This deal is no deal

06/19/2017 01:17 pm ET Updated Jun 19, 2017

Last Thursday, the Eurogroup of Finance Ministers approved the latest disbursement to Greece under its program, ahead of maturities falling due in July.

But it again postponed action on debt relief, promising only to study a proposal to tie repayments to GDP growth by formula. Given that, the IMF agreed to participate only "in principle"—and will not disburse any of its funds under its program for Greece until debt relief is sufficiently specific and substantial.

This deal is no deal.

First, once again, it entrenches an intellectually indefensible set of targets for the budget primary surplus—3 1/2 percent of GDP at least to 2022—in the context of an economic catastrophe that is unprecedented globally and historically outside of war, and seldom in wartime (See Chart).

Further, by endorsing the program, the IMF has endorsed these fiscal targets, ignoring the findings of its own research.

And the creditors’ attempt to conceal the incoherence of the program targets by couching them in language echoing the ECB's inflation framework—a primary surplus of equal to or above but close to 2% of GDP in the period from 2023 to 2060—is risible.

All this compounds longstanding IMF-cum-creditor economic illiteracy on Greece with yet more illiteracy, where literacy could not now be more urgent.

Second, disbursement by the IMF contingent on debt relief is also indefensible. This allows IMF management to parade globally as righteous champions on the overhang of Greek debt, cleansing their many past failings since 1999 on this issue. But they also do everything possible to enable continued creditor inaction on debt. This is not the first time that such a high premium has been placed on demonstrating "clean hands" while doing everything to enable execution: Pontius Pilate, also anxious to avoid a confrontation, showed the way.

Further, contrary to its claims, there is no IMF precedent for this form of contingent disbursement. 1980s IMF programs anticipating debt relief worked within well-established Paris Club procedures and parameters. There is no such clarity here. Ignoring this difference jettisons (as did the 2010 "systemic exemption") recent carefully crafted IMF policy: so instead of requiring debt reduction in the "red unsustainable" zone (where the IMF has belatedly placed Greece), the IMF now conjures up a distinction between a program and a disbursement despite the total opacity on the debt resolution procedures and parameters pertaining to Greece.

And the notion of tying debt to growth is a sure way to discourage Greek policymakers from enacting growth-enhancing reforms. IMF endorsement of this element of the program (as on the fiscal targets) also ignores its own research.

Third, key actors have yet to sign off on this "deal".

The Bundstag may debate it—though Schauble is resisting. There is much to debate: the Spanish representative on the Eurogroup in May 2017, commenting on the (then) proposed IMF non-disbursing program said "you cannot be 50% pregnant"; and after its formal presentation, the ECB determined that the IMF arrangement still precludes Greek QE eligibility. These verdicts on the deal are not minor details for the Bundestag.

And though US officials on the IMF Board have doubtless blessed the proposal in advance, they—as others have discovered—are liable to unceremonious overrule by Mr. Trump. With US-German relations deteriorating over the German current account surplus, German defense spending, and sanctions on Russia, do not be surprised if Mr. Bannon et al. see that their boss can hit Mrs. Merkel hard by blocking this "50% pregnant" deal at the IMF board ahead of German elections.

Last, there is still a question of what Mr. Tsipras will do about this semi-pregnancy.

If he was to maintain full compliance with program conditionality while defaulting on the July maturities, despite obtaining program disbursements, he would thereby demonstrate that default is aimed solely at driving timely resolution of the debt. And the purpose of that would be to eliminate any risk of Grexit. Given full program compliance through default, this stance would therefore be the inverse of his stance in 2015 (which overtly threatened Grexit). And his emphasis on the urgency of debt relief would be formally endorsed by both the IMF and the ECB, again unlike 2015. All this would attenuate deposit flight arising from default and remove the grounds the ECB advanced in 2015 to cap Greek access to ELA.

Mr. Tsipras has staked his place in Greek history on securing debt sustainability. If the program disbursements are actually made, he will not get a better opportunity to lead on the issue than by defaulting in this way, now. He has not always chosen the most strategic of available options, but he could do so this time—simply by doing nothing more from this point on.

This ugly deal is not done. It still faces key hurdles. Should it fall at any of those hurdles, this commentator will shed no tears for it.

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