Transcript of a Conference Call with a Senior IMF Official on Greece and AIP

June 22, 2017

SENIOR IMF OFFICIAL: As you will have seen, the Managing Director told the Euro group this afternoon that she was ready to go the IMF Executive Board and recommend approval in principle of a new IMF Stand-By Arrangement for Greece.

This is an unusual procedure that has not been used for some time but it was a procedure that was used in the 1980s in a situation fairly similar to what we face now, in the sense that we are in a position where the IMF is confident that the policy package that Greece has put together and the actions that they have taken would form a solid basis for an IMF program and where we don’t have -- as the Managing Director puts it -- the second leg needed for outright approval of a new arrangement, which is sufficient assurances on debt relief for us to declare the debt to be sustainable. We had hoped, and had been working toward, the option of outright approval, where we had hope that we would be able to get the debt relief commitments, a debt relief agreement by now.

We have been working on this over the past few months. It is now clear that the European partners need more time to converge. We have seen a significant movement over the months. If you look at the Euro group's statement today, you will see some additional measures and additional specifications that the department and European creditors have put on the table. We welcome that progress but we still don’t have enough on the debt relief side to meet the debt sustainability requirements of the program.

Now in these circumstances we did feel it was useful both for Greece and for Europe to move ahead on this approval in principle track for several reasons. First of all, it sends a very strong signal to the world that the IMF now believes that Greek policies are on the right track and they are worthy of IMF support. And secondly we are able to do that in a way which, without compromising the debt relief requirements, we will ultimately need for to release IMF resources. And third it gives Greece and their creditors some breathing space a few more months. It avoids what would otherwise have been a cash crunch for Greece next month and so it is very much in the interest of the stability of the Euro area and the financial system in Greece.

QUESTIONER: Oh, thanks for doing this. So what sort of deadline if any at all will you be suggesting in for the primary reason for creating this in the past was to help catalyze financing including debt relief. But as in the Argentina program the failure to put one in contributed to the failure of the program. Secondly, doesn’t -- how does this not relieve pressure on Germany and other European creditors to give Greece debt relief and how does this not risk eroding the credibility of the IMF?

SENIOR IMF OFFICIAL: Okay. On the first question, in the past we have, when we have used this approval in principle procedure we have sometimes -- I think it is fair to say we have usually set a deadline but not always. The --

QUESTIONER: Well, you mean after the, before the guidelines there were no 30-day guidelines. Well, afterwards there was two exceptions and both were for two week extensions for vacations.

SENIOR IMF OFFICIAL: Right but we, the Argentina case came up to the guidelines were. And that period lasted about five months I believe. But the critical point here is that we are in a very different context. The way that the approval and principle was used in the 1980's was in the context where it was literally a chicken and egg problem that we were trying to solve where the creditors where not ready to move until the IMF had a program in place and the IMF could not go ahead with the program until it had assurances from the creditors. So we had a standoff.

QUESTIONER: The same situation you have today: Germany won’t go without the IMF, the IMF won’t go without debt relief.

SENIOR IMF OFFICIAL: Let me finish. The situation we are in today – the IMF approving this arrangement in principle would not by itself unlock creditors’ relief. The issue amongst the creditors is ... The complexity in the Greek case has to do not with the fact that the IMF is not yet on board but rather to the fact that the 17 creditors involved are operating in a currency union where the provision of debt relief is inherently difficult because of moral hazard concerns, bailout risks and so on... It is a much more difficult political contest and it is one that requires time – we have seen convergence, we hope to look at a final convergence, we believe that if we give it more time it will be possible ultimately. Whether putting a deadline will be helpful in getting that convergence, we haven’t decided yet and the MD will decide what she wants to recommend to the Board.

QUESTIONER: Will you make a suggestion as staff has made in the past?

SENIOR IMF OFFICIAL: We haven’t decided yet, there are pros and cons. The situation is very different from the 1980s about whether a deadline would be helpful or not. The objective is to get to an agreement with a debt relief package that would be sufficient for the IMF to go ahead with a program and put Greece on a sustainable footing.

QUESTIONER: When will the MD propose the SBA to the Board? Will it be approved immediately? Will the proposal come with a certain amount of money?

