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Why Greece could still default on the IMF

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Isn’t there something weird about the timing?

Buk Surface-to-air Missile System

June 25, 2015 Comments (0) Views: 1587 Homepage

Greece: is it time for “Extend & Execute”?

I’ve made comparisons between Greece and various countries in recent months: Indonesia, Brazil, Argentina, Panama & even Sweden, to name a few. Now it’s time to introduce another one: Cuba.

The 1962 Cuban Missile Crisis

In 1962, US spy planes found evidence of Soviet Nuclear Missiles being installed in Cuba. The US blockaded the island to prevent more missiles from moving in, and pressured the Soviet Union to move the existing ones out, which they eventually did. Only later did the world discover that the US had secretly agreed to remove its Jupiter missiles from Turkey and Italy at a later date, in return for the Soviet climb-down in Cuba.

Introducing “Extend & Execute” for Greece

The question with respect to Greece is whether an analogous deal is possible: with Greece starting to execute against a new Prior Actions list now, in return for assured debt ‘help’ at a later date. Actually, if you listen carefully to what the IMF’s Head of Public Affairs had to say about Greece earlier today, you’ll see it’s more or less exactly what the IMF is hoping for as an outcome. And in his all-too-brief Press Conference of Monday evening, about the only thing that Eurogroup President Dijselbloem went out of his way to talk about was “prior actions, which is the key thing that it boils down to”. On Tuesday, Christine Lagarde called it “specificity” (as we speak, Sting and the rest of the Police are probably thinking of re-forming, and using ‘Specificity’ as the title for a new album!).

It would be a welcome improvement on “Extend & Pretend”, for sure: we might call it “Extend & Execute”, actually.

One problem, of course, is that it isn’t just Greece who has fallen short in terms of its various reform commitments in recent years (and loan programmes), but also its partners who have failed to stand up to the plate with respect to Greece’s debt burden. Luckily for Greece, though, the answer is quite straight-forward: threaten not to pay, and watch as the Eurogroup meeting is convened faster than you could say ‘Master Financial Assistance Facility Agreement’.

Let them eat taxes

As for the ongoing wrangling with respect to the Prior Actions, it seems obvious to me that it’s the creditors who should be doing most of the backing down with respect to whether the Greek government wants to meet is budget targets through tax increases or spending cuts. Have a look at the IMF’s own manuals, for example, and you’ll quickly see that the much of the point of Prior Actions is to engender buy-in from the ‘host’ government, which will therefore be more amenable to actually carrying out the reforms once all the photographers and policy officials have finally gone home. In the end, it would be absurd, to say the least, for a proposed agreement with agreed deficit targets to fail to pass over the tax/spending mix of how the target is actually going to be achieved, particularly when the government in question has committed to do the heavy-lifting up-front.

But when?

So, when will “Extend & Execute” be agreed? Well, I’m going to suggest the early hours of Monday 6th July for want of anything better. There’s been so much brinkmanship around in the Euro zone of late that I really wouldn’t mind betting that somebody might force the Greek issue grind on into the morning of 1st July, at which point it will be the IMF that has to say whether Greece has defaulted or not (they’ll say they haven’t, by the way). Markets will fall in any event, and eventually the subsequent weekend will come to the rescue.

Unless, of course, it really has been pre-ordained all along by Greece and/or its creditors that the next phase in Greece’s disengagement with the Eurozone will commence on 1st July. It wouldn’t surprise me completely, if something like that happened. It probably wouldn’t be the end of the world either, as we (or even the Greek people) know it.

But, who knows: maybe President Obama and the US government (unbeknownst to the rest of us for now, just like Cuba) will somehow underwrite the Europeans’ Greek debt promises, to give Greece the modicum of extra comfort it needs to agree to “Extend & Execute”, and to begin the process of finally restoring order in the Eurozone.

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