International Business

I.M.F. Report Shines Uncomfortable Light on Greece’s Financing Gap


JULY 15, 2015

The I.M.F. was not saying anything different from what it and its chief, Christine Lagarde, had quietly told eurozone leaders last weekend.
But by going public with its warnings, the fund was putting the world on notice: Without some relief that might enable Greece to grow its way out of debt, the I.M.F. is unwilling to continue throwing good money after bad.
The question in the next couple of days will be whether that frank appraisal helps or hinders attempts to keep Greece in the eurozone.
The stark assessment could prove useful to the bailout debate if it leads to serious discussion about debt relief. But the report also raises the risk that lawmakers in countries like Germany, whose approval is required for any deal, will balk at the huge sums involved and prefer to cut Greece loose.
The size of Greek’s financing gap was not a surprise to eurozone leaders, who had the I.M.F.’s updated estimates in hand when they sat down in Brussels last weekend. Ms. Lagarde, the managing director of the I.M.F., took part in the all-night talks, although since it was a meeting of eurozone heads of state she was essentially an observer.
But while the agreement that was announced Monday morning in Brussels acknowledged the need for debt relief, the leaders offered few details and said they would not forgive any of Greece’s debt, a so-called haircut. By releasing the new estimates publicly late Tuesday, the I.M.F. put pressure on the eurozone countries that hold most of Greece’s debt to pay more attention to the issue as they discuss a new rescue package for Greece.
The I.M.F. said on Wednesday that it had been warning eurozone leaders for some time that Greece’s debt was not sustainable, and that the release of the updated report was not timed to put pressure on them.
Critics say the I.M.F. shares the blame for the Greek morass, saying that until recently the fund was complicit in the wishful thinking that has driven policy on Greece since the debt crisis began in 2010.
But as a result, after five years of rescue plans designed and financed with I.M.F. help, Greece is effectively back where it started — awash in debt and at risk of being flushed out of the eurozone.
“It has been a nightmare,” said Guntram Wolff, the director of Bruegel, a research organization in Brussels.
Besides threatening the unity of the eurozone, Greece has hurt the image of the I.M.F. and been a financial drain on the fund. Long a lender mainly to developing countries, the I.M.F. in the last five years has become the de facto eurozone bailout agency, with nearly two-thirds of its outstanding loans tied up in Greece, Ireland and Portugal.
Greece is the I.M.F.’s single largest debtor, owing the fund $23.6 billion, or 28 percent of the fund’s credits outstanding. And since June, Greece has fallen €2 billion behind on its payments to the fund, the largest arrears in I.M.F. history.
Mr. Wolff, an economist who has advised the I.M.F., was critical of the fund for agreeing to past plans that did not acknowledge the full extent of Greece’s debt problem. “They signed up to a program that was not sustainable,” Mr. Wolff said.
Responding to such criticism, Olivier Blanchard, the chief economist of the I.M.F., pointed out in a blog post last week that policy makers in 2010 were still fearful that Greece could be another Lehman Brothers, with the capacity to provoke a broad financial crisis. That made leaders reluctant to give Greece a big break on its debt.
“The risks were perceived to be too high to proceed with restructuring,” he wrote.
The release of the latest estimates on Greek debt was a sign that the fund has learned its lesson. A senior official of the I.M.F., speaking on condition of anonymity, said Tuesday that the fund would not be a part of any future plan that did not include serious debt relief.
On Wednesday, I.M.F. sources who insisted on anonymity said the statement was not meant as a threat, simply a reminder of the fund’s rules: It is not allowed to pour money into a hopeless situation.
Valdis Dombrovskis, a European Commission vice president responsible for the euro, said on Wednesday that debt relief was “back on the table” after the Brussels summit meeting.
“Certainly this issue is also going to be part of the discussions,” Mr. Dombrovskis said.
Greece’s debt may not be as insurmountable as it seems. Even if eurozone leaders do not forgive any of the debt, they could push payments so far out into the future that it doesn’t matter. The I.M.F. suggested as much in the report released Tuesday.
“You kick it two generations into the future,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “It essentially disappears, given the grace period.” Political leaders can still claim to their voters that Greece will have to pay back everything it owes — even if it might not be in many of the politicians’ or voters’ lifetimes.
Already, there were signals from Berlin on Wednesday that the German government was open to some form of debt restructuring, as long as it did not include outright forgiveness of the debt.
Mr. Kirkegaard predicted that the I.M.F.’s new appraisal of Greece’s debt needs would help push leaders toward a deal.
“The report shows what everyone knows,” he said. “It’s their job to use the megaphone and say, ‘This is the situation.’ I strongly applaud them for doing it.”
The risk is that members of the German Parliament, whose approval is needed for any new rescue plan, will not accept any debt restructuring. Already, a strong faction of political leaders and economists in Germany believe Greece is hopeless and should leave the euro.
There is only a short time left for Greece to fulfill tough conditions set by the European creditors, which they set as a prerequisite to any talks on debt relief. Greece faces a crucial deadline on Monday, when it must make a payment of €4.25 billion on bonds held by the European Central Bank.
Greece is expected to be a major topic when the central bank’s policy board, the Governing Council, meets on Thursday. Mario Draghi, the president of the European Central Bank, will hold a news conference afterward.
On Wednesday, Jacob J. Lew, the United States Treasury secretary, met with Mr. Draghi. Their handlers declined to say what the two men discussed, but Mr. Lew, who has been outspoken in pushing eurozone leaders to keep Greece in the currency bloc, planned to “discuss the path forward for Greece within the eurozone,” the Treasury Department said in a statement.
On Thursday, Mr. Lew was scheduled to meet in Berlin with Wolfgang Schäuble, the German finance minister, and in Paris with Michel Sapin, the French finance minister.
The Greek government will probably be unable to make Monday’s payment to the central bank unless it can secure some sort of temporary financing from the European creditors. Failure to repay the money might force the central bank to withdraw the emergency support that has been propping up Greece’s banks.
If the banks fail, it will intensify the downward spiral of the Greek economy — the crash that the I.M.F. is now sounding alarms about. 

