Frankfurt’s fury at the IMF

Not particularly reassuring at a time of still fragile market confidence is the spectacle of the IMF squabbling with the ECB. IMF chief Lagarde yesterday threw a real spanner in the works by asserting that public sector creditors would need to participate in Greek debt-restructuring if the contribution from the private sector was not sufficient. Unsurprisingly, the ECB remains firmly opposed to any restructuring of its debt, which it claims was acquired purely for monetary policy purposes (and in particular to make up for the inability of European politicians to agree on how to deal with Greece’s debt problems with sufficient urgency). Later in the day the IMF attempted a belated retraction of Lagarde’s remarks by suggesting that, actually, the IMF “has no view on the relative contribution of private sector involvement and official sector support”, but by then it was too late. Clearly, the IMF feels the ECB needs to take at least a partial write-down.

It was apparent in its latest Greek debt-sustainability assessment last month that the IMF was much more concerned about the situation than it had been previously. This helps to explain yesterday’s remark by Lagarde that the ECB may need to help out, and the tougher stance it is now adopting. Confirming the tenor of the IMF’s latest analysis on Greece, yesterday the Kiel Institute issued a report claiming that the debt load of Greece would remain “unbearably high” even if public sector creditors agreed to participate. For their part, private sector bond-holders have welcomed the IMF’s intervention with open arms – on Tuesday, Charles Dallara, IIF head, also opined that both public and private sector bond-holders should endure pain. Of Greece’s EUR 350bln debt, the private sector owns roughly 60%. Even the OECD supports the proposal for the ECB to accept losses.

The ECB will be livid about the IMF’s stance. Two former members of the ECB Governing Council, Weber and Stark, resigned because they fundamentally disagreed with the bond-buying program and no doubt others in the ECB are just as uncomfortable. Buying the bonds of Europe’s fiscally miscreant sovereigns was something the ECB clearly did not want to do, but was forced to undertake in the interests of attempting to preserve market stability. German politicians were quick to dismiss the IMF’s suggestion, with senior CDU lawmaker Michael Meister stating that he couldn’t “imagine that European politicians would allow third parties to make such an indecent claim on our central bank”.

One can only imagine that Lagarde’s remarks will have generated fury in Frankfurt.