The International Monetary Fund and eurozone government lenders need more time to reach an agreement on debt relief for Greece because the eurozone is still not sufficiently clear in its intentions, IMF chief Christine Lagarde said on Friday.
Top euro zone officials and Lagarde met on Friday on the sidelines of a G7 finance ministers meeting in the Italian port city of Bari to discuss debt relief which the Eurogroup of euro zone finance ministers promised in May 2016, under strict conditions.
“We will carry on working on this debt relief package. There is not enough clarity yet. Our European partners need to be more specific in terms of debt relief which is an imperative,” Lagarde told reporters on entering the G7 talks.
The Fund has made debt relief for Greece a condition for its participation in the latest bailout for Athens, the third one since 2010. Several euro zone governments, led by Berlin, want the IMF to participate for credibility reasons even though they disagree with the need for debt relief.
German Finance Ministers Wolfgang Schaeuble, also at the meeting in Bari, asked if he would be prepared to ease the conditions for debt relief, said:
“We are prepared to stick to what we have agreed in May 2016. That is the basis on which we are working … I am still in favour of getting a solution, at least a political solution, in the Eurogroup on the 22nd of May.”
The IMF believes that debt relief, or at least a clear promise of it now, is needed to restore investor confidence in Greece, especially if the country, which has public debt of 180 percent of GDP, is to return to market financing next year.
But Germany and other northern European countries say that if Greece has a high primary surplus long enough, it may not need any further debt relief, especially that the existing very cheap euro zone loans are already saving the country’s government eight billion euros a year, or 4.5 percent of GDP.
The IMF and the euro zone are therefore debating for how many years Athens is to keep the primary surplus at 3.5 percent of GDP, with views ranging from 2-3 years to 10 years – with the upper figure seen as completely unrealistic by the IMF.
Berlin is wary of committing to debt relief upfront, fearing it would leave lenders with no leverage over the Greek government which has often failed to deliver on promised reforms in the past.
Germany, which faces elections in September, also believes that a decision on debt should only be taken at the end of the bailout in 2018, when the latest economic data is known.
But the IMF wants more details now. For example it wants to know by how many years the eurozone could extend Greek loan maturities, even if described only as a possible range.
“Debt relief measures don’t have to be calibrated to the last decimal or delivered before the end of the programme,” the IMF official said. But promises would have to be quantified with detail going “well beyond” measures previously offered.
“They need to have numbers on what are the potential measures, to show that these potential measures really entail a game changer as far as debt is concerned,” the official said.
Waiting until 2018 for the latest numbers, as Germany wants, will not change the need for debt relief, the official said.
“However the world changes, I can assure you the IMF debt sustainability analysis in 12 months will not show that debt relief is not needed. For sure debt relief is needed,” he said.
Officials said however both the euro zone and the IMF were determined to reach a deal by May 22 and were constructive in their discussions, going beyond a mere restating of positions, even though a lot more work had to be done to reach a deal.
Euro zone lenders promised in May 2016 that if Greece delivers on all reforms pledged under its bailout, they would extend the maturities and grace periods on loans so that Greek gross financing needs are below 15 percent of GDP after 2018 for the medium term, and below 20 percent of GDP later.
They also said they could consider replacing more costly IMF loans to Greece with cheaper euro zone credit and transfer the profits made from a portfolio of Greek bonds bought by euro zone national central banks back to Athens.
But all this could happen only if Greece delivers on its reforms by mid-2018 and only if a debt sustainability analysis shows Athens needs the debt relief to make its debt sustainable.
When implemented in full, the debt relief measures should lead to a cumulative reduction of Greece’s debt-to-GDP ratio of around 20 percentage points until 2060, according to estimates of the euro zone bailout fund.
They would also cut Greece’s gross financing needs by almost five percentage points over the same time horizon.