The end of an affair for France and Germany

The faultlines on Greece are set to deepen and widen, writes François Heisbourg

by: François Heisbourg

European integration is a game that involves up to 28 players and at the end the Franco-Germans win. So it has been for close to 70 years, and so it was again in Brussels last Monday with Angela Merkel and François Hollande setting the terms of a deal subsequently blessed by all others. This may have come as a surprise, given the huge differences between the two countries’ positions. The Franco-German system was being tested to the limit.

The often-forgotten secret is that France and Germany rule the roost not because they agree but because they do not: De Gaulle wanted a Europe of nation states, Adenauer was a self-avowed federalist, and a few days ago Berlin was actively considering Grexit, while Paris worked to keep Greece in the single currency. Because the two countries often represent polar opposites within the mainstream EU conversation, a deal struck by Germany and France can usually be accepted by all, minus the UK. This does not mean the couple’s balance remains unchanged. During the cold war, a strategically dependent Germany ceded the central role to France. Nowadays, German leadership on issues such as Ukraine is made acceptable thanks to cover provided by France. Similarly, the deal struck in Brussels on Greece bears the “no-debt-forgiveness” footprint dear to Germany.

Last Monday, France was one of only three countries out of 18 ready to sign on to a new bailout deal with Greece (Italy and Cyprus were the two others). But it is France and Germany together who took the final decision. Germany kept debt restructuring off the table. France also got what it wanted: no Grexit. Mr Hollande received high acclaim on his return from Brussels.

So the tired old couple still works some of its magic. The fact Ms Merkel and Mr Hollande share character traits may have helped: unabrasive and diffident, they are born proponents of the quest for compromise, important in German coalition-building and the Socialist party’s art of synthesis.

However, this could be a last fling, as the faultlines that opened last week deepen and widen. By openly contemplating the forced secession of Greece, Germany has demonstrated that economics trump political and strategic considerations. France views the order of factors differently, as is clear in Mr Hollande’s July 14 proposal to make the eurozone a politically accountable body with its own parliament and budget. This could still be fudged if the new bailout scheme were successful.

