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Oh Hi, Greece! We Didn’t See You Blowing up Again…

Greece is bubbling again.

The long-suffering cradle of democracy’s place on the front line of the migrant crisis may have pushed its economic problems down the international news agenda since last July, but they are coming sharply back into focus now, as the tensions between Athens and its lenders erupted again at the weekend.

As it has so often during the six (!) years since Greece first asked for a bailout, what is happening is being overshadowed by how it is happening.

It isn’t new that Athens can’t agree with the Eurozone and the International Monetary Fund on how to implement the latest €86 billion ($95 billion) bailout agreement; the left-wing government of Prime Minister Alexis Tsipras has been wriggling on that particular hook for months.

What is new is the extremes of mistrust and underhandedness that relations between the three have reached. First, somebody eavesdropped on a conference call between three senior IMF officials on negotiating tactics, two of whom were staying at the Hilton Hotel in Athens at the time. Then they leaked it, causing a fresh storm of indignation in Greece about economic blackmail. Tsipras fired off a theatrical letter to IMF head Christine Lagarde, who responded by draping only the thinnest veil of diplomatic language over an accusation that he had orchestrated it all himself.

“The (IMF mission to Greece) consists of experienced staff who have my full confidence and personal backing. For them to be able to do their work, as you have invited us, it is critical that your authorities ensure an environment that respects the privacy of their internal discussions and take all necessary steps to guarantee their personal safety.”

The call’s transcript features Poul Thomsen, Delia Velculescu, and Iva Petrova, who are, respectively, the head of the IMF’s European department, the head of the IMF mission in Greece, and a Washington-based expert in fiscal policy issues. In it, Thomsen (who has been directly involved in the Greek drama since 2010) effectively despairs that anything short of another round of last-ditch brinkmanship will persuade either Athens to carry out the promises it made last year, or persuade the Eurozone to forgive some of the debts under which Greece is suffocating.

“What is going to bring it all to a decision point?” Thomsen asks. “In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default.”

The explosive content comes as he speculates on how to deal with that situation.

“Basically we at that time say, ‘Look, you Mrs. Merkel, you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say, ‘The IMF is not on board?’ Or to pick the debt relief that we think that Greece needs in order to keep us on board?'”

As a disinterested observer, it’s hard to fault Thomsen’s logic. The Eurozone’s political leadership has had only one aim since 2010 and that is to stop Greece from leaving the currency union in a way that would expose Eurozone’s long-term frailties and leave it a prey to the remorseless pressures of financial markets. Greece’s governments have had many aims, but they have all boiled down to defending the bankrupt promises of their predecessors. The two have repeatedly cobbled together messy, last-minute compromises to cover up the unbridgeable gap between them.

At each step of the way, the IMF has betrayed itself. Under its charter, it’s only supposed to help out countries with temporary balance of payments problems that arise when private lenders decide they don’t want the counterparty risk any more. It lends hard currency in return for reforms that will guarantee a country’s long-term solvency. It is not supposed to lend to bankrupt governments, in their own currency, while they try half-heartedly to fix intractable political and structural problems.

Under European pressure, it has repeatedly agreed to pretend that Greece is not bankrupt, and that it continues to reform in good faith (Velulescu makes it quite clear what she thinks of that in the transcript: “These guys agree on something and then they give it up the next day. We have said this time and again, we know that they don’t do what we say…It just doesn’t function.”). The quid pro quo is that the European Central Bank agrees to a similar fiction of extending its “emergency lending assistance” to Greek banks that it pretends are solvent. Everyone knows that the endgame is either debt forgiveness or “Grexit.” No one has found a way to stomach either possibility, yet.

If that was the full extent of the issue, there would be good reason to think that this summer’s game of brinkmanship will end with another messy compromise just before Greece has to make a big debt repayment on July 20.

 

But this year is (a bit) different. As Thomsen notes, that date falls under the shadow of the U.K.’s vote on leaving the European Union, due June 23. That referendum will likely occupy most of European political elite for much of the early summer, and a vote to leave would send a centrifugal shock through the whole bloc. There would be no pretending any more that the EU is historically destined for an “ever closer union.”

At that point, it would become all about Berlin. Would the Bundestag drop its opposition to debt forgiveness (a government spokesman repeated Monday that it’s “not on the table”) and accept that saving Greece is a price worth paying to save the euro? Would it decide to cut Greece off and accept the consequences? Or would it try to co-opt the IMF into kicking the can down the road one more time?

The last option is without doubt the default. Thomsen suggests that it won’t sign off on such a trick again, and many of the IMF’s non-European members would back him in that. But does the Fund really have the guts to trigger the kind of global financial turmoil that it exists to stop?