IMF Greece programme review is “alarming” says boutique

The International Monetary Fund’s fifth review of Greece’s rescue programme marks a welcome shift in the institution’s approach to the Greek crisis, but its suggestion to rewrite Greek law to make restructuring easier is “unprecedented and alarming,” said a research note from Exotix, a London-headquartered investment boutique.

The IMF thinks that even with 100% participation and a 50% haircut, Greece’s debt is sustainable only under a favourable scenario, which is unlikely the note said. The IMF expresses doubts that the rescue package can deliver sufficient participation and thinks some coercion may be needed. It also appears to be open to changes to Greek law in order to write a collective action clause (CAC) so that 100% participation is achievable.
By supporting a rewriting of Greek law to enforce changes to bond contracts, the IMF is setting a dangerous precedent, the note said. 

“To overcome the hurdle of low voluntary participation in haircuts, the [IMF] appears to be supporting the idea of changing Greek law so that if some majority of bondholders agree, the deal will be binding on remaining hold-outs. We think the strategy may ‘work’ in a very narrow sense of forcing participation, but is fraught with risks,” the note said.

The company said it does not object to CACs provisions to facilitate voluntary market based solutions, but to the principal of rewriting the law.

The main risk is contagion, the note said. Following proposals under the IMF policy support instrument, Italian bond yields spiked and EU governments are unlikely to welcome proposals to rewrite Greek law to include CACs.

If the EU sanctions rewriting Greek law, market participants might ask which law will be rewritten next, raising questions about Portugal, Ireland, Italy, and Spain. “We would expect bond markets to take a very severe lurch,” the note said.

“Now it is clear the IMF, who should be the guardian of transparency and fair play in such circumstances, is prepared to sanction changing the law when the law doesn’t suit its goals.” The alrernatives are “all dreadful”, but this is no excuse, the note concludes.

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