Unfortunately, by having avoided what they loathe — debt forgiveness — the Germans may now be hoist with their own petard. Adding billions to Greek debt, enforcing pro-cyclical pension cuts and tax increases in the middle of renewed recession, and positing as in 2011 a €50bn privatisation programme: this is as unlikely to work now as it was in the past. Now it has acquired the formal status of plan B, Grexit is likely to come back. France would then be faced with an impossible choice: to flow with the German-led tide of Grexit, clearly as a subordinate, or to fight a losing battle to prevent a country from being forced out of the European family.

Even Franco-German co-management may not be up to striking a workable compromise. The change behind the scenes is that the Paris-Berlin bond can no longer take strength from the shared project of European integration: France’s 2005 rejection of the proposed EU constitution was a turning point. The relationship has instead become utilitarian and as a result the EU’s days of ever closer union may be at an end.

The writer is special adviser at the Paris-based Fondation pour la Recherche Stratégique

Another Greek Can-Kicking

There won’t be light at the tunnel’s end until Germany kicks itself out of the eurozone.

By Holman W. Jenkins, Jr.

July 14, 2015 7:59 p.m. ET

Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel at a news conference in Berlin, March 23.  Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel at a news conference in Berlin, March 23. Photo: tobias schwarz/Agence France-Presse/Getty Images

If you’re a Greek who no longer has much money in the Greek banks, Grexit is looking better and better. That’s even with the latest tentative bailout deal, which is the extend-and-pretend variety: It’s unlikely to get the Greek economy moving or end Greece’s destabilizing cycle of crisis upon crisis.

If you still have money tied up in Greek deposits, you might feel differently. Another bailout might seem another chance to get your money out without suffering a haircut (to recapitalize Greece’s broken banks) and conversion to the drachma (an outcome still in the cards). You are willing, then, to sacrifice the economy’s return to long-term health to maximize your chance of reclaiming your life savings.

If you’re Angela Merkel, you’re willing to settle for another extend-and-pretend bailout of Greece because you don’t want Grexit on your watch. But you also don’t want a shellacking from your domestic German voters who are weary of seeing their money go to prop up the Greeks. That’s why you’re pleased with co-conspirator France stepping out as defender of Greece and promoter of fake plaudits for the Greek bailout. A European tradition is that Germany likes to be seen deferring to France to quell any idea that Germany is becoming strident and imperialistic again.

No actual long-term problem of Greece or the eurozone is being solved here, however. At the same time, don’t believe cries that Greece must be saved or the European project is doomed.

This is a case of the propaganda that was used to sell the euro in the first place coming back to haunt. Stop lying to yourselves, Europeans. Currency integration was not necessary for the European Union to succeed. It isn’t necessary so Europe can have clout in the world. It’s not necessary in order to avoid another war, as former German Chancellor Helmut Kohl was fond of implying.

If anything, the single currency is undermining the larger European project. The antidote to fascism is becoming a stimulant to fascism as the eurozone overreaches to impose what amounts to nation-building on Greece even as it continues to accommodate France and Italy, whose debts pose the real long-term threat to European togetherness.

Let’s quickly add that the euro is a failure only because it wasn’t allowed to work. If we have learned anything about “optimal” currency zones, fiscal discipline has to begin with lenders, not borrowers—with bankers and fund managers knowing their money will be lost if they lend to countries on unsustainable paths.

That said, authentic market discipline was never realistically compatible with modern European welfare and interest-group politics, as the eurozone lately has been proving over and over.

Which brings us to Hans-Olaf Henkel. Back in the day, pro-business Europhiles like Mr. Henkel—he ran IBM Europe and headed a prestigious German trade group—embraced the common currency as a lever to compel pro-market policy change. “Structural and competitive weaknesses will now be mercilessly exposed,” he preached.

Alas, it was not to be. The euro, which was supposed to be the rod that spanked the Europeans into reforming their welfare states, became the opposite, the enabler of Europe’s growing debt addiction.

