No one really knows what effect the resignation of IMF head Dominique Strauss-Kahn following his shocking arrest on sex charges will have on the fate of debt-ridden Greece.
So far, everyone involved in the Brussels crisis talks this week has been acting out their expected roles: Germany has insisted that Greece should get no more help unless it does something in return (like selling off its public companies and land, which it’s been loathe to do), while the European Central Bank adamantly resists talk of a default.
Yet many experts expect their ceremonial dance to end with Greece defaulting on its debts — even if it’s called by another name. The latest euphemism to surface: “reprofiling” or a “soft restructuring.” According to the latest iteration (subscription to Financial Times required), bondholders of Greek debt would have to wait longer than originally promised for their bonds to mature.
The alternative would be “a drip-feed” of endless loans to Greece -- something that’s “hard to imagine Europe’s taxpayers accepting,” the Economist magazine said last week. In an editorial, it called for the IMF, experienced with restructuring governments’ debt, to unite with Germany against the Central Bank in demanding an extension on the maturity date of Greek government bonds -- a move that would protect German banks, which are big holders of Greek government bonds.
Strauss-Kahn -- or DSK, as he’s known -- was an old hand at persuading governments to do this sort of thing and was considered instrumental in negotiating the bailouts within the past year not only of Greece, but also of Ireland and Portugal. But he was just as insistent as the central bankers that countries like Greece adhere to what now looks like a failing policy: drastic austerity plans coupled with loans from the EU/IMF at interest rates considered punitive by the bailed out countries.
While many have said this past week that Strauss-Kahn was responsible for reviving the IMF, others are not so sanguine. American Enterprise Institute scholar Desmond Lachman says in the Financial Times (subscription to Financial Times required) that Strauss-Kahn will be remembered as the man who put the IMF “on the road to decline by his misguided handling of the eurozone crisis.” The failures of the bailouts in both Greece and Ireland, Lachman says, risk blackening the IMF’s reputation in Europe in the same way as its similar policies in Asia and Latin America “rendered the fund a pariah in the 1990s.”
With the leadership of the IMF in doubt, will Greece fare better or worse?
Better, speculated one trader in the Financial Times’ Alphaville blog on Monday. The IMF will be more lenient toward Greece, and maybe Ireland, which also wants a reduced interest rate, because of the “black eye” it received from the weekend’s arrest.
Worse, other experts predicted, because it will shift the IMF’s focus away from Europe, where DSK had it firmly fixed.
Some think that’s a major risk, particularly if Asian and Latin European members succeed in getting a non-European appointed as head of the institution, which traditionally has been headed by a European. British bookmaker William Hill was putting the best odds May 18 on Kemal Davis, former Turkish Finance Minister, for IMF successor. Davis is from an “emerging” economy, still European but perhaps more sympathetic with other countries on Europe’s so called “periphery,” such as Greece and Ireland.
French Finance Minister Christine Lagarde had been near the bottom of the bookies’ lists with 14 to 1 odds. By this morning, she was the front-runner. The latest odds showed Agustin Carstens, governor of the Bank of Mexico, at the bottom with 25 to 1 odds against him.
But then again, maybe a Latin American would know what it felt like to be Greece, deep in a hole, with the IMF seemingly asking for impossible cutbacks.
-Sarah Glazer, author, “Future of the Euro,” CQ Global Researcher, May 17, 2011