been telling us (and the ECB) for some time: Greek debt, as currently structured, is unsustainable even under best-case scenarios.

Greek pensioners wait outside a bank.
According to IMF, Greece will need "over €50 billion over the three-year period from
October 2015 to end–2018" (p. 9 item 4). IMF says "further concessions are necessary to restore debt sustainability." Specifically, IMF suggests "to extend the grace period to 20 years and the amortization period to 40 years on existing EU loans." (See p. 12, item 10.) The DSA also talks extensively about haircuts: the need for ECB to recognize actual losses, thereby reducing amounts owed.

It's hard to overemphsize the importance of the findings in IMF's sustainability analysis. The IMF document shows that the relief packages being offered to Greece by ECB have been ridiculously underpowered and ECB knows it. It proves that ECB negotiated in bad faith. ECB fraudulently enticed Greece to take loans it knows Greece can't pay. This is criminal, predatory lending activity, by definition. In most civilized countries, it's illegal.

IMF is no dummy, and neither are Greek leaders. IMF shows, in its DSA, that Greece wouldn't qualify for further IMF loans even if it hadn't defaulted on June 30. The June 30 default (technically, an arrears) moots any further IMF payouts for Greece, but that's okay; the DSA shows Greece was at the end of that particular road already anyway.

The IMF document changes everything, because no future debt talks can ignore its findings. The truth is out in the open. Greece needs better terms. It's not open to question any more. IMF sides with Greece on the basic question of debt sustainability.

Latvia's outgoing President Andris Berzins offered a shockingly accurate observation in an interview with Latvian Independent TV recently, when he said "this [Greek] debt is so big that everyone understands that it won’t be repaid." Indeed, Greece's total debt (€315 billion) is so large, if a crowdfunding campaign were held tomorrow, every human being alive today on earth would have to contribute €44.

The outgoing Latvian president also said: "Loans to Greece have just bought time so that those in power don’t have to take decisions. This is like a game: who can hold out longer by not showing that this money has been lost? This burden has become bigger and there obviously is no possibility to repay."

Of course, taking a writedown on Greek debt (the only realistic way forward) is political suicide for the likes of Angela Merkel, because it would signify that the cost of the Greek bailout has been passed directly to German taxpayers. (Germany is not the only debtholder, of course. Other Zone countries, and their taxpayers, would absorb the cost of a haircut as well.) This is why Merkel will fight debt forgiveness to the death, even though Germany itself benefitted immensely from debt forgiveness in post-war years (and Greece was one of the signatories of the 1953 London Conference).

In the meantime, the Greek referendum has become (in addition to its other meanings) a vote of confidence, or  no confidence, for the country's leaders. Both Tsipras and Varoufakis have said they'll step down if the vote is not a resounding OXI.

Here's hoping Greece votes NO to predatory lending and further unsustainable (by IMF's own definition) debt. The alternative is more payday-loan chicanery, leading (inevitably) to an involuntary default on debt that's no longer capable of being repaid under any forseeable scenario.

Be sure to join us here tomorrow for our Friday Water Cooler links: our best-of-the-best freakonomic news links.

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