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27/09/2016

IMF report puts pressure on Greece’s EU creditors

Euro & Finance

IMF report puts pressure on Greece’s EU creditors

Euclid Tsakalotos, Greek Minister for Finance and Christine Lagarde, Managing Director of the IMF. [European Council]

A new IMF report on Greece’s financial situation, published hours, before a key meeting in Brussels, said the country needs unconditional debt relief from European Union creditors over the long term to rebuild its financial strength.

The International Monetary Fund’s debt sustainability analysis (DSA) released yesterday (23 May) also said that the relief needs to be deep through at least 2040, noting the country’s limited prospects for achieving significant economic growth and a fiscal surplus.

The DSA said Athens faces substantial challenges to achieving even the modest goal under a proposed debt restructuring of a primary budget surplus of 1.5%.

To best help the country achieve that, it said, “providing an upfront unconditional component to debt relief is critical to provide a strong and credible signal to markets about the commitment of official creditors to ensuring debt sustainability.”

The DSA, which projects what it would take for Greece to get its finances back under control and restore the economy to long-term growth, challenges the German-led view that Athens must commit to broader fiscal and structural reforms if the EU creditors are to reduce the country’s debt burden.

The report was released a day before eurozone finance ministers meet in Brussels to discuss reducing Greece’s debt burden and disbursing new funds to the troubled country. On Sunday (22 May) Greek lawmakers adopted another batch of controversial spending cuts and tax hikes.

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The IMF has said it would participate in new lending to the country only if the Eurogroup significantly eases the burden of servicing Greece’s debt.

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The IMF said Thursday (19 May) that Greece would need a lengthy period free from debt payments to achieve sustainable finances if the European Union does not agree to cutting the debt up front.

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Given Greece’s poor record at meeting conditions in its three so-far unsuccessful bailout programs, the IMF said it “understands and supports” the EU view that relief should be contingent on implementing reforms.

“However, debt relief conditional on policy implementation should not extend beyond the program period,” it said referring to the 2018 end to the EU’s current three-year bailout program.

The original plan of that program was for Athens to achieve a 3.5% primary budget surplus, which excludes debt service.

But that assumed the country’s economy would return to firm growth, which has not happened amid the slow eurozone economy and political turmoil within Greece.

The only way Greece can expect to achieve a sustainable fiscal position and look to a stronger economy, the IMF said, is debt relief that involves a combination of extending the maturity of its debt, substantial deferrals of interest and principal payments, and fixing the interest rate on its debt at 1.5 percent at most through 2040.

“Importantly, extended payment and interest deferrals without fixing the underlying interest rate would not suffice,” the IMF said, pushing the highly controversial idea that Greece’s European partners would put their own credit on the line to achieve low rates for Greece.

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