Bursting the Bubble

Greece: Eurozone and IMF clash over debt relief

7 June 2016 | by

On one level, the recurring Greek crises fits the idea from Karl Marx of history repeating itself, first as tragedy, then as farce. Greece came close to a eurozone exit last summer. While it will probably come close again this year, it is unlikely to leave. The eurozone, Greece and International Monetary Fund (IMF) stood at a stand-off and reached an agreement implanting some proposals from the IMF, but the group around Germany, swept along by Alternative fur Deutschland, won the stand-off. The IMF published a new document right before the summit. In that document they has concluded that Greek public debt, at 180 per cent of gross domestic product, is unsustainable; as is the agreed annual primary budget surplus, before interest payments, of 3.5 per cent of GDP. The fund insists on debt relief, but Germany continues to resist.

The IMF wants all payments on European loans granted to Greece since its first bailout in 2010 to be deferred until at least 2040 with maturities extended until 2080, according to the note. Interest payments on loans from the euro area’s crisis fund would be fixed at a maximum of 1.5 percent until at least 2045. The IMF’s projections for the Greek economy rely on a baseline assumption that debt will rise to 293.8 percent of gross domestic product by 2060 without the proposed measures.

Greece Debt

The eurozone’s largest creditor did not agree with this. Swept by the success of AfD, Schauble, with the help of others including Belgium, the Netherlands, Austria and Finland, did not understand the logic of the IMF, and with upcoming elections in Germany and with Merkels suffering from low opinion polls for the first time in her tenure, Schauble did not give in: he only wanted debt relief after the elections of 2017 and only when it is necessary. Only minor adjustments can be implemented until 2018. For instance, the interest rise on the second help program was not included.

Greece and Germany won the argument and the IMF was bought on board. Greece was awarded for implementing harsh reforms on pensions, one of the only welfare citizens received, the labor market and, and public ownership of industries and sectors was privatised – such as some trading harbors. They received 10.3 billion euros as a loan, out of the 86 billion available via the third help programme. With this Greece will survive until October 2016. The IMF, however ‘publically humiliated’ (quote Die Welt) it was by Schauble in the aftermath of its initial report, stood ground on the sustainability of the debt path of Greece. The debt relief effort will be framed by an overall cap of the country’s debt service. Greece’s “gross financial needs” will remain below 15 percent of GDP in the medium term and 20 percent thereafter.

Sustainability of the debt path will be done first by short-term re-profiling of the country’s loans, such as waiving an interest rate hike that should have taken place in 2017 on tranches from the second Greek bailout, agreed in 2012, and making the country take advantage of the low interest rate environment currently benefiting the European Stability Mechanism (the eurozone bailout fund), which funds itself on the markets.

Despite the IMF staff’s deep scepticism about Greece’s solvency and the math of the German bailout plan, they ultimately answer to the IMF board, where Western governments such as Germany and the U.S. have a voting majority.

Behind the scenes, German Chancellor Angela Merkel has pressed in recent weeks for the IMF to announce that it will rejoin the bailout, so that she can get the Greek issue off the table quickly without controversy in Germany.

Ms. Merkel and U.S. President Barack Obama are eager to avoid a new drama over Greece when the European Union is looking unusually politically fragile given the refugee crisis, the rise of populist parties across the bloc, and the U.K.’s referendum on whether to leave or remain as an EU member, and of course Merkel’s own unease over the rise of the AfD.

Under pressure from its dominant board members, the IMF had little choice but to accept Germany’s preferred formula on Greek debt.

Difficult talks between the IMF and the eurozone lie ahead this Fall before the IMF finalises its loan programme for Greece. The IMF wants more specifics on the menu of loan-restructuring measures that Europe is prepared to use in 2018. But the IMF is now expected to soften its demands for extra austerity measures by Greece. The IMF programme is likely to set Greece a budget surplus target, excluding interest, of 1.5% of gross domestic product – lower than the 3.5% primary surplus that Europe wants to see. However, without investment and increased tax collections, the government of Tsipras will not manage to steer the budget into a surplus. With unpopularity polls rising for Tsipras following his failure to impose his manifesto commitments regarding austerity, and labour strikes continuing, there is an ongoing question mark over how Greece will continue to implement any additional reforms which arise from the Fall summit in order to gain access to the fresh bailout money.

Greece Budget

Six years after the Greek debt crisis shook the eurozone to its foundations, the Eurogroup deal may once again be seen as a messy compromise mostly aimed at playing for time. Once again, it can be criticised for skirting the radical decisions that would allow Greece to stand on a firmer footing. And once again, it will be seen as a cynical ploy to avoid those decisions because of electoral politics: in this case, postponing major choices until after the 2017 German elections.

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