In the Eurocrisis, reality is in the eye of the beholder. The eurozone is committed to spending as little money as possible on Greece. They will give the minimum amount of aid for Greece to avoid a default, but not enough to revive the country’s growth prospects. The Germans do not care about Greece, just maintaining the euro. As long as the wacky numbers floating around occur well into the future, markets will not be spooked, and the status quo will be maintained.
Lagarde has a different version of reality. The troika agreed that a 120% debt to GDP ratio is sustainable, and the IMF wants all concerned to stick to that agreement. While this number is more realistic than the Eurozone’s, it is still unrealistic. Greece will never pay back the current debt load in full.
What the Greek bailout is really about is maintaining the illusion that the Eurozone is solving its debt crisis to give institutions a cover for continuing to buy PIIGS debt.
The German led Northern tier believes that it can get away with pushing Greece’s goals back yet again while Lagarde’s IMF thinks that they are pushing the envelope to0 much this time.
Both sides are now following the 4th Iron of the Eurocrisis to a tee: Nothing gets done unless a crisis is created first. Brinkmanship is the name of the game here.
Greece will not be allowed to default, so there is no reason for the markets to be upset. Weidmann already give the outline of a compromise that will be satisfactory to all parties:
Bundesbank President Jens Weidmann… said on Friday that Greece levels were unsustainable but that it would have to earn a write-down by getting its budget into shape.
Lagarde will get her write-down, the Germans will get to extract a pound of flesh to appease voters, and Greece will agree to whatever is necessary to keep the money flowing.