A reader forwarded me the March 25 edition of the Goldman Sachs “European Weekly Analyst” report which includes a sobering discussion of the situation in Greece:
We outline here what we think will be a very large 18-month IMF program, which will come with a set of draconian policy measures as a conditionality. Whether the effort will lead to a restoration of debt sustainability will depend on the willingness and ability of Greece’s political leadership to undertake (and for its population to accept) some very substantial cuts in living standards during the next three years.
To state the obvious “very substantial cuts in living standards” doesn’t sound like a winning re-election slogan to me.
The word on the street from Asian political leaders for the past few years has been that people remember what it was like to “benefit” from IMF rescues in the nineties and that demands for very substantial cuts in living standards were involved. This is always said to be an important motive for the Asian fad for accumulating large foreign currency reserves. And this in turn is said to have contributed to the “global imbalances” that fueled the property boom in the US, UK, Ireland, Australia, Spain, etc.
It’s worth being clear that the primary actors here are the governments of Germany and, to a lesser extent, France and the other EU countries. The IMF is being brought into the picture because that’s what the Germans want.