Athens must pay because IMF can’t and Berlin won’t

New Europe — The IMF says Greece needs debt relief. Alternatively, “structural reforms” [i.e. austerity”] must go further and deeper.

Athens and Brussels suggest the Greek programme  should be considered viable, and should be allowed to go on as planned in the summer of 2015. After all, if it was viable then, it is more than viable now, since Athens has outperformed. Frankly, that is a problem everyone would like to sweep under the carpet for some time, except the IMF seats in Washington and does not have only Europeans seating on its board.

The main subject of negotiation is time and money. The dilemma is clear and with precedent: either Athens will be squeezed more, or the creditors will take a hit. Athens traditionally takes the squeeze in the hope that the creditors, in time, will take the hit. In the meantime, governments come and go.

Washington: debt relief, here and now

A report published in Washington on Tuesday suggests that Greece will fail to fulfill calls for a 3,5% budget surplus and calls for more “reforms,” over and above what was agreed in the third bailout of the summer of 2015.

Last week, Washington projected that the Greek debt will drop to 164% of the GDP by 2022, before gradually resurging to 260% by 2060.

The eurozone has in theory authorized some debt relief, which the head of the European Stability Mechanism, Klaus Regling, estimates will reduce the Greek sovereign debt burden by 20% by 2060. It is all about prolonging maturities and cutting interest rates. In essence, the IMF wants more of the same, trimming the debt so that its service requires a smaller portion of the GDP allowing the economy to grow faster.

Alternatively, the IMF would settle with austerity. It is asking for contingency measures worth 2.5 to 3% of GDP that would kick in automatically if Athens misses its primary surplus targets in 2017 and 2018. The IMF Board is asking for contingency measures to the tune of 2.5 to 3% of GDP that would kick in automatically if Athens misses its primary surplus targets.

Elections relief

No one in Europe wants debt-relief. So, the IMF proposal has become the new basis for negotiation.

The Dutch go to the polls in March, with the Eurosceptic far-right leading on the polls. The Dutch Finance Minister and President of the Eurogroup, Jeroen Dijsselbloem, suggested on Wednesday that Washington is “unnecessarily pessimistic.”

Wolfgang Schäuble resists Washington’s calls for debt relief and wants Greece to maintain a 3.5% budget surplus well beyond the end of the bailout programme in 2018. “Anyone who now speaks about debt relief for Greece does not strengthen those who want reforms,” he notes.

A couple of weeks ago, SPD’s former leader Sigmar Gabriel expressed “great concern” for Berlin’s failure to play a “more constructive role” in the Greek negotiations. Alas, he also wants Athens to accept a 3,5% surplus for about a decade.

There is, of course, a way for debt relief to become acceptable in Germany. The head of the liberal Free Democrats (FDP) suggested on Thursday that Greece should get a debt write-off if it agreed to leave the euro zone, a position Schäuble has expressed both in 2012 and in 2015.

Chancellor Merkel expressed the hope on Thursday that “the eurozone must remain together” and “what we agreed on should be delivered.” Electoral campaigns are the wishing season, in Berlin as in Athens.

The surreal position of Athens

Athens wants the chance to stick to the objectives of the programme as set in the summer of 2015. Thus far, the government has significantly overperformed in terms of budgetary goals, achieving a 2% budget surplus rather than the originally envisaged 0,5%.

The 2017 objective is set at 1,75%, reaching 3,5% for 2018. For now, Greece is one step ahead in the game. So far so good, except of course Berlin wants the IMF on board and insists on Greece achieving a 3,5%… nearly forever. Washington thinks that is somewhat unrealistic; some people argue that Berlin counts on the programme being unrealistic.

For a Greek government that was elected with a demand for debt write-off, it is surreal that Athens is keen to have its debt proclaimed serviceable. But, time is not on the side of the Greeks, as outstanding payments at the second half of 2017 are casting their shadow. To make those payments, Greece will need the next payment, which requires the IMF, the European Commission and the ECB to play ball.

Athens got to give

The time for an agreement is running out. Eurozone finance ministers meet on February 20. The next Greek payment is due in July.

Surrealistically, the Greek Alternative Foreign Minister for EU affairs, George Katrougalos, tells reporters he is “optimistic” of a “political agreement.” His optimism is puzzling, home and abroad.

The Moody’s rating agency on Thursday was not optimistic, describing the standoff between Athens, Brussels, and Washington as “credit negative.” Greek spreads for 2-year bonds surged to 10,9% on Thursday.

The sovereign debt expert and chief economic advisor for Allianz, Mohamed A. El-Erian,  wrote on Thursday that it is the IMF that is right and Brussels that is wrong. Markets too think the Greek debt is unsustainable and that further tightening of the budget screws “harms the country.” But, the Greek debt was always based on “political capital,” not market capital.

El-Erian makes a simple point: the longer European governments oppose debt reduction, he argues, “the harder it will be for the country to recover from the devastating collapse in output and living standards.” That does not sound optimistic.