National self-interest is flogging the dead Greek horse

Late this morning it was confirmed that Sunday evening’s EU Finance Ministers’ meeting was thrown an unexpected curved ball by the IMF, whose representatives announced at the start of the session that without a written guarantee from Brussels to underwrite the Greek government (should the financing plan fail to hit the agreed targets) then the promised $17 billion ‘bridging loan’ from the International Monetary Fund would not be forthcoming.

This is the IMF effectively behaving like any other creditor, and saying “We’re not taking a haircut”. So it is going to make selling the haircut concept to the other creditors that much harder in the coming weeks.

It is also the IMF behaving like an arm of the US Government, a traditional state to which it has been reverting since the waves closed over Dominic Strauss-Kahn last month. Sources in New York speculated today that it may also signal the US Federal Reserve  effectively saying, “We’re already taking a $127 billion hit with Franco-German cdos on Wall Street, so we want this money secured”. It was a difficult call, as its immediate effect has been to freak the markets. That said, it’s hard to blame the Americans in this instance.

The signs are not good, but then they never were going to be: Greece is a dead duck in terms of default avoidance, but political denial continues…..at the taxpayers’ expense. Still, the reality now is that Berlin is locking horns with the ECB, the IMF is squabbling with the EU, the IMF’s likely next head is on a world tour, and the market doesn’t believe anything it’s being told. The bottom line – ministers have delayed the decision for three weeks – had every Slog source in Europe holding up their hands in dismay this morning.

But within the last two hours, the EU Finance Ministers have in turn passed the buck back to the Papandreou Government. On the eve of a confidence vote that threatens to topple Papandreou, they are pushing the Greeks to pass laws to cut the deficit and sell state assets as a prerequisite to any further EU aid. Astonishingly, they even left open whether the country will get the full $17 billion promised for July from the IMF – and talked in terms of a ‘possible’ Bailout2 to follow. After which, to cap a perfect day, the IMF has now accused them of being indecisive.

The IMF scolded the EU leaders for failing to take a “cohesive and cooperative approach” to a crisis that risks triggering “large global spillovers.”

“The communication cacophony surrounding the policy response in our view is one of the reasons why the risk of contagion has remained and remains high,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

Cacophony or not, the EU Ministers’ retreat bears the hallmark of the German Chancellor’s seal. Frau Merkel has done to Sarko what she so often does: agree something in principle at a summit – and then stitch him up in practice soon thereafter.

The madness continues. Stay tuned.