The International Monetary Fund has warned that it might not be able to participate in Greece’s bailout programme if it does not include substantial debt relief, setting itself on a collision course with the country’s eurozone creditors. The move particularly raises the pressure on Germany, which has opposed any debt relief, just as it prepares to seek the approval of its parliament to negotiate the details of a new bailout hashed out in a summit at the weekend.
The Bundestag is expected to be summoned for an emergency session on Friday if the Greek parliament on Wednesday passes austerity measures demanded by creditors in return for up to €86bn in fresh financial support. Alexis Tsipras, the Greek prime minister, is struggling to contain a rebellion within his leftwing, anti-austerity Syriza party ahead of the votes on the legislation, which is being backed by the opposition.
In the three-page memo, sent to EU authorities at the weekend and obtained by the Financial Times, the IMF said recent turmoil in the Greek economy would lead debt to peak at close to 200 percent of economic output over the next two years. At the start of the eurozone crisis, Athens’ debt stood at 127 percent. The memo, prepared for EU leaders ahead of the summit on Greece, argues that only through large-scale debt relief — something eurozone officials have fiercely resisted — could Greece see its debt fall to levels where it would be able to return to the financial markets.
“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads. That view was reinforced by the IMF on Tuesday when it said it would not be able to disburse €16.4 billion of its own funds that European officials are counting on unless an agreement on debt relief was concluded.
“We have made it very clear that before we go to the [IMF] board [for authorisation to release funds] we need a concrete and complete solution to the debt problem,” a senior IMF official told reporters.
Such a solution would not have to come immediately and talks could drag on well into the autumn with the IMF’s current programme now not due to expire until March 2016. But under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the appetite to do so has diminished.
IMF involvement in Greece’s rescue has been critical to a German-led group of eurozone hardliners who believe the European Commission, one of the other Greek bailout monitors, is not sufficiently rigorous in its evaluations. The issue became one of the sticking points during all-night negotiations between Mr Tsipras and Angela Merkel, his German counterpart, at the weekend, with Mr Tsipras repeatedly refusing to accept IMF participation in a new bailout.
According to EU officials, Ms. Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore “Grexit” from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that “Greece will request continued IMF support” once its current IMF programme expires in March next year.
But the IMF is now making clear that if Germany wants it to remain on board then Berlin will have to make room for significant debt relief. It also has the backing of the US, which has argued for debt relief in recent days. Jack Lew, the US Treasury secretary, is flying to Europe on Wednesday for meetings with European finance officials starting with Mario Draghi, the head of the European Central Bank.
If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.
In addition, an EU official said that of the €86 billion in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500 billion bailout fund — was expected to put up only €40 billion-€50 billion.
The current IMF programme, which still has €16.4 billion in undisbursed funds and runs through March 2016, is expected to make up some of the difference, and eurozone officials had been assuming a follow-on IMF programme would contribute as well. Any shortfall would have to be made up through Greek privatisation proceeds, which have repeatedly fallen short of expectations, or through Greek borrowing on the bond market, which has dried up since the Syriza-led government took power in Athens in January — and which the IMF memo said was highly unlikely to materialise.
Under the terms of IMF participation in Greece’s second bailout, eurozone officials had agreed they would take steps to ensure Athens debt falls to “substantially lower” than 110 percent of gross domestic product by 2022. The new IMF memo said it is now projected to be at 170 percent by 2022.
It added that financing in a new programme would make Greece’s bailout funding levels so large that they would exceed “the 15 percent of GDP threshold deemed safe” under IMF rules, and would “continue rising in the long term”.
Mr. Tsipras has long argued for debt relief. In Monday’s bailout deal, eurozone leaders only agreed to consider the topic after Greece completes the first programme review, which is unlikely to occur until late this year. Even then, EU leaders have only proposed lengthening maturities on existing eurozone bailout loans rather than full-scale writedowns, which Berlin argues is against EU law.
But the IMF memo said eurozone leaders needed to look at the issue more immediately and in amounts far larger than currently under consideration. Among the options it suggested was a “very dramatic extension” of repayment plans with a “grace period” of another 30 years on the “entire stock of European debt” — meaning Greece would not make a single interest or principle payment on eurozone loans until 2053; it already has such a grace period until 2023.
Alternatively, eurozone creditors would have to make “annual transfers to the Greek budget”, meaning eurozone grants to Athens, or “deep upfront haircuts”, the IMF said.
Source: Financial Times