Mr. Henkel saw the error of his ways. He co-founded Germany’s version of the anti-euro political party that has been popping up all over the Continent, but with a difference: His party, Alternative for Germany, still believed in the European Union, it still believed in the common market, just not the single currency.

As of last week, though, he separated himself from the party over its growing anti-immigrant wing, a sign of troubles percolating across Europe. Last year he warned that a British vote to exit the European Union would be the “worst scenario” for the forces trying to save Europe from itself.

Mr. Henkel wrote a book proposing a bifurcated currency system. The uncompetitive southern countries, including France, would keep the euro. They would be spared messy currency conversions.

They would be spared bank runs. Germany and other creditor nations would bear much of the cost of adjustment by adopting a new, strong currency, essentially a deutsche mark in all but name.

What about the supply-side reforms that were also part of this week’s Greek deal? If enacted, wouldn’t they contribute to genuine recovery inside the euro system? It can’t be repeated often enough: The currency the Greeks use matters less than the domestic policies they adopt for true prosperity. But missing is any evidence from recent experience that such changes of heart can be imposed successfully from outside.

In Mexico, Crime Is Bigger Than a Crime Boss 

The July 11 escape of the notorious Sinaloa crime boss, Joaquin "El Chapo" Guzman Loera, from a maximum-security prison in Mexico has drawn considerable Mexican and international media attention. While the brazen and elaborate nature of the escape will add to the lore already surrounding Guzman, the escape itself carries little significance for organized crime in Mexico — though it will place a momentary strain on coordination between U.S. and Mexican law enforcement. The forces that drive the evolution of organized crime and their impact on society in Mexico are simply greater than any single crime boss.


Mexico's geography enabled drug traffickers like Guzman to operate on a global scale. As international law enforcement effectively dismantled the powerful Colombian cartels and stymied their maritime trafficking routes through the Caribbean in the 1980s and 1990s, Mexico became the lynchpin of new smuggling routes into the United States. This evolution took place just as the Mexican criminal networks that trafficked drugs broke down into smaller groups. Though crime bosses like Guzman rose in stature relative to others, all organized crime groups in Mexico are the result of a systematic decentralization in cartel structure that continues today.

In fact, by the time Guzman was arrested in February 2014, the Sinaloa Cartel was already fragmenting. Groups that operated in areas such as Chihuahua, Sonora, Sinaloa and Baja California states — areas that were once part of El Chapo's criminal network — were already acting autonomously. Some of them were even fighting one another. The arrest of Guzman and the subsequent capture of some of his lieutenants only accelerated this trend. Now, geographic domains that were controlled by Sinaloa-based crime bosses for decades are now controlled by other groups, including the Cartel de Jalisco Nueva Generacion, which expanded from the Tierra Caliente region, and La Linea, which was once the enforcement group for the Juarez cartel.

Among the myths surrounding El Chapo were tales pertaining to his purported role as an arbiter of organized crime in Mexico. According to some of those myths, his organization preferred to expand its business operations through negotiation, rather than through violent conflict. But Guzman, in fact, was party to some of the most violent turf wars in Mexico, introducing rampant insecurity in places such as Tijuana, Nuevo Laredo and Ciudad Juarez.

These conflicts had subsided by the time he was arrested but not before nationwide turf wars devolved into more localized conflicts. Guzman may attempt to re-consolidate the control he once had over Mexico's organized crime activities, but his previous efforts to do so failed, and the task would be even tougher now that his network has become even thinner.

Since 2012, Mexican organized crime has become increasingly balkanized amid government efforts to revamp public security institutions, and nationwide levels of organized crime-related violence have gradually diminished. Though having more crime groups means there are more bosses, these leaders have not been able to sustain violent offensives against their rivals and fend off the state as well as their predecessors did. And while waves of extreme violence can still emerge in places like Tamaulipas, they typically weaken as soon as security forces move in — in contrast to past conflicts in places like Juarez, where violence continued to climb despite repeated deployments of federal troops.