SENIOR IMF OFFICIAL: The MD will now put together the staff report for the Board. We have been working on it in anticipation that the decision might be coming. We hope that the documents will be finalized in the next week or so. Then there is a clearance procedure, a couple of weeks to consult the capitals once it has been issued to the Executive Board. The MD had in mind that this would take us into July. When the request for AIP for the use of Fund resources is put to the Board there will be an amount, it has not been finalized yet, the MD said in the press conference today that it would be well within the IMF’s normal access limits, this will not be an exceptional access, it will be precautionary, she mentioned a figure of up to US$2b to offer a magnitude.

QUESTIONER: Are you confident that Greece can go back to the markets at the end of the program so it can avoid a new one?

SENIOR IMF OFFICIAL: If we did not believe that we had a good chance of getting debt relief agreement, the IMF program getting into effect, and concluding the program next August with Greece in a sustainable position and ready to get back to the markets and stand on its own feet financially we would not go down this route.

QUESTIONER: Precautionary: only used by the Greek if they want to? on the deadline: What kind of pressure can you have on Germany if they can rely on AIP forever?

SENIOR IMF OFFICIAL: Precautionary is not different from a normal arrangement except that the member at the outset notify that they do not want to draw. In this case, they might decide to do so because the terms of the IMF money are not as favorable as those of the ESM, so they would be substituting one for one, but that will be their decision, they would be able to draw at any time, even though they got into it on precautionary basis. In terms of how to convince Germany, I think, as I've been emphasizing, this is really a political process that has to run its course. There are many Eurogroup members who also, who believe strongly that is important to have a rigorous debt relief package for Greece that will truly solve the debt problem once and for all, and that is certainly our stance.

So, this is a debate that's going on, not necessarily for us to convince Germany, I think it's a debate that's in the Eurogroup that we hope will -- and believe will eventually converge on the right solution.

QUESTIONER: What kind of additional leverage would this offer the Fund in terms of implementation and other kinds of policies that are needed?

SENIOR IMF OFFICIAL: Well, the principal purpose here was not to gain additional leverage in any particular sense. I mean, in terms of our engagement with Greece on policies, the Fund's staff team on Greece has been fully engaged with the other European institutions for the last two years, you know, participating in all the reviews, contributing to the policy discussions, and the determination of what the policy program needs to look like.

But it's true that, articulating the policy agenda in the Fund's own format, as we will do in the policies for the upcoming standby arrangements, may help, you know, put a bit more focus on those measures that we think are macroeconomically critical. As you may know the ESM Program has much more wide-ranging conditionality, our tends to be more focused, so that may be helpful in ensuring good implementation, but that was not the primary objective of this.

The objective as that I stated is that it provides breathing space for the creditors to come around on debt relief and, in the meanwhile, allow Greece to avoid a cash crunch over the summer.

QUESTIONER: And can I have just a follow up, what was the -- the MD actually -- know beforehand -- that the Fund would rejoin the bailout beforehand, or was there something that was decided during the meeting?

SENIOR IMF OFFICIAL: Well, this idea has been under discussion for a few weeks, I don't think it's any secret that -- there were some discussions of this at the Eurogroup Meeting a month ago, but at that point it was full agreement, and we can only go forward or so on this track if Greece is fully onboard, and they needed more time also. So, the groundwork was done, it was really a matter of the politics coming together today which it did.

QUESTIONER: Hi, yes. Thank you. Since the US$2 billion is really not really that much at all, it's not really -- and it's precautionary, what's the point of the IMF at all? I mean why is the IMF really necessary except to provide political cover for Germany? You mentioned pros and cons of providing a deadline, can you tell us what the pros and cons -- the pros of providing a deadline, and the cons of providing a deadline?

And, you know, you mentioned historically that there were several programs without deadlines. Besides the Argentina case, which I have to note was a failed IMF bailout, what was the longest time given, or what was the average time given for the ones that didn’t have 30-day deadlines?

SENIOR IMF OFFICIAL: Yes. So, let me -- I'm not sure I have the numbers on the average deadlines in the past cases to hand; we could provide you that later.

QUESTIONER: That would be helpful. Thank you.

