Behind Grexit: Multilateral Agency Politics, US Sphere of Influence and Debt Trap

At the Cato Institute economist Steve Hanke explains why the IMF has been playing hardball with Greece: (bold mine)

Under normal conditions, the IMF is supposed to be limited to lending up to 200% of a country’s quota (each country’s capital contribution made to the IMF) in a single year and 600% in cumulative total. However, under the IMF’s “exceptional access” policy there are, in principle, virtually no limits on lending. The exceptional access policy, which was introduced in 2003, opened the door for Greece to talk its way into IMF credits worth an astounding 1,860% of Greece’s quota – a number worthy of an entry in the Guinness Book of World Records.

The IMF’s over-the-top largesse towards Greece explains why the IMF has been forced to play hardball with Greece’s left-wing Syriza government. The IMF’s imprudent over-commitment of funds to Greece leaves it no choice but to pull the plug on Athens. That is why the IMF’s negotiators packed their bags last week and returned to Washington, and that is why it will probably remain uncharacteristically immovable.

Wow. This serves as a shocking revelation of how the politics of multilateral agencies work. Internal rules will be broken to accommodate politically privileged sector/s.

And there's more. But some background required.

This chart from Fathom Consulting/Reuter’s Alpha now reveals of the astounding shift in the Greece debt composition from private sector to the public sector.

In short, political agencies as the IMF, ECB and European governments bailed out previous private sector creditors.

And this pie chart of Greek debt from Der Spiegel exhibits the current distribution of creditors.

This shows that  reason for the “IMF’s “exceptional access” policy” where “there are, in principle, virtually no limits on lending” has been because the IMF and various governments have been deeply hocked into Greek debt.

In short, the troika (IMF, EC, ECB) has been doubling down to provide financing to Greece because they hold most of it. Talk about Ponzi financing.

Now the IMF’s resources may have been stretched to the limits for them to play “hardball” with the former!

As a side note, I recently pointed out that of the 13% of the estimated $29 trillion bailout funds provided by the US Federal Reserve during the last 2008 crisis have mostly channeled been to European banks. So such rescue measures may have helped in the transfer of Greek debt exposure from private hands to public coffers.

Yet the IMF has been funded by taxpayers from around the world through a quota system. The allocated quota determines both the financing contribution and the voting power of member nations. Since US holds the biggest quota this means that the US has largest influence on how IMF distributes its tax funded resources. 

I would add that aside from possible IMF financing constrains, the Greek government’s overture to the Russian government where the latter could turn out as a 'white knight' or lender of last resort, could also play a factor for IMF-Greece government impasse.

For instance this recent development from the CNN:

Greek Prime Minister Alexis Tsipras is reported to have scheduled a meeting with Russian President Vladimir Putin in St. Petersburg on Friday.

Meanwhile, in Moscow, another deadline is fast approaching. Next week, the European Union must decide whether or not to renew sanctions on Russia.

In other words, much of European politics have been anchored on US influences whether seen from the prism of previous bailouts or recent sanctions on Russia or on Greek financing negotiations. 

All seems connected.

And this is the reason why the Chinese government has launched a counterweight to US sphere of influence through the Asian Infrastructure Investment Bank

And more importantly, many have come to believe that in the case of a default, the public sector’s exposure to Greek debt will limit contagion on marketplace. Some expect ECB’s action to provide enough firewall to contain the crisis.

Well debt is debt. The transfer to a claim on resources from private to public will also have repercussions.

The influential think tank the Council on Foreign Relations (CFR) via Benn Steil and Dinah Walker warns of complacency from the risks of a Grexit: (May 7, 2015)

The IMF has turned up the heat on Greece’s Eurozone neighbors, calling on them to write off “significant amounts” of Greek sovereign debt.  Writing off debt, however, doesn’t make the pain disappear—it transfers it to the creditors.

No doubt, Greece’s sovereign creditors, which now own 2/3 of Greece’s €324 billion debt, are in a much stronger position to bear that pain than Greece is.  Nevertheless, we are talking real money here—2% of GDP for these creditors.

Germany, naturally, would bear the largest potential loss—€58 billion, or 1.9% of GDP.  But as a percentage of GDP, little Slovenia has the most at risk—2.6%.

The most worrying case among the creditors, though, is heavily indebted Italy, which would bear up to €39 billion in losses, or 2.4% of GDP.  Italy’s debt dynamics are ugly as is—the FT’s Wolfgang Münchau called them “unsustainable” last September, and not much has improved since then.  The IMF expects only 0.5% growth in Italy this year.

As shown in the bottom figure above, Italy’s IMF-projected new net debt for this year would more than double, from €35 billion to €74 billion, on a full Greek default—its highest annual net-debt increase since 2009.  With a Greek exit from the Eurozone, Italy will have the currency union’s second highest net debt to GDP ratio, at 114%—just behind Portugal’s 119%.

With the Bank of Italy buying up Italian debt under the ECB’s new quantitative easing program, the markets may decide to accept this with equanimity.  Yet assuming that a Greek default is accompanied by Grexit, this can’t be taken for granted.  Risk-shifting only works as long as the shiftees have the ability and willingness to bear it, and a Greek default will, around the Eurozone, undermine both.

The reemergence of market volatility has partly been due to the risks of Grexit. (Reuters Alpha Now June 12, 2015)

Finally, all these cumulative attempts to bridge finance debt strained nations reveals of the current heightened state of fragility from an event risk pillared on the global debt trap.

And if such event risk materializes that would have massive consequences then all the recent funneling of resources to Greece by the IMF, as I previously wrote, would pose as a constraint to future bailouts.