by Mike Kimel
The managing director of the IMF is the impresario of any bailout. The big decisions must be negotiated with all significant stakeholders but this still leaves enormous scope for discretion.
If Ms. Lagarde becomes managing director she can directly influence the terms of IMF involvement – and based on her negotiating position to date within the eurozone, we can presume she will lean towards more money, easier terms, and above all no losses for the banks that made foolish loans.
Increasingly it looks like the eurozone leadership, under French guidance, will go for the Full Bailout option, in which all Greek debt is bought up by the IMF, by the European Central Bank, and by other eurozone entities. This debt will be held to maturity – and any creditor who did not yet sell will be made whole (those who already sold at a loss are out of luck).
This course of action will be expensive, in terms of nominal outlays and in real risk-adjusted terms, because whatever terms Greece gets must also be offered to Ireland and Portugal. The IMF may need to raise more capital or – more likely – tap its credit lines from member governments.
The French want to sway decision-making at the IMF in order to use US, Japanese, and poorer countries’ money to conceal from their own electorate that the eurozone structure has led all its members into serious fiscal jeopardy – some borrowed heavily, while others let their banks lend irresponsibly and thus created a large contingent liability.
The best way to hide the true cost is to have other people’s taxpayers foot the bill, preferably with the least possible transparency. There is a lot at stake for eurozone politicians. Ms. Lagarde will run the IMF.
The George Bush/Barack Obama bail-out policy writ larger…