Credit: World Economic Forum

IMF fights Eurozone over Greek debt relief

The rift between Greece's creditors reopens over the terms of the third bailout, but Lagarde may find Schaeuble an implacable opponent.

by Adam Gale
Last Updated: 11 Aug 2015

Greek PM Alexis Tsipras may have lost the war over his country’s third bailout, but there could be fresh hope he will win the peace. Tired of its fellow creditors in Europe ignoring its calls for debt reduction, the International Monetary Fund (IMF) has deployed the most fearsome weapon in its arsenal: the anonymous briefing.

A nameless IMF official has said that the organisation would not provide funds for the €86bn (£70.2bn) bailout agreed a few weeks ago, unless there was an ‘explicit and concrete agreement between Greece and its Eurozone partners on how to provide debt relief’.

There was ‘no expectation’, he added (we know it was a he, at least), that this would happen in the next few weeks. Given Greece’s next repayment to the European Central Bank is due on August 20, that could be a problem.  

The IMF has already made it clear that Greece’s debt is unsustainable. Without relief, it argues, the country will remain trapped in a spiral of depression. The burden of its debts  approaching 200% of GDP – would prevent its economy from growing, which would itself prevent it from paying back what’s owed. Mercy is the only answer.

Its pleas have fallen on deaf ears. Eurozone hawks led by German finance minister Wolfgang Schaeuble are refusing even to consider debt relief until Greece implements structural and fiscal reforms to its satisfaction. Furthermore, they say, a classic haircut – simply writing the debt down – is out of the question, at least without Greece temporarily leaving the euro, which is anathema to PM Alexis Tsipras.

This should not be interpreted to mean it’s impossible, however. There is more than one type of haircut, after all.

Extending the repayment timeline while offering grace periods on the interest would effectively reduce the debt burden through inflation and economic growth (assuming the Eurozone ever returns to inflation and Greece ever returns to growth, of course), in a way that would crucially be easier for the Germans to tolerate politically. It’s the flat top mullet of debt haircuts – everybody wins.

The Eurozone hawks want to make sure Greece gets its act together, reforming government and economy to make sure it never gets in the same mess again. They know they can use the promise of debt reduction in this form as leverage to get their way, which is why they haven’t ruled it out.  

The IMF agrees reform is necessary, but has clearly become exacerbated by how unwilling Schaeuble et al are to touch their styling scissors. There’s not an awful lot it can do about that, however.

The IMF is by far the junior partner to Europe when it comes to funds, so it can’t really stop the third bailout going ahead by refusing to participate. Indeed, doing so would be totally counter to its objectives of restoring Greece to economic health (any bailout’s better than no bailout, right?).

What it’s really doing by going public is trying to put political pressure on Germany and the others to soften their stance. The whole reason the IMF was involved in the bailouts in the first place was to offer legitimacy, after all. The implication is clear: if you do this your way, you’ll do it without us and that will undermine the credibility of your plan at home.

As Germany and certain others already face a tough time getting the bailout approved by their legislatures once the terms are finally agreed, it’s easy to see why Lagarde might think this would work.

Unfortunately for her, Schaeuble has proven himself an unswerving master of chicken. Backing down is not an option, unless Merkel orders him to. She, however, faces a struggle to get votes from Bundestag members who want Greece to fend for itself, not those who want to give it more money. These people are clearly less likely to vote for a lenient bailout, not more.

If Greece does get the debt reduction it desperately needs as part of the ongoing negotiations on the third bailout, it’s going to be when Europe decides. The IMF throwing its toys out the pram won’t change that.

Tags:
Strategy

Find this article useful?

Get more great articles like this in your inbox every lunchtime