Monday, April 4, 2016

"Dear Christine!" --- "Dear Mr. Prime Minister!"

Here is the sequence of events leading up to the storm:

Transcript of recorded internal meeting (phone call) on March 19.
Letter from Alexis Tsipras to Christine Lagarde of April 2.
Letter from Christine Lagarde to Alexis Tsipras of April 3.

The Greek government may have justifiably found some of the content of the leaked internal IMF conversation offensive but the real slap in the face occurred at the top level: When you address a Head of Government as "Mr. Prime Minister" after he as addressed you as "Christine", you have really put the man in his place.

The whole issue is actually a tempest in a teapot. After every important meeting, after every important negotiation, each side has internal conversations as to where they stand. Such conversations are obviously not for the record and the language used in such conversations is obviously not always fit to print. Only utopists like Yanis Varoufakis argue that the world would be a better place if all such internal conversations which are not necessarily fit to print were to be made public.

I, too, was a bit ticked off when I read the protocol and saw how employees of an international institution would 'rule' over a sovereign country as though it was their own. But only after the violent reaction from the Greek side did it dawn on me that of all parties involved, the Greek side had the least to complain about. After all, the IMF employees evaluated strategies for loosening Greece's fiscal constraints by forcing a debt forgiveness on the EU, particularly on Germany. Whichever way I slice it, the employees wanted to make the IMF an ally of Greece and not its opponent.

The ultimate transparency which is being demanded by many good people of Europe these days could have major implications on mutual trust. The members of the Eurogroup will no longer have open and frank discussions when they have to fear that their comments are being recorded. They same applies to representatives of the Quadriga when they have to fear that every word they utter in private will show up in the newspapers the next day.

Regrettably, not having open and frank discussions will affect the quality of the outcome.


  1. Yes, the IMF should, in theory, be an ally of the greek government. And in fact, back in 2013 it was shaping up that way, under Finance Minister Stounaras the Greeks finally extracted a commitment from the Eurozone that they would look again at OSI haircut question.

    However, that was under Stounaras. The IMF knew he would deliver on what he said. Since then?

    1. Since then, Greek government push back on all corrective measures. It seems Tsipras feels committed to implementation of the measures listed in July but not the budget KPIs as a whole. So he push back on everything, expecting that if the budget execution is not up to the estimation, the difference will be picked up by the Europeans in more debt relief.

      A lot of observers, even those critical towards Syriza, agree that more tax increases are not a solution. And I do also.
      But I would expect a constant reporting on the progress the government achieve in tax collection and fighting tax evasion.
      But I see little reporting on tax collection progress. And results are apparently bad: collection from tax evaders dropped from 2014 26m to 2015 3,7m according to @MarketElf.
      I would expect this govt to send a strong message that tax and contributions need to be paid, and the message to be sent to the plumber and to the "oligarch",Syriza archenemy alike.
      But no. If you pay your tax, you are a sucker, because your neighbour who evades tax don't pay contributions for his employees will not suffer much if he is found out.

      Separately, GR don't want to cut pensions again because it is the safety net for all the family? Then propose a plan with deep pensions cut implemented progressively conditioned to a minimum universal revenue. But no, better continue the same way as before. If I am an unemployed Greek and my parents are dead, my best hope is that a civil servant will understand how much I cherish the memory of my parents and that they are still alive in my thoughts.( That's harsh, but what I mean is that law should be written so that you don't have to go around it)

      So what will happen now? No idea.
      I wish Greek people well, I wish European countries less wealthy that the Greeks well, and same to the more wealthy(but those can give a hand).
      At the end of the memorandum, Greeks will have gone through a lot of hard time, but the end result not clear: worst case is if Greece exits of the memorandum as a country where no connection is made between the tax you pay and the subsides that are shared in the country, and that would be the worst thing for non Greek Europeans, because we'd be still at risk to face a Greece crisis 10 years later.
      In any other case, the money Europe spends on this bailout, including on debt relief, will be money well spent if it is not unfair to European poorer countries

    2. Mr. Druesne,

      "Regling: The Europeans Have Not Spent a Single Cent In Rescue Programs"

    3. @Anonymous, 9:50PM

      What is your point exactly?

