The IMF caves in on Greek debt relief

May 25, 2016

The IMF went into the Eurogroup meeting over the weekend with a strong and clear opening position which it had made public. The IMF’s position prior to the meeting emphasised how even with heroic efforts Greece will not be able to achieve a long term primary surplus of 3.5 percent of GDP. The Fund called for this target to be lowered to 1.5 percent. It saw as impossible the idea of Greece transforming itself from a laggard in productivity to a eurozone leader. This meant it kept long-term growth projections to just 1.25 percent, outlined the dismal record that Greece has in privatisations and the troubles of its financial sector.

It called for gross financing needs to be limited below 10 percent of GDP up to 2040 and under 20 percent until 2060. According to the IMF’s analysis, a significant debt reprofiling was required, involving the extension of maturities of EFSF loans by 14 years, ESM loans by 10 years and GLF loans by 30 years.

The Fund asked for a grace period and deferral of payments of 6 years for ESM loans, and 17 to 20 years for EFSF and GLF loans. Further, it called for no interest payments for EFSF loans for 17 years and ESM and GLF loans for up to 24 years.

It also asked for fixed rates that will not exceed 1.5 percent until 2040 and the elimination of any spreads on GLF loans.

Most importantly, it said that Greece needs an unconditional component of debt relief that will send a strong and credible signal to markets about the commitment to debt sustainability that will act as a catalyst for investor confidence and remove any speculation about Greece’s place in the euro.

As it turned out the IMF pretty much conceded everything and the real winner, as usual, was German Finance Minister Wolfgang Schaeuble who was probably the one participant in the Eurogroup that completely achieved his objective. His only concession is that he had to compromise on his initial stance that relief on Greece’s debt does not need to be discussed before 2023, now it will be discussed in 2018.

It was noticeable that IMF’s managing director Christine Lagarde refrained from participating in the subsequent press conference and that Poul Thomsen who appeared for the IMF at the press conference, appeared extremely uncomfortable when asked about the sensitive issue of debt relief.

The outcome of the Eurogroup meeting is that Greece gets a much needed injection of cash that will help it overcome its liquidity squeeze and allow the repayments of some arrears between now and the end of the year. Also, given the mostly mild conditionality outlined for the next review in the autumn, Tsipras can plan for a relatively calm summer and maybe even winter.

Furthermore, the European Central Bank’s governing council is expected to decide on June 2 to reinstate the waiver on Greek government securities, which was lifted in February 2014. This would lead to lower funding costs for Greek banks for around 4.5 billion of liquidity that has been withdrawn.

Also significantly for Greece, the debt issue was finally put firmly on the table. This could be interpreted as a victory for the Greek side but the concessions from the eurozone are limited. Any major interventions have been deferred until 2018 at the earliest and are subject to programme compliance that could easily cause friction, especially given that Tsipras has to implement a highly recessionary programme full of direct and indirect taxation.

By the end of the meeting all parties could claim that Greece was on the path to recovery. It isn’t.

“Reality is that which, when you stop believing in it, doesn’t go away.”
– Philip K. Dick

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