Reuters today writes that “the leaking of a conference call of International Monetary Fund officials on Greece’s latest bailout review has further undermined mutual trust in fraught debt talks, embarrassed the European Commission and infuriated the IMF and Germany.”

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At stake are many things, not the least of which is the IMF’s reputation as a stern enforcer of financial rescue programmes meant to make indebted states viable and the European Union’s determination to hold the euro zone together and avert another damaging Greek crisis.

And as Reuters adds, Greek Prime Minister Alexis Tsipras “exploited the leak at home to demonize the IMF, rally his left-wing Syriza party ahead of more painful sacrifices to secure the next slice of European loans, and try to put his conservative opponents in a corner.”

However, his efforts to drive a wedge between the EU institutions and the IMF, and isolate IMF Europe director Paul Thomsen, a veteran of six years of acrimonious negotiations with Athens, fell flat. “Each time Tsipras is going to have to compromise, he needs to create an external enemy,” said George Pagoulatos, professor of European politics and economy at Athens University. “It’s part of his old populist playbook. It’s smart domestic politics even if it is dumb diplomacy.”

Diplomatic pandering aside, Tsipras rebuke undercut months of patient efforts by Tsipras himself and Finance Minister Euclid Tsakalotos to rebuild lenders’ trust following last summer’s turbulent events which culminated with a bank run, capital controls and a banking system that relies on the ECB for its daily existence.

As Reuters writes, it also shone a light on a complex, three-dimensional chess game the IMF is playing to try to make Greece accept painful reforms of pensions, taxation and bad loans while pressuring Germany and its allies to grant Athens substantial debt relief.

“Put simply, the IMF’s position is that the Greek economy is in worse shape than rosy EU forecasts suggest, and that a necessary relaxation of fiscal targets must be balanced by greater debt relief from euro zone lenders.”

Because apparently it is news to someone that while Europe was pretending it was helping Greece (when it was merely making sure none of the bond held by the ECB were defaulted on), Greece was pretending to reform.

Of course, since Greek reform in any measurable way is unachievable, there was the question of whether it makes sense to chop off some of the debt it can never repay, as a confirmation of what a great job Greece had been doing (or perhaps as impetus to force it to actually do something). By antagonizing the IMF – the only part of the Troika that was pushing for a haircut – that also is now off the table.

Germany, the biggest creditor, is the most reluctant about major debt restructuring. Its parliament insists on a continued IMF presence to enforce budget savings and minimize the need for stretching out loans and freezing interest payments.

“The bottom line is the debt will not be repaid in our lifetime,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington.

Or ever.

“The IMF is gearing up for new clients in the emerging economies. That is not best done by being soft on Greece. They won’t go to the (IMF) board to approve participation in a third Greek bailout without something they think is tough and credible,” he said.

Brussels contends that both the economy and Greek compliance with the bailout programme are better than the IMF thinks, hence the first review should be concluded soon, allowing Athens to access the next 5 billion euros ($5.70 billion) of loans.

Reuters conclusion: “How the three-way tug-of-war between the IMF, Greece and Berlin will play out remains uncertain. The sequencing will be tricky, but no side seems to have an interest in walking away.”

Ironically, Greece finally has some true leverage over Germany as Merkel is more dependent now on Greece to act as Europe’s gatekeeper than she was during last year’s crisis over a possible “Grexit” from the euro zone. Berlin needs Athens’ cooperation to process and detain migrants and refugees until they can be send back to Turkey. If Greece really wants to flex its muscles, it will simply demand a debt haircut in exchange for keeping refugees within its borders.

Then again, now that the Western Balkan route has been closed, with Austria now openly sending migrants back, Greece may have lost what little leverage it had…

As for the IMF, it too does not want to abandon Greece as a black mark on its record. “Four of the five euro zone bailouts have gone pretty well – an 80 percent success rate. Yet if the IMF walks away from Greece now, everything they’ve done in Europe will be remembered as a failure,” said Kirkegaard.

 

Which brings us to point #2: also last week, we warned “it may be another turbulent summer in Europe” and on Thursday Barclays seems to have agreed with this assessment. This is what Francois Cabau said in a note titled “Greece – Back To The Fore” in which he says that we do not rule out the prospect of “Grexit” returning.

Here are the highlights:

We continue to think Greece has the potential to return to the headlines, and we do not rule out the prospect of “Grexit” returning. Our baseline remains that the current government will ultimately remain in power, managing to pass the creditors’ required reforms through Parliament.

 

We nonetheless note the more fragile European political environment (Dutch referendum, UK’s EU referendum, likely snap elections in Spain, key elections in France and Germany in 2017) compared to previous episodes, and the possibility that the increased noise around Greece could potentially influence the UK referendum on EU membership. Furthermore, the ongoing migration crisis in which Greece plays a central role is exacerbating tensions at both domestic and European levels.

 

Market-wise, we believe the escalation of the situation in Greece in conjunction with the UK referendum on EU membership could drive further peripheral spreads. On the FX front, Greece’s large projected repayments in June and July, which coincide with the impending UK EU Referendum, could result in heightened volatility and EUR depreciation as redenomination fears re-emerge, in our view.

Here is an interesting tangent on the wildcard in this summer’s Greek events: “Migration”

We believe that the migration crisis has entered Greece’s programme review through the back door. It is our belief that Greece has most likely looked to extend the talks and attempted to bargain with EU leaders on completing the programme review and achieving OSI, by exerting pressure given its crucial role on the migrant crisis, before the EU referendum takes place on 23 June in the UK. Now that the Western Balkan route is effectively closed to migrants, and that the EU has decided on an action plan (agreement with Turkey), we think Greece is likely to have less bargaining power than earlier this year; however, we still expect it to play a major role in addressing the crisis. Further delay in the programme negotiations has only been possible due to a relatively light repayment calendar (see below).

Finally, the key timing choke point, which as always when dealing with Greece has to do with when the money runs out. The answer: late June.

Looking ahead, IMF redemptions totalling €0.46bn are due to take place on 30 April, while ECB bonds of c.€50mn fall due on 11 April (a c.€2.171bn outstanding bond due on 24 April was issued purely to provide funding for Greek banks at the ECB and so should not be considered as part of funding needs, in our view). Thereafter, the next significant outflows are due in June and July with €750mn due to the IMF and then c.€2.3bn due to the ECB. Therefore, we think Greece is likely to be able to negotiate payments up until June (albeit narrowly and with likely recourse to allowing arrears to rise again). However, the July repayments appear more challenging should further ESM disbursements not be forthcoming.

Will another “Greek summer” ruin the vacation plans for numerous bond trading algos? Find out in three short months.

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