Is the IMF necessary for the 3rd Greek Program? – by Alexandros Kyriakidis (University of Sheffield)

April 20, 2016

Alexandros Kyriakidis is a PhD Candidate at the Department of Politics of the University of Sheffield

Tensions have been growing between Greece and the IMF, including a highly controversial Wikileaks leaked conversation between the IMF Mission Chief for Greece and the Head of IMF’s European Department that raised issues at the highest level, with letters being exchanged between IMF’s Managing Director Cristine Lagarde and Greek Prime Minister Alexis Tsipras. Amongst these concerns, the Greek Prime Minister has questioned both the demands of the IMF, but also, indirectly, whether its participation in the 3rd Greek program is necessary or even desirable.

A brief background: The Greek Prime Minister is the leader of the Party SYRIZA, which won the majority in the January 2015 Greek elections – the first left-based, anti-austerity Party to be elected into government across the EU since the beginning of the crisis. Its electoral mandate was to renegotiate the financial assistance (loan) agreements, to sharply reshape the austerity-based conditionality of this assistance (so-called Memorandums of Understanding or MoUs), and to not accept the supervision of the programs by the so-called Troika, i.e. the European Commission, the ECB and the IMF. There were long and arduous negotiations and a Greek referendum (6 July 2015) with an outcome against further austerity measures but of questionable outcome value. On the eve of the referendum (30 June 2015), the Greek PM requested a new, 3rd Greek financial assistance program and an accompanying MoU, officially initiated in August 2015, in a somewhat dramatic policy drift from the electoral mandate of this government. Despite such drift, SYRIZA obtained a majority again in the September 2015 snap elections following through with the 3rd program.

Why, all the fuss in relation to the IMF? As opposed to the previous two Greek programs, in which the IMF participated through corresponding funding, this 3rd one was agreed only with the Eurozone Member State-based, international assistance mechanism ESM, and did not involve the IMF (the last IMF program for Greece expired on January 2016). However, the IMF participated in the drafting of the MoU with a view of providing financial assistance in the future upon satisfaction of two conditions:  (1) a detailed fiscal package that provides a sustainable economic trajectory (focus on pension reform), and (2) the provision of "significant debt relief, well beyond what has been considered so far," since "Greece's debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own."

It is clear that none of the two aforementioned conditions have been fully met. On the structural adjustment side, the Greek government is unwilling to implement even more austerity measures, especially in relation to a further reduction of pensions, after almost 6 years of consolidation. On the debt relief side, the Eurozone Member States, and particularly some such as Germany, essentially oppose any debt relief (which has been reiterated as a necessary action by the IMF), least of all any that would go further than what has already been considered (i.e. a mediocre extension of Greek debt maturities). In the meantime, the IMF considers the targets set by the Greek program as unachievable for the medium to long terms to achieve a sustainable fiscal position.

Is IMF participation then really necessary? It is worth noting on a theoretical level that IMF participation in the Eurozone in the beginning was considered unthinkable and amounting to a testament of the Eurozone’s failure, among others because of the Eurozone’s levels of growth (IMF interventions focused mostly on developing nations), as well as their antagonistic presence (in monetary/finance terms) to the USA /USA dollar. This, however, has long been abandoned as a taboo.

In the current situation, a Eurozone Member State seeking ESM assistance has to request IMF assistance too. Legally, there are two legislative instruments on the EU’s side that govern the request of financial assistance from a Eurozone Member State: the ESM Treaty, upon which the ESM is based, and the Two-Pack EU Regulation 472/2013, laying down the EU-based process relevant to a Eurozone Member State receiving financial assistance. The ESM Treaty, an international treaty concluded outside the EU legal framework, stipulates that not only is the ESM to cooperate with the IMF very closely, with the latter participating both at a financial and technical level, but also that "a euro area Member State requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF" (Recital 8). Similar provisions are included in Article 13(2)(b) of the Treaty. In addition, the Troika, i.e. wherever possible the IMF as well, is formally tasked with drafting the policy conditionality outlined in the MoU and monitoring its implementation (ESM Treaty Article 13). Similar are the provisions of Regulation 472/2013, whereby a Eurozone Member State requesting financial assistance either from the ESM or the IMF is subject to Troika supervision (Recital 12, Article 7).

Pursuant to the above legal observations, there was also a clear political commitment in the Eurosummit of July 2015 (where the 3rd Greek program was agreed upon) that Greece would request a new IMF financial assistance, to run parallel to the ESM program, stipulating that "Greece will request continued IMF support (monitoring and financing) from March 2016” (emphasis added by author).

So is it necessary for the IMF to partake in the Greek program? For the IMF itself, certainly not. The legal provisions do not contain any type of reciprocity clause, and do not commit the IMF to accepting the request of the Eurozone Member State concerned; in this case Greece. However, on the EU’s side, it seems necessary for a Eurozone Member State that receives financial assistance through the ESM – such as Greece – to request similar assistance from the IMF. In either case, Greece already committed at the highest level (Eurosummit) to requesting IMF assistance and is, therefore, restrained in perceiving a request for IMF participation as optional, especially considering the importance that some Eurozone Member States, such as Germany, place on the IMF’s participation as a guarantor for the program’s efficiency and success. This is, after all, the reason for the close cooperation between the ESM and the IMF as outlined above. However, in the case that the IMF denies the provision of assistance, then there is no stipulation as to how the process unfolds, although it would seem logical that the ESM-based program would continue. What happens remains to be seen. However, clear legal limitations exist as to the options of the Greek government to reject or not apply for IMF participation.

 

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