The Blog

When Neighbors Don't Get Along

Posted on May 25, 2016

When Neighbors Don't Get Along

Posted on May 25, 2016

Last week an article in the Wall Street Journal spoke of the clash between Germany and the IMF in regards to lending to Greece.  The article should have spelled it out for you in one sentence to get things rolling, but it didn’t. So I will do that here:

The issue: The IMF, as of last summer 2015, is not involved in lending to Greece.  Germany hates this and wants the IMF to be a lender of the bailout package.

As it turns out, when I talk about the issue to my friends they don’t take to the gravity of the situation as I do.  Why do they all get so bored with this information even when I explain it in simple terms? Macro-economic issues aren’t difficult to understand but what makes it seem difficult is the fact that sometimes people explain it incorrectly. So, I’m gonna do one better here.

How would you feel if you and all your neighbors were responsible to be solvent and make rent on-time and yet, every single month, the same neighbor, Greece, could never make the payment? Now, what if your Home Owners Association didn’t mind about this insolvent neighbor nor help any of you good neighbors by getting involved? Wouldn’t you want to leave that neighborhood or have that insolvent neighbor leave the neighborhood?  That’s all this issue is between Germany, Greece and the IMF.

All we’re talking about is a few neighbors and the Home Owners Association.  The astute neighbor, Germany, reluctantly [and I mean, severely disliked that they had to do this] bought the majority of debt of Greece so as to bail-out them out from default. 

Why?

So, that the Eurozone wouldn’t collapse. 

Now, Greece is on the hook to repay Germany back along with other neighbors who loaned money to Greece.  When you loan someone money you expect to be repaid on-time, every payment period.  Simple concept. Right?

Now, Germany knows it's lending rent to its good-for-nothing neighbor, Greece so that Greece can make good on owing its rent each month to many other neighbors in this neighborhood, the Eurozone. Is that so hard to understand?

In this metaphor the IMF is the Home Owners Association in which, the astute neighbor, Germany, would like it to get involved with this insolvent neighbor, Greece. Why? Because Germany feels that the IMF can enforce stricter fiscal policies and overhauls.  But there’s a problem brewing amidst negotiations between the IMF and Germany.

The main debate between Germany and the IMF is simple:

Germany: c’mon IMF, become a lender with me. I don’t like Greece. They’re lazy.  I don’t want to be on the hook alone and you have deeper pockets than I do. Plus, you can enforce stricter fiscal measures on them.  

IMF: We didn’t get involved during the summer of 2015 because we’re concerned for the sustainability of Greece’s debt. We think it prudent to give Greece a longer-dated maturity on their loan as well as no-interest payment until 2040. 

Germany: Ya, Greece is re-donk-ulously unsustainable, no kidding.  The bailout loan to Greece is 226B Euros, you’re asking us to add another 60M Euros to that for this latest Bailout package because Greece can’t even make good on the loans we and our neighbors have lent.

IMF: If we extend the maturity on their loans and give them no-interest payments on it they will be able to re-gain financial and economic strength.

Germany: Ya. Got it. You’re wrong and you’re ridiculous.  I don’t believe that plan is prudent and those terms don’t work.  We have to get this figured out in the next 2 weeks (June).

Now, why does Germany care so deeply about the IMF getting involved?

Germany cares because they fear that continuous loan restructuring of maturities and interest could lead to their own internal problems.  Specifically, the problem being that every time talk of restructuring actually occurs, Germany has to go to its Parliament, the Bundestag, to ask to release further bailout funds to Greece.  This could, if done on a continual basis, lead to tensions between conservative voters in the Bundestag, who could rebel against such perpetual restructuring.

So, whose side are you on?  What kind of compromise could Germany and the IMF find in order to keep Greece afloat?

I think it boils down to this:

http://samsrandomthoughts.weebly.com/uploads/1/6/2/1/16218138/364296.jpg

Hope this explanation helps.

Jos. G. Sellery

Source:
WSJ article 5.18.16 “IMF Clashes with Berlin on Greece”