IMF's Lagarde To Greece; Pay Us Or Else

APR 17, 2015 @ 11:44 AM 1,865 VIEWS

Opinion

FORBES

Tim Worstall

CONTRIBUTOR

http://www.forbes.com/sites/timworstall/2015/04/17/imfs-lagarde-to-greece-pay-us-or-else/

It’s long been true that welshing on debts to the International Monetary fund is just something that a civilised country just doesn’t do. Thus there’s little surprise when Christine Lagarde, the head of the IMF, points out to Greece that there’s really no mileage in that country thinking about not paying the IMF back the money it’s owed. Because, you know, that’s just not something that civilised countries do.

There is however a sting in the tail here. For there’s no formal method of dunning a country that does fail to repay the IMF on time. It takes at least a month after the payment doesn’t appear for the IMF to go through it’s own internal reporting processes and then another couple of weeks for it to declare actual default. And there’s politics in there as well: they can, quite happily, say that, well, they’re trying to pay, they’ve paid a bit perhaps, so we’ll not actually say that they are in default. The point being that the rules aren’t hard and fast. What really matters is what other people think of a skipped IMF payment and here it’s the European Central Bank that is most important.

Here’s Lagarde:

International Monetary Fund Managing Director Christine Lagarde warned that she wouldn’t let Greece skip a debt payment to the lender, shutting down a potential avenue to buy the Greek government some financial leeway.

“We never had an advanced economy actually asking for that kind of thing, delayed payment,” Lagarde said in an interview Thursday in Washington with Bloomberg Television. “And I very much hope that this is not the case with Greece. I would certainly, for myself, not support it.”

It’s almost ritualistic, her saying that of course. But that it has been said does bind in a way future actions. Having gone public with said statement then the IMF can’t really turn around and say “Well, it doesn’t matter” if Greece is late with a payment.

Christine Lagarde, the head of the International Monetary Fund, said the IMF is worried about the “liquidity situation” in Greece but made it clear that the institution would not give the country any leeway on €1bn of debt repayments coming due in early May.

This is almost like the Kremlinology of old of course, looking for the runes in such remarks, but by the standards of these things it’s a fairly firm statement. But it’s really the ECB that matters here.

Assume that Greece did delay the IMF payment (as one minister has said they would, if faced with a choice of paying the bank or paying the country’s pensions). Not a great deal would happen immediately as a direct result. What would actually matter is what the ECB did:

With Greek sovereign yields blowing wider on Thursday (and pretty much staying there), it’s worth revisiting what exactly might happen if, say, May 1 arrives and Greece fails to pay the €200m due to the IMF that day.

Received wisdom has it that the ECB will withdraw the ELA — emergency liquidity assistance — currently propping up the Greek banking system, which will promptly collapse; Tsipras and Co would then be forced to bring back the Drachma (or similar) and Greece would exit the eurozone.

But what do the “rules” here say?

Well, actually, the rules are written in such a flaccid manner that the ECB could do anything it liked. They could conclude that it’s temporary, no biggie, and keep supporting the Greek banks. Or they could conclude that it’s not, it is a biggie, and close them down and thus force default and Grexit. But the point is that a putative default to the IMF doesn’t really change that situation. Because the rules are sufficiently flaccid that pretty much anything can be interpreted as being a reason to withdraw EULA support: or nothing. We’re not actually in a rules based world here, we’re in a politically determined one. If the other eurozone members think that keeping Greece solvent , in the euro and functioning is sufficiently important then they will do that. If they don’t they won’t: there’s really no rules here that can insist that they go either way.

Which means that all really depends upon those Eurogroup members thoughts on how the Greeks are playing the game. If they think that proper (and “proper” by Eurogroup lights) attempts are being made to deal with the problems then the support will continue. If they think that the mickey is being taken then, at some point, it won’t.

My latest book is "23 Things We Are Telling You About Capitalism" At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang's "23 Things They Don't Tell You About Capitalism".