IMF Showdown A Turnaround in Greece?

When Jean-Claude Juncker meets with IMF director Christine Lagarde on Friday to discuss Greek debt, he'll have something of a trump card up his sleeve. The Greek economy contracted only minimally last year, doing far better than expected, Handelsblatt has learned.
Good news at last for Alexis Tsipras. Sources: Fotolia, Reuters [M]



Between disastrous debt levels, government crises and refugee chaos, Greece has acquired the reputation over the last six years of being something of a hopeless case.

Now, however, the Greek drama has taken an unexpected turn, with the country's economy reported to be recovering much more quickly than anticipated.

According to the latest calculations of Eurostat, the statistical office of the European Union, Greece's gross domestic product contracted by only 0.3 percent last year, Handelsblatt has learned from diplomatic circles in Brussels.

Last summer, Greece's international lenders predicted a 2.7 percent decline in the country's economic output for 2015. The International Monetary Fund, the European Central Bank and the European Commission agreed on the third Greek bailout package, amounting to €86 billion, or $96 billion, on this basis.

Despite this positive development, sources in Brussels say the Greek government must do more than it has announced to date, claiming that Greece has so far implemented only 50 to 60 percent of the reforms agreed in the third bailout package. In particular, they say that the pension reform presented by Prime Minister Alexis Tsipras is inadequate.

The IMF is considerably more skeptical than the Europeans, with sources there saying that Greece has implemented “at most 20 percent” of the planned reforms.

We cannot have far-fetched fantasy hypotheticals concerning the future of the Greek economy. Christine Lagarde, Managing Director, IMF

The Washington-based institution has accused the European Commission of trying to make Greece's financial situation out to be better than it actually is to avoid urgently needed debt relief. Some E.U. commissioners, meanwhile, suspect that the IMF wants to back out of rescue plans for Greece and is therefore claiming that the country is in worse shape than it really is.

Others believe that the fund is refusing to yield for tactical reasons, in the hope that the Europeans will agree to more generous debt relief for Greece.  Some on the commission are even talking about blackmail, saying that the IMF is aware that Germany's parliament has insisted on the fund's involvement in the Greek bailout package and that some people at the IMF are exploiting this fact to make unrealistic demands on the Europeans.

While these differences between Greece's lenders are nothing new, they have escalated significantly in recent weeks, with barbs being exchanged on both sides.

That has led expectations of a showdown in Washington later on Friday, when Jean-Claude Juncker, president of the European Commission, is scheduled to meet IMF head Christine Lagarde at the fund’s annual Spring Meetings.


Quelle: dpa
IMF Managing Director Christine Lagarde at her press conference on Thursday.
(Source: dpa)


Ahead of that meeting, Ms. Lagarde has again raised doubts about Greece’s debt sustainability based on projections that Greece would attain a budget primary surplus of 3.5 percent by 2018.

While that might be attainable in short-term if there were “heroic efforts” on the part of the Greek people, she said on Thursday night, “what we find highly unrealistic, on the other hand, is the assumption that this primary surplus of 3.5 percent can be maintained over decades. That just will not happen.”

The IMF has previously said it predicts Greece will only attain a primary surplus of 1.5 percent by 2018.

“We cannot have far-fetched fantasy hypotheticals concerning the future of the Greek economy,” the former French finance minister said. Debt relief by didn’t necessarily mean a “haircut,” she argued, but could take the form of maturity extensions, interest reductions or a “debt holiday.”

“Bottom line, it needs to all add up,” she said.

Ms. Lagarde did, however, emphasize the fund’s commitment to the bailout, saying “we will not walk away” from Greece.

Also speaking in Washington on the sidelines of the IMF gathering was Jeroen Dijsselbloem, the Dutch finance minister who heads the Eurogroup of euro-zone finance ministers. He insisted that the 2018 target wasn’t going to change because it was one of the key elements of last year’s bailout agreement.

He denied that Greek debt was unsustainable. “We already did a lot to make it more sustainable -- lowering the interest rates, lengthening the maturities,” he said. “So for the coming five to 10 years, I don’t think there is a big debt-service issue. I think the Greeks can pay on an annual basis.”

For the coming five to 10 years, I don’t think there is a big debt-service issue. I think the Greeks can pay on an annual basis. Jeroen Dijsselbloem, Eurogroup head

Nevertheless, the European Commission is prepared to make limited concessions to Greece, with sources in Brussels saying that the terms of loans from the European Stability Mechanism, the European Union's permanent bailout fund, could be extended by a further 10 to 20 years from the current average of 30 years. However, one E.U. diplomat says that the loan terms would have to increase to 100 or even 150 years if the IMF were to get its way.

The three lenders to Greece, the European Union, European Central Bank and IMF, have also discussed fixing interest rates for loans from the rescue fund at their current level, which is extremely low.

Such a cap would provide Greece with greater certainty in planning for the coming decades, but would require the ESM to protect itself when refinancing its own activities, so that it does not later end up subsidizing Greece in the event of a general interest rate rise.

A transfer of bilateral Greek loans to the ESM is also said to be conceivable, but more complicated from a political viewpoint. Such a transfer, which would lead to a minimal reduction in interest costs, would have to be approved by Germany's parliament, the Bundestag, although this also applies to an extension of the terms of existing loans.

There has also been talk of the ECB and national central banks ceding profits that they make on Greek bonds on their books in the coming years. Such an agreement would reduce Greece's refinancing requirements.

While all these measures could collectively help to ensure that Greece can manage its debts, the country's international lenders no longer want to look at just the actual level of debt. Instead, affordability is expected to be defined as a situation in which Greece must spend no more than 15 to 20 percent of its GDP on servicing debt. This figure was originally to be 15 percent, but sources close to European lenders now say it is more likely that a range will be stipulated. The IMF is reported to be critical regarding an increase in the limit.

One potential compromise is being touted, Handelsblatt has learned from sources close to the lenders.

It would involve the IMF accepting the European forecasts, while the European Union, ECB and IMF would simultaneously agree to impose further austerity measures on Athens if they did not reach their current budget targets.

The IMF would thus be protected should the European forecasts indeed prove too optimistic.


Ruth Berschens is Brussels bureau chief. Jan Hildebrand is the deputy bureau chief in Berlin, where he covers financial policy. Moritz Koch is Handelsblatt’s Washington correspondent. Siobhán Dowling,  an editor with Handelsblatt Global Edition, contributed to this article. To contact the authors: [email protected], [email protected], [email protected].