The phrase ‘under-promise and over-deliver’ is not one that the EU has any knowledge of, given that not for the first time we are being led to believe (this time by EU’s Rehn) that a deal on the restructuring of Greek debt is near, “if not today, then over the weekend”. There’s little point in speculating on the amounts and terms because what has become more interesting this week is the IMF’s position on the situation. Following Lagarde’s comments earlier in the week (intimating that the ECB may have to take a hit if the private sector contribution was insufficient), the IMF suggested that it took no position on the level of private sector involvement.
That may be true on one level, but it matters to the IMF, especially when the ECB is digging its feet in and saying that it does not feel it should take a hit on its holdings of Greek debt and that, in doing so, it could be breaking the ‘no bail-out’ clause of the founding treaty’s clause to which it must adhere. So an outcome from the private bond-holders involved in the current negotiations that falls short of that required would mean that either the ECB will have to take some strain or the IMF will have to loosen its conditions (120% debt/GDP by 2020) or somehow take a more optimistic view on the economy. The latter would be without much justification. Furthermore, Greece is already falling short on structural reforms. Since the peak in employment in Q3-08, total employment has fallen 11%. Employment in the public sector has barely fallen (less than 30k), compared to the half a million fall in total employment.
So the deal does matter for the IMF. A poor one, combined with the ECB sticking to its guns, will place the IMF in a position of needing to lend more to a country which is still on a precarious path to fiscal sustainability. Furthermore, having been asked twice, the private sector is not going to take any more pain by itself.