      Regling explains that under the ESM scheme, money lent to Greece are borrowed by ESM on the markets and that Member States have subscribed in capital, which will serve as the collateral.
      --> if Greek repays below cost of ESM funding or if part of the debt is cancelled, the collateral provided by the member states will take a loss.

      Besides, ESM is only one of the instruments which were used.
      During the 1st bailout, Member states provided direct bilateral loans to Greece (which have not yet matured), then loans were provided by EFSF where Member states provide a guarrantee and last summer EFSM was used for the bridge loan (to UK furor)

      Whether Europeans provided the loan directly, capital to serve as collat or the guarantee for the loans is not very important, if the loan is not repaid, each Member state will take a loss.

    4. @ Jerome Druesne
      Well, not quite...

      Of course, someone loses money when loans which are paid are not repaid but the question is whether and how tax payers ever feel that. Tax payers only feel what goes through the budget. I don't know in which legal entity Austria's bilateral loans to Greece were booked but they for sure increased Austria's debt. If they are not repaid, the debt remains but the asset disappears. The disappearance of an asset does not show up in the budget because the budget shows no accounts receivable. In that scenario, all that the bilateral loans caused was an increase in Austria's debt and its interest expense but if interest rates are zero, there is no impact on the budget and on tax payers. So much about miraculous government bookkeeping.

    5. Not really: Austria would have to book a loss. and same if there is a reduction of the nominal:

      I suspect main reason that European countries are ready to extend loans or lower the interest rate is that the impact on them is diluted over time.
      But if there is a haircut on nominal, I am nearly sure they would have to take the loss immediately, and it will impact their deficit on the year of the haircut. So it will impact significantly the budget of each member state on the year of the nominal haircut

      I vaguely remember that the funding of the bilateral loans was also excluded of EU countries debt as far as stability pact, Mastricht criteria was concerned, but if the loans they extended to Greece are not to be repaid, of course their funding will appear in the member state debt.

    6. I am not specialist, or even familiar, with rules of national accounting, but to summarize:

      As I understand,

      if maturity extension and interest rate lowering in the loans to Greece--> nobody really cares because the effect in the other member states budget, debt, ... is diluted over time

      Nominal haircut --> effect on other member states budget, deficit,... is immediately felt.

      For Greece, 1. or 2. have a similar positive impact, and you should only consider the net present value of the loans after restructuring rather than nominal

      Sadly the effect of 2. is null in the eye of the public: you continue to have the same debt/GDP ratio, and all the boring talk that the debt is unsustainable continues.
      For example, the 2012 restructuring of official debt by EU was worthless on the PR front. But greatly lowered the debt financing costs for Greece

    7. The crux of the matter is on whose books the loans are. If they made out of the Treasury, non-payment of the loans will only mean that the debt taken up to make those loans cannot be retired. Makes not much difference when interest on that debt is zero. Otherwise, no further loss will have to be recorded (no double-entry bookkeeping for governments).

      If the loans are on the books of some state-owned entity (like KfW in Germany) under the Republic's guarantee, non-payment will trigger the Federal guarantee. That will require an increase in federal debt but I am not sure that payment under the guarantee flows through the budget.

      If the loans are on the books of the ESM, it can get costly because the ESM will require its shareholders to replenish losses. Again, more debt with little or no interest cost.

      If the loans are on the books of the ECB, the loss can be deferred until doomsday.

    8. I essentially agree with your message, it is complicated.
      I would in fact welcome if analysts looked into the nominal haircut hypothesis from the Member states perspective.
      But so far, they only write about how it would affect Greece, not the other member states

  2. "Regrettably, not having open and frank discussions will affect the quality of the outcome." I agree but we live in the era of mass surveillance and disclosure and not only from governments. Stupid.
    Now to the main point. There are 4 points that are technically optimal to intercept. Three are obvious: New York, where the fiber leaves the water-NSA, West of England, where the fiber enters the water-GCHQ and Athens. However the best point is Frankfurt, home of the top communications node in the Europe, all the data of which are hoovered by BND. Make out of this anything you want.
    Concerning the Greek government gee these guys are naive. Given that it is a leak of something never officially recorded (a document may be leaked and if the leak is contested it is at least theoretically possible to produce the original. A phone talk?) the obvious answer to any attacks based on the recordings is simply "What are you talking about?Can you PROVE anything?" It will also make Greece looking incapable of protecting what is in effect diplomatic personnel, forcing the IMF to become very hostile to protect its people.

    1. It is not necessary to prove the content of a tapped phone call: this is not in a court of law. This is international politics and the IMF has been caught manipulating for its own ends, and considering even more damage to the Greek economy. It reeks of incompetence and arrogance: in any well-run international organisation they would all have been sacked by now. However, we see with political corruption everywhere that politicians never resign, even after criminal conduct. This is the era of lawlessness and arrogant abuse of power. The 1930s all over again.

  3. Hello Mr. Kastner,

    There is really not too much to say more than the confirmation that Greece is being run by a bunch of idiots. They prove this on a daily basis and this latest issue is only single example. They do not even have the competence to properly translate. Or if they purposely mistranslated as to create a public uproar as done in the past this is worse than incompetence but national traitors. They don't even know how the game is played. If they wanted this conversation leaked only for impressions, Tsipras could have easily publicly ignored it and allowed people to decide the meaning. But they accepted it mis read it and made fools out of themselves.

    It makes me sick to my stomach that this party or government represents my country and an image of "who Greeks are?" Because under such a representation, our colleagues or collaborators, who by the way know what they are doing, see Greece Greeks by their representatives. Hence if the representatives are morons then the people are too.

    However how all the negotiations is done by our representatives with quadriga, they are both preparing a new set of measures which will bring Greece and Greeks, one step further to total collapse. Paying about 70% of income to taxes and social insurance, directly or indirectly is soon to come. My household is a position which has maintained the same income 2008 to 2015. In 2008 we paid 40% of our income to the government. Last year 2015, that number went to 53%. And from what i am hearing as to what is being boiled for next years this will rise to 65-70%. This is relative to income tax, property tax, emergency tax (which has become permanent), social insurance and VAT at 23%. What democracy? This is modern feudalism.


  4. Mr. Tsipras has done it again, he has a talent for putting his foot in his mouth and creating enemies. I don't really care if the transcript was obtained by Greek authorities or from other sources. This time he has found himself a worthy adversary, a person who has more influence on the politics of his country than he has. Mme Lagarde is not a person who suffers fools lightly, and I would guess she has a long memory. I don't even think the PM has somebody who can explain her answer to him, he will do this again. Congratulations Mr. Tsipras.

  5. For how long will the Eurozone shoot itself in the foot like this?

    The IMF should have never been involved in this. The Eurozone was a surplus monetary-union and had every means available to solve this benign crisis in one it's regions.

    For how long with the ECB act against the interests of it's governments by not supporting their bond markets (unless they' re in a program)?

    For how long will the Eurozone impose fiscal austerity in the middle of a depression?

    I'm so beyond this. Why must we go through Brexits, Grexits, the rise of Le Pen, and so on, and so on? Break up the Eurozone and save us from this miserable limbo. Jesus.

    1. Agreed. Of course, the eurozone could have worked, if its politicians had any brains and the Commission had any guts to resist nonsense. The inclusion of the IMF was originally at the insistence of Germany and France, as I recall -- who felt that the EU had insufficient expertise to solve economic problems (!!) The refusal to reduce te Greek debt (demanded by the IMF) comes from the Germans. The anti-Keynesian pro-austerity nonsense comes from the Germans, too.

      Question: which country is responsible for the eurozone crisis and the utter shambles it is now in? Hint: the name of that country appears earlier in the text.


  7. I doubt that Christine Lagarde lets her decisions be influenced by a row with somebody like Tsipras. She is too cold and has been in politics for many years.

  8. I'm sure that Lagarde base her decisions on facts. However, the most expensive decisions are those where the pros and cons balance, when Mme Lagarde sit on the top of the fence and decide what side to come down on. It is also the time when Tsipras start to wonder if he has been honest with the IMF, if it was smart to call them a criminal organisation, if it was wise to accuse them of engineering a default. In short, if civil behavior will get you better results than accusations and empty threats.