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How will the bailout work and how soon can it be activated? The IMF is likely to be the first out of the box with money because it is set up dispense money quickly once it gets board approval. (Getting such approval is a foregone conclusion with European and U.S. backing.) The money will be doled out over a number of years, though heavily front loaded because of Greece's pressing problems.
Delivering the money in tranches is the traditional IMF style — it's a way of keeping countries true to their word. Each decision to disburse is preceded by an IMF mission to see whether the country is, more or less, living up to commitments.
Dominique Strauss-Kahn, managing director of the IMF, hinted on Thursday that the European money would be committed over a shorter period of time than the IMF. “Of course, the IMF plan has to look further for other years, 2011, 2012, and that is a large part of the discussion that we will have with the Greeks,” he said. In a statement today, he said, “We are prepared to move expeditiously on this request.”
What conditions will the IMF impose on Greece? Like every other letter of intent — the document by which a country makes specific commitments to change policies in exchange for an IMF loan — there will be conditions. In Romania's letter of intent, for instance, the country agreed to slash its fiscal deficit by and additional 2.5 percentage points in 2010. That included a freeze “on all but the lowest wages, a continuation of the replacement of only 1 of 7 departing workers and further cuts in overtime premia,” among other cuts.
Greece's commitments will probably be tougher because its fiscal hole is deeper. Each letter of intent comes with a specific calendar that lists conditions and the date by which that measure must be met.
But the letter of intent isn't gospel. It's a negotiated document between the IMF and Greece — and this time surely the EU and ECB will have a big input to make sure all are requiring the same changes. For the most part, it institutionalizes what the country requesting a loan has already agreed to do — and pushes the country to do more.
“You're constantly going between pushing the authorities to needs to be done and what you could sell (to the government and populace)” said Susan Schadler, a former senior IMF official for Europe. “You put in whatever the government thought of doing, plus stuff you negotiate at the end.”
The letters are typically made public a week or so after the IMF announces a deal. How will this letter of intent be different? There won't be any requirement on monetary policy because Greek uses the euro, the currency it shares with other European economies. Romania, which uses its own currency, for instance, committed to aim for an inflation target of 3.5% in 2010, when inflation was running at 5% or so. But that's not as big a change for the IMF as it seems. In the Latvia/EU program, the IMF didn't require Latvia to make any changes in its euro peg because of EU/Latvian pressure, and the country's desire to become part of the euro-zone. The consequence: other cuts became deeper
How will the conditions be enforced? The IMF will probably be given the enforcer's job because that's what the IMF does. Recently, for instance, it suspended payments to Ukraine when that country, during a brutal election season, failed to meet pledges. Using the IMF to play the heavy also spares European countries from having to beat up one another financially, which can have serious political implications. (Note how the Greeks were already playing the Germany/World War II card.)
But the presence of the EU and ECB could give the Greeks leverage to keep the IMF from cutting them off. IE They can lobby the EU to hold off the IMF.” Once there is a disagreement, the Greeks could line up European friends,” said Ms. Schadler
How tough could the negotiations among the IMF, Greece, the European Central Bank and the European Union get before a loan is approved? Very tough. The IMF hasn't insisted that other European countries restructuring government debt as part of loan deals. But with Greece's problems deepening daily, the IMF may feel that the 45 billion-euro package being discussed publicly may not be sufficient.
In that case, said Ms. Schadler, “The IMF could decide the numbers don't hang together. The IMf could say it can't go for a program that won't add up—that it either requires (sovereign debt restructuring) restructuring or massive amounts of more money.”
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Thousands of Greek civil servants went on strike Thursday, warning of a social explosion if any more austerity measures are announced. Reuters * Greece’s problems are spreading quickly to other countries. CDSs on Portugal’s debt jumped 17%, and on Spain’s debt jumped 9% in just one day. * The euro currency appears to be going into free fall against the dollar and the yen. Bloomberg. All of these indicators appear to be accelerating in the wrong direction, implying that Greece and Europe are experiencing a classic full-scale panic. It’s like a huge ball rolling downhill that keeps gathering momentum until it can no longer be stopped. There’s a very real possibility that a full-scale crash is imminent, though of course this isn’t the first time I’ve said that. At the very least a manor currency kind of financial dislocation appears to be coming very rapidly
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Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
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