HANDELSBLATT EXCLUSIVE Quid Pro Quo on Greece's Debt

Searching for compromise, Greece’s creditors are considering tying debt relief to austerity targets. But Germany is not playing along - at least not in public.
It's all about the euros. Picture source: DPA

Markus Söder, Bavaria's finance minister, traveled to Athens to deliver a clear message from Germany’s top dog, Wolfgang Schäuble, for the Greek government before the next tranche of €8-billion in bailout money is transferred.

“It’s not enough to agree to reforms, they also have to be implemented,” Mr. Söder told Greece’s national finance minister, Euklid Tsakalotos. “Greece is running a marathon and it has just started - it’s not close to the finish line” he said.

Indeed, in the eyes of Greece’s creditors, the government of Prime Minister Alexis Tsipras has quite a lot of work to do. A 53-page confidential document, obtained by Handelsblatt, lists the many so-called “prior actions” that Athens is expected to implement. Among them are controversial tax and pension reforms that are supposed to take effect in 2019 and 2020.

The goal of the cuts is for Greece to generate a 3.5-percent primary budget surplus. According to the document, Athens has to achieve this target by 2022, but the deadline is a point of dispute between the International Monetary Fund, or IMF, and Greece’s European creditors.

If the participation of the IMF does not work, then collateral should be paid out for the next tranche of credit. Markus Söder, Bavarian Finance Minister

The IMF insists that debt relief is prerequisite for Greece to meet that goal, while German Finance Minister Wolfgang Schäuble insists that Athens should stick to its targets. Debt relief for Greece is a toxic issue in Germany, which is in the middle of an election year. During his trip, Mr. Söder was clear about the German government’s position.

“Continued financial pressure is necessary for Greece to implement the reforms,” he said. “There cannot be any further burden on the German taxpayer.”

But an internal document from Europe’s bailout fund, the ESM, tells a different story. The document, seen by Handelsblatt, lays out different options to help Athens meet its targets. Greece’s creditors could, for example, postpone interest payments as far out as 2050 or cap them at any given period. This could be achieved over three steps, extending the debt to 2030, then 2040 and 2050.

Athens, however, would have to agree to uphold the EU stability pact, which limits budget deficits, as a precondition for receiving the assistance. A German government spokesperson said the Finance Ministry cannot comment on documents from the ESM.

The problem is that the IMF is opposed to this approach, according to the document. The fund wants unconditional debt relief for Greece at the end of its current bailout package in 2018, otherwise measures to reform the country would have no credibility with financial markets, in the IMF's view.

And the IMF currently has a strong negotiating position with the German government, which wants to prevent the fund from pulling out of Greece’s rescue program.

“It [the IMF] has the necessary expertise and is objective and independent,” Mr. Söder said. However, in the event that differences cannot be resolved and the fund does indeed pull out, the Bavarian finance minister floated a plan B.

“If the participation of the IMF does not work, then collateral should be paid out for the next tranche of credit,” Mr. Söder said. “The model is feasible. Finland has already reached such an agreement with Greece,” he said.

But demands for collateral are controversial in Greece. One way or another, Athens and its creditors will have to reach an agreement. Mr. Söder made clear that Berlin is against Greece leaving the euro zone – at least at this phase: “A Grexit is not an option given the current situation in which Europe finds itself,” he said.

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. To contact the authors: [email protected], [email protected]