SENIOR IMF OFFICIAL: But let me -- well, on the role of the IMF, the Europeans, from the outset of the European crisis, thought it was useful to them and to their member countries to have the IMF engaged, given our expertise, not only in crisis management in general, but specifically on macroeconomic -- designing macroeconomic programs. And I think they and the Greeks will continue to find the IMF's contributions, in that respect, useful. The IMF arrangement brings all of that together in a formal and coherent way.

And just as we have in many other program situations there has been burden sharing when IMF has contributed some financing, and other creditors have provided financing to complete the package. That's consistent with the IMFs catalytic financing role. This is not actually that different from any other crises episodes of the past.

In terms of pros and cons of setting a deadline, as I said the context -- and I keep coming back to this, the context was very different in the 1980s, where the issue was - the creditor coordination mechanism at that time could only work if and when the IMF actually approved an arrangement. That context ceased to apply by the late 1980s when the Paris Club found ways to provide assurances in anticipation of IMF approving a program, and we could then lend on the basis of those assurances. So it solved the chicken and egg problem for official creditors.

In the present case, this is not a Paris Club context, because all the creditors here are Greece's European partners, essentially, so it's a different political dynamic. And as I said earlier, the issue is not -- the European creditors can't move on debt until the IMF has arrangement, it's more about how much debt relief is really needed, what should be underlying assumption in respect to debt calculations are made. How do we deal with the uncertainty over the long future horizons?

So these are the kind of issues that we are dealing with, not the chicken and egg problems of the 1980s, and these are issues which take time to work through as we've seen over the last few months. And they will take a few more months in our view to resolve it.

The MD emphasized at the Eurogroup Meeting today that the fact that we are coming onboard now with this agreement in principle - by no means that the work on debt relief can move on onto a slower track. On the contrary, she urged the creditors to redouble their efforts to reach convergence in the coming months.

QUESTIONER: Okay. I'm sorry, I missed where you told me the pros and cons of providing a deadline now.

SENIOR IMF OFFICIAL: Yes. So, I'm getting to that. I'm setting the context for that.

QUESTIONER: Oh. Sorry. Apologies.

SENIOR IMF OFFICIAL: In this context, it's not clear that setting a deadline is actually helping. What's needed is to continue working through the different -- the merits of the different underlying assumptions which is a key part of what's dividing us from the European institutions right now; and to explore different instruments, different ways of dealing with the uncertainties, as I said. These are processes which, if you try to put a hard deadline and say, you know, the debate has to stop at this particular juncture, that's not likely to be -- it's not necessarily going to be helpful to get any resolution.

Whereas in the 1980s, where it's the chicken and egg problem, once the IMF moved, we wanted then to creditors to recognizing the fact that the IMF had moved, to cease procrastinating and come on board as quickly as possible; so, a very different; very different concepts.

QUESTIONER: So, if I may? It seems like a deadline has already proved important in catalyzing some kind of deal, at least getting IMF to choose its least favorite option and compromise here, it's the July payments. That's the sort of deadline that we are talking about. It's that sort of deadline that was proving catalytic, the catalytic agent in the 1980s. I'm having a difficult time in understanding how you do not see that the IMF acquiescing on this is not alleviating pressure on Germany in any shape or form. I just don't understand it, intellectually, how you cannot appreciate that.

SENIOR IMF OFFICIAL: Because we are not changing the terms under which we will be prepared to provide IMF resources, we are holding out for debt relief that we believe is necessary, and we are continuing to push the arguments that our long-run assumptions on which our debt relief assessments are -- our sustainability assessments are made are the right ones. And we believe that we can, as we have done, you know, get the Europeans to gradually move in our direction. They have done that over the last few months, as I've said.

And, yes, it's true that the motivator ultimately is the economics of the situation, and apparently the case it was the impending payments, but if we look further ahead, all the Eurogroup vendors have a stake in solving the Greek debt problems once and for all. And it's a matter of us convincing them, what is really needed to solve that problem; this is as much in the interest of Germany, as it is in the other countries, for Greece to have a successful exit and a durable exit from the ESM Program in August 2018.

MR. ANDREAS ADRIANO: We have to wrap up now. Thank you all for dialing in, and this concludes this Press Briefing. Just to remind you of the ground rules. This was on the record with attributions to a Senior IMF Official. Thank you very much.

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