The good news for the International Monetary Fund, which has been saying for ages that Greece’s debts are unsustainable, is that European lenders now seem to agree.
There are “serious concerns” about the sustainability of the country’s debts, the three European institutions negotiating the latest bailout said on Thursday. They think Greece’s debts will peak at 201% of GDP in 2016, which is roughly what the IMF said a month ago when it projected a high “close to 200% of GDP in the next two years”.
So what should be done? Unfortunately, that is where unanimity seems to break down. The IMF’s view of the options in July was blunt. First, there could be “deep upfront haircuts” – in other words, a portion of Greece’s debts to eurozone lenders would be written off, which, reading between the lines, seemed to be the IMF’s first preference. Second, there was the politically-impossible policy of eurozone partners making explicit transfers to Greece every year.
Or, third, Greece could be given longer to repay, an approach likely to be more palatable to European leaders. But this option came with a heavy qualification from the IMF: “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.”
Is Europe ready to be “very dramatic,” as the IMF defined it? Almost certainly not – at least not in Germany. Thursday’s European report spoke about extending repayment schedules but it seems highly unlikely that 30 years would be acceptable in Berlin.
If that’s correct, the IMF’s willingness to cough up its €15bn-€20bn contribution to the latest €85bn (£60bn) rescue package must be in serious doubt. The fund’s guidelines say loans can only be advanced when there is a clear path back to debt sustainability, usually defined as borrowings being less than 120% of GDP. On Thursday’s European analysis, Greece would still be at 160% even in 2022.
In the first Greek bailout of 2010, the IMF bent its own rules to take part, declaring Greece to be a special case. That led to accusations it was trying to save the euro rather than help Greece, a charge reinforced when the IMF, in an excruciating piece of self-analysis, later confessed its economic projections had been “overly optimistic”. The IMF, surely, won’t want to get into another mess of that sort.There will, however, be heavy pressure from Germany to compromise and dilute the debt relief. It will be hard to get any bailout package through the German parliament but the task might be impossible if the IMF won’t endorse it.
Nevertheless, the IMF should stick to its guns. Greece needs serious debt relief, not token measures. It is about time that lenders accepted the economic reality that piecemeal measures are pointless when debt ratios reach 200%.
The IMF should do the principled thing: insist either on haircuts or a 30-year grace period on repayments. Anything else would damage its credibility further.
Cashing in too early
As investors anxiously await Glencore’s half-year figures, as described on Wednesday, the production update contained a taster. This year’s capital expenditure budget is being cut again. It has now fallen in stages from $7.9bn to $6bn. That’s not a surprise given that commodity prices remain weak but it’s worth remembering that the company launched a $1bn share buyback only a year ago.
Chief executive Ivan Glasenberg was feeling flush with cash last August. Glencore wanted to “walk the walk,” be nice to shareholders and avoid having a “lazy” balance sheet. Most of the $1bn was spent before December when Glencore’s shares traded between 280p and 330p.
Now they’re 177p as the market frets about the company’s ability to maintain a strong investment-grade credit rating. There have been many ill-judged buybacks over the years, especially in a mining sector where optimism is the default setting in boardrooms. Glencore’s joins the list.
Regulators cooperative
The Co-op Bank is too weak to pay a fine for past failings, its regulators decided this week. How weak is it? Here is the assessment by credit rating agency Moody’s of the damage that would have been done if the Co-op had been forced to cough up.
“A £120m fine, even reduced to £85m under an early settlement agreement, would have resulted in a significant erosion of the capital position of the bank and potentially threatened its future sustainability,” said Moody’s.
Strong stuff. And, remember, £120m was merely the penalty that would have been imposed by the Bank of England’s Prudential Regulation Authority. The Financial Conduct Authority also waived its fine – it’s just that, oddly, it didn’t mention a figure. Moody’s, in the dry language of rating agencies, described the regulators’ leniency as “a credit positive.” You bet.
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