It was never going to be easy – not with so many players involved.
Just days after European leaders hammered out a bailout deal in Brussels to keep Greece in the euro, the International Monetary Fund is already calling for changes that have the potential to torpedo Monday’s fragile compromise.
A new study sent to euro-zone governments by the IMF, and seen by Handelsblatt, shows that Greece will need far bigger debt relief than its 18 euro-zone partners have been prepared to envisage.
“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” the IMF said, referring to the European Stability Mechanism bailout fund.
The IMF’s plea for more bailout money is partly due to the damage done to Greece’s economy and its banks in the last two weeks, a time when banks have been closed and Greeks restricted to taking no more than €60 out of their bank accounts every day.
The IMF warned that Greece’s debt would climb to almost 200 percent of gross domestic product in the coming two years. The paper also listed risks that could raise Greece’s financial requirement above the planned €86 billion envisaged by the third bailout deal thrashed out in 17 hours of talks that lasted into Monday morning.
European countries would have to give Greece a 30-year grace period on servicing all its European debt, according to the IMF.
Christine Lagarde, the former French finance minister who now leads the IMF, reportedly raised many of these worries during the weekend negotiations in Brussels. While she has agreed in principle to support another aid package for Greece, she has one key demand: Greece’s debt load must be sustainable.
That the IMF is still involved in Greece’s program at all is controversial. Greek Prime Minister Alexis Tsipras had demanded the IMF, which is seen as the leading voice for tough austerity and reforms, be excluded from the equation.
But Washington’s role has been particularly important to conservative lawmakers in German Chancellor Angela Merkel’s government, many of whom are deeply skeptical about the merits of sending yet more bailout money to Athens.
The Washington-based IMF has its own reasons to act tough. To date, it is the only one of Greece’s lenders not to have been paid. Greece missed a €1.6-billion payment to the IMF at the end of June, and another payment of more than €400 million this week.
So how can Greece’s debts be made sustainable? And where will the extra money come from?
“The negotiations will be exceptionally difficult,” said German Finance Minister Wolfgang Schäuble on Tuesday, maintaining the pessimism he has shown on Greece ever since leftist Alexis Tsipras became the country’s prime minister in January.
Not everyone shares that pessimism. One E.U. official pointed out that Athens sold a five-year bond to private investors without any problems a year ago. If the Greek government implements the reforms as agreed, the country will gradually regain the confidence of investors, the official said.
E.U. diplomats believe the IMF will definitely take part in the third bailout. The IMF’s involvement would lessen the burden on euro-zone governments because some €16 billion from the previous IMF rescue program for Greece is left over. With the IMF on board, the new loan from the euro zone’s bailout fund, the European Stability Mechanism, would amount to €40 to €50 billion, said officials in Brussels.
But the IMF’s demands might still be tough to swallow. European countries would have to give Greece a 30-year grace period on servicing all its European debt, the IMF wrote in its updated debt sustainability analysis sent to euro-zone governments late on Monday.
The IMF also lists more radical options: direct annual transfers from the euro member states to Greece or “deep upfront haircuts” on their loans. Both those have been ruled out by the German government and many other euro states.
Privatization revenues are another questionable source of money. European leaders on Monday pushed Greece into accepting that a separate fund be set up to manage the sale of state assets to investors. But the sum of €50 billion that has been envisaged for the fund by euro government leaders is now seen as unrealistic, officials in Brussels said.
There is also a much more immediate financing problem. The talks on a third bailout are expected to take at least four weeks, but Greece needs money now to be able to pay its debts to the European Central Bank and the IMF, and in order to stabilize the banks enough to allow them to reopen.
The euro zone’s finance ministries are working out a way to secure this interim financing. At least 15 different options for this were on the table at a meeting of senior euro-zone officials on Tuesday, but none have been agreed on just yet.
The French government, which has been one of Greece’s key allies throughout the crisis, is reported to be considering helping out Greece with a bilateral loan. State-owned development bank Caisse de Depots et de Consignation could quickly make the money available because it does not require parliamentary approval.
Mr. Schäuble remarked that he wouldn’t stop any country from voluntarily lending Greece money, but he added that no one was pushing to do so at the meeting of E.U. finance ministers.
A further option is a loan from the European Financial Stabilisation Mechanism (EFSM), an emergency fund controlled by the E.U. Commission which contains some €11.5 billion. All 28 E.U. member states, not just the 19 that belong to the euro zone, have a say in what it’s used for. Britain’s finance minister, George Osborne, strictly opposes the use of this fund, saying the euro zone must solve its problems itself.
Mr. