Greece's economic meltdown in 2010 was a subject of special interest for U.S. policymakers, including then-Treasury Secretary Timothy Geithner, according to the latest batch of Hillary Clinton's State Department emails.
The Greek crisis and debt restructuring will be high on the agenda at the G-20 finance ministers and central bank governors meeting in Turkey on Friday and Saturday. The events of 2010 will inform the discussions on the Greek debt over the coming months.
Τhe way the debt relief will be imposed is important. Despite IMF estimates that Greek debt would peak at close to 200 percent of GDP in the next two years, Germany appears to only accept an extension of loan maturities, when Greece wants interventions in the interest rates. The IMF and the U.S. have a special role in the matter.
On this basis, the IMF issued a special note on Tuesday warning that although financial market reaction to the protracted uncertainties surrounding the negotiations for the new Greek program was limited and risks have since diminished significantly, financial stress could re-emerge in the euro zone if the latest rescue plan falters due to political uncertainty or reform fatigue.
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A review of Clinton's 15 emails on Greece in in the batch released this week reveals that while the Obama administration supported the IMF's involvement in the 2010 bailout, geopolitical and international security considerations played a big part in America's posture. Concern appeared paramount over EU cooperation on Afghanistan and Iran.
One email that stands out was sent from journalist Sidney Blumenthal, a former aide to President Bill Clinton and long-time confidant and advisor to the former first lady. He identified early on the potential risks posed to the euro zone from the diffusion of the Greek debt crisis. He cited the views of John C. Kornblum, an expert on U.S.-European political and economic relations who served as the U.S. ambassador to Germany from 1997 to 2001.
Blumenthal emphasized that "a potential second major phase of the economic crisis in Europe is likely with the designation of Greece to junk bοnd status, on the edge of default, with Portugal, Spain, and perhaps even Ireland at tipping points."
Viewing the Greek crisis within a geopolitical context, Blumenthal claimed that it could even undermine the U.S.-European cooperation on a wide variety of issues, such as Afghanistan and Iran.
"In the worst case, the President could be confronted with a major crisis of confidence among members of the EU. He would be blamed for inattention to the negative trends," Blumenthal warned and concluded that "we cannot treat our partnership with Europe as just another point on a multi-polar map. Maintaining consensus within Europe and between the U.S. and Europe is essential to maintaining a foundation for our global efforts."
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The recent intensification of the Greek crisis has demonstrated that the U.S. continues to believe that it is essential for Greece to remain a member of the euro zone for geopolitical reasons.
The former Greek Minister of Finances George Papakonstantinou told CNBC that "in 2010, the Obama administration understood very quickly the systemic nature of the Greek crisis. Having lived through the Lehman episode, the U.S. did not want to see the same mistakes repeated."
Papakonstantinou added that "there was constant contact between the U.S. administration and the Greek government during that period. It is clear that in the spring of 2010, U.S. pressure did nudge Germany to decide to commit to the first bailout. The decision to implicate the IMF however came from Germany, not the U.S. The U.S. accepted the German demand and probably welcomed it."
What Geithner's schedule reveals
The United States economic diplomacy on the 2010 Greek crisis and the initiatives later taken by the Obama administration with respect to the euro zone crisis are reflected in how former Geithner handled the case with his EU counterparts and the leadership of the IMF.
Between January 2010 and June 2012 Geithner had no fewer than 168 meetings or phone calls with euro area officials and a further 114 contacts with the IMF. Among the 168 contacts with EU officers are 58 contacts with ECB presidents Jean-Claude Trichet and Mario Draghi.
Papakonstantinou told CNBC that "in 2010, neither the ECB nor any euro zone country were willing to even discuss Greek debt restructuring. And while there were some voices to the contrary within the IMF and in the IMF Board, the official position of all three institutions—IMF, European Commission, ECB— excluded that possibility."
A new beginning
According to Papakonstantinou, "the U.S. sided with Europe and the IMF Board because it was to maintain systemic stability in Europe, and avoid a collapse in Greece. Issues of debt sustainability could be dealt with later."
With Europe opposed to restructuring the Greek debt, the IMF agreed to develop a detailed program without debt restructuring. This major IMF decision still haunts the Greek rescue program. By not carrying out a debt restructure early on, the loans given to Greece were inflated and expanded the austerity program, in turn initiating a five-year political crisis. After breaking its rules against lending to countries with unsustainable debts, the IMF finally became hostage to the European positions on how the Greek rescue should proceed.
Today the IMF seems willing to release itself from European bias and has clarified that it will participate in the third Greek bailout, when Europe gives Greece some form of relief for its towering debts.
The United States—the IMF's largest shareholder since 1945—now believes that this is the only way. In recent months U.S. Treasury Secretary Jack Lew has helped IMF Managing Director Christine Lagarde increase the pressure on Europe for debt relief and to help Greece avoid an exit from the euro zone.
