As the International Monetary Fund approaches the seventh anniversary of the contentious Greek bailout, it is torn over whether to commit new loans to a nearly bankrupt Greece.
For more than a year, IMF officials have been saying — loudly — that they cannot participate in a new rescue package for Greece unless Europe agrees to ease Greece’s onerous debt burden.
The fund’s reluctance to commit additional money to Greece also highlights a widely held view among IMF officials — and in the Trump administration — that the fund overextended itself in Greece. They also see the responsibility for restoring the country’s economic health as resting primarily with Europe, which is currently covering 80 per cent of Greek debt.
At the same time, Greece, which has acceded to demands from the fund to cut spending and bring in more revenue, faces a 7 billion-euro debt repayment in July, which it may not be able to meet if the IMF and Europe cannot reach a new bailout agreement. In many ways, the situation in Greece has become an existential question for the IMF.
The fund has been criticised for overcommitting financial resources to the European debt crisis.
For example, the 30 billion euros the fund lent to Greece in 2010 was 30 times more than the sum of Greece’s financial contribution to the fund as a member, which is called a quota. The loan is one of the largest in the history of the fund, which was formed in 1944.
Yet the IMF has an obligation to lend to countries that are in financial need as well as to safeguard global financial stability. “This is where it gets especially fraught,” said C. Randall Henning, a specialist on global financial institutions. “The fund is digging in its heels, but if the pattern of brinkmanship that the Europeans and the Greeks have practised in the past prevails, you will see more instability in the markets. This is definitely creating anxiety — both within the fund and within national governments.”
Unlike at previous spring meetings, questions about Greece did not monopolise the public discourse last week as finance ministers, central bankers and financiers from around the world gathered in Washington to assess international economic trends.
Instead, the agenda was dominated by the recovery in emerging markets, improved prospects for global growth and uncertainty about the Trump administration’s commitment to free trade policies long promoted by the IMF.
But behind closed doors, how to proceed with Greece consumed a lot of time, as usual, participants said. Euclid Tsakalotos, the Greek finance minister, met with an array of officials, as he usually does at IMF meetings, but little progress was made.
Publicly, the mantra of fund officials, starting with Christine Lagarde, the managing director, was the same: The numbers had to add up before the fund could consider disbursing new cash.
“We had constructive discussions in preparation for the return of the mission to discuss the two legs of the Greece programme: policies and debt relief,” Lagarde said in a statement after meeting with Tsakalotos.
That means that for the IMF to lend, Greece must prove that it can be financially responsible over a sustained period, and Europe must address the country’s substantial debt overhang with some combination of interest rate reductions and maturity extensions.
Germany and other northern European creditor nations, who are deeply suspicious of Greece’s ability to manage its finances over the long term, have promised voters that they will only agree to another Greek bailout if the IMF provides its imprimatur.
Still, despite an unusual economic performance by Greece, which ended 2016 with a budget surplus of 3.9 per cent of gross domestic product — the highest in recent memory for the notoriously profligate nation — IMF officials conceded that they were not close to a deal.
The complexity of the Greek situation was nicely captured in a policy paper primarily written by Jeromin Zettelmeyer, a sovereign debt specialist (not least on Greece) who recently worked as a senior adviser in the German ministry for economic affairs.
The paper, which addresses the thorny question of how much debt relief Greece actually needs, was published by the Peterson Institute for International Economics, and has become required reading for policymakers on all sides of the Greek talks.
It made two critical points. It questioned Greece’s ability to consistently deliver large enough budget surpluses to allow it to pay down its debt — which now stands at 326 billion euros, or 180 per cent the size of the Greek economy.
And while the document accepted that Europe had proposed feasible measures to reduce the debt, such as extending maturities and lowering rates, it argued that for these steps to make a difference, Europe might have to commit as much as 100 billion euros in additional loans to keep Greece afloat.
As someone who has worked on both sides of the divide — Zettelmeyer was also an economist at the IMF — his goal in producing the paper was to find that elusive common ground that would allow Greece, Europe and the IMF to reach an agreement.
But after 53 pages and countless hours of brainstorming, he came to the same conclusion as many others before him: There is no simple way out of the Greek mess.
“It’s dispiriting — while there are technical solutions there are big political problems attached to all of them,” Zettelmeyer said. “There is a presumption that there will just be more procrastination. And that is hard to swallow because things could get out of control.”
That is why some analysts believe that the IMF and Germany will find a way to compromise, with Europe agreeing to just enough debt relief to allow the fund to come back on board.
“The clock is ticking,” Henning, the author, said. “With these European elections, the last thing anyone wants is another Greek crisis.”
New York Times News Service
