Wikileaks revealed today the transcript of a phone conversation on 19 March between Paul Thomsen, Director of IMF's European Department and Delia Velkouleskou, Head of IMF’s mission to Greece. Both express their discomfort regarding the fact that negotiations continue without an agreement among the institutions on the targets of the existing program, and even on the debt relief package.
“The thing that I am worried about is that we are setting a date for the return of the mission, when we might not have an agreement inside the Troika on how to proceed” says Thomsen. “Of course I don't want to come back so soon. I don't think that in two weeks, or in ten days we will be able to make more progress than we are now” Velkouleskou replies. According to the two executives, the Commission wants to complete the evaluation “ideally by the 8th of April”, otherwise by 12 April. But they believe that this is not going to happen.
It appears that the IMF stands its ground regarding its requirements, whereas the Commission is willing to compromise in the negotiation with the Greek government. “In a way we went into this negotiation with the wrong strategy, because we negotiated with the Commission a minimal position and we cannot go further and the Commission is just starting from this one and is willing to go much further. So, that is the problem. We didn't negotiate with the Commission and then put to the Greeks something much worse, we put to the Greeks the minimum that we were willing to consider and now the Greeks are saying ‘Well we are not negotiating’” says Velkouleskou. But Thomsen seems to have an action plan.
Merkel’s dilemma
According to Thomsen, the Europeans will want soon a political solution for the evaluation of the Greek program. In fact, the Director of IMF's European Department expresses his surprise something like that has not happened yet, crediting it to the on-going refugee crisis. Then, the German chancellor Angela Merkel will face a serious dilemma.
When Germany will want a solution for Greece, Thomsen will pose the following question at her:
“Look, you Mrs. Merkel you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say 'The IMF is not on board'? or to pick the debt relief that we think that Greece needs in order to keep us on board?” Right? That is really the issue.
It should be noted that strong resistance within Germany is something Merkel and Schäuble always take seriously into consideration, as demonstrated by the Hillary Clinton’s memo revealing Schaeuble’s plans in 2012. Thomsen estimates that this will solve the Greek impasse and that it will lead other institutions to agree to the terms of the Fund for Greece. And he makes it clear that the Fund will only stay in the program with its own terms.
The “parallel program” for the debt
The problem is that the IMF executives feel that the targets of the third program are too low, according to IMF’s assessment. Basically, at this point the two top executives are offering more explanations about an already known position of the Fund regarding harder measures and debt relief. “I am not going accept a package of small measures. I am not” says Thomsen.
As a possible solution to bypass the deadlock among the instutions, Thomsen express the idea of a new economic program, basically a forth memorandum, between Greece and the IMF, whose sole purpose will be the Greek debt relief with some harder terms than the existing program. What is quite astonishing is that he believes this new program could be parallel to the deal signed with Greece back in July 2015.
“But can we do what you suggested? Have two programs with two targets? Even for the medium run?” Velkouleskou asks. “Yes, if the Europeans say that it is our target that matters for their disbursement for debt relief– but they are not going to say that” Thomsen replies adding at a little later “So the program is not financed and contingent debt relief. The debt relief is not coming either, because they are not on track to meet the criteria. That is the whole point. They essentially need to agree to make OUR targets the baseline and then have something in that they hope that will overperform. But if they don't, they will still disburse”. Velkouleskou wonders “whether they could accept the medium term targets as the Commission, for the purposes of the program, and our targets for the purposes of debt relief”.
What the IMF wants is to lead the Greek government to agree on measures of at least 2.5% of GDP. In that case, it is willing to support Greece in its effort for low surpluses (1.5% instead of 3.5%, as the Commission requests) and at the debt relief.
July history repeating
IMF officials, however, also consider the case if the Europeans refrain from completing the evaluation and discussions go on “forever”, as they say. “What is going to bring it all to a decision point? In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default. Right?” asks Paul Thomsen.
At that point, he presents a scenario; negotiations continue with today’s data and positions, without a solution until July. As he points out, a month before the Brexit referendum European will not want to open the Greek issue and will take a break until after the referendum. In July, Greece will have to pay its obligations, without a program in fact, and it will itself at the exact same point as in July 2015.
The full transcript here