WASHINGTON — The International Monetary Fund’s already fragile rescue for Greece has taken a serious battering, after Greek voters rejected the government that accepted the Fund’s harsh austerity program in exchange for bailout funding.
The weekend vote that sent a centrist government packing also sent a message to the IMF and the European Union that the medicine tied to their 130 billion euro second bailout of the country is not acceptable to the Greeks.
Where that leaves the deal is still unknown, but it is likely the IMF, the fiscal disciplinarian behind the deal, will come under new pressure to modify its terms — which Athens was already having trouble meeting, just months into the program.
Analysts say the vote, which gave huge boosts to both far left and far right parties, amounts to a cold shower for the Fund.
IMF chief Christine Lagarde has already been at pains to convince IMF members that the Fund will hold Greece and other eurozone borrowers to its tough conditions.
The vote will make it hard for Greek legislators to come together into a new government, much less to confirm a commitment to reforms promised by the previous regime.
The election results “show an unprecedented segregation of the political landscape that leaves the door wide open for political instability,” said Lefteris Farmakis and Dimitris Drakopoulos of Japanese securities house Nomura.
Already the first stage review of the IMF-EU bailout — used to assess Athens’ progress and then decide the release of more funds — will likely be delayed, said Gillian Edgeworth of Italian bank UniCredit.
Even if the Greek centrist parties do cobble together a new coalition, “What was already difficult just got even more so,” Edgeworth said.
The IMF was only a small portion of the 130 billion euro European Union-led bailout plan reached just a few months ago, itself a refashioned program after the previous one failed to get Athens on an even keel.
But the IMF’s role is crucial: it takes the role as the enforcer which will gauge Athens’ progress in meeting both fiscal goals and reform requirements of the program.
They include slashing its debt-to-GDP ratio, and shaking up a range of government institutions and private sector structures that hobble growth.
The IMF itself took a wait-and-see position on Monday.
“We understand that discussions will be under way in coming days to form a government,” IMF spokeswoman Conny Lotze told journalists.
“We look forward to being in contact with the new government once it has been formed. Until that time, we have no further comment.”
The wait could be long: already the signs are that forming a new coalition government in Athens will be hard.
To analysts at Barclays Bank, the writing is on the wall: the election results “makes a renegotiation of some of the terms of the EU-IMF program more likely, including the fiscal consolidation measures.”
Speaking in Zurich Monday, Lagarde seemed to hint at possible compromises, stressing that if countries miss some of their specific targets for closing budget deficits, it might be okay as long as they keep meeting economic reform needs.
Rather than focusing, for instance, on spending cuts, she cited the need to break up job-stifling labor cartels, like the truckers in Greece who make it more expensive to get a locally grown tomato to market in Athens than one from the Netherlands.
“Some countries under severe market pressure have no choice but to move faster,” she said.
Mark Weisbrot, an economist at the Center for Economic and Policy Research, suggests the IMF will have little choice but to adjust to the new Greek political reality — because Europe will have to as well to protect the eurozone.
“They’re going to adjust their strategy to political developments,” he said.
Whether the Fund really believes in what they will do, “they don’t have much of a say. The Europeans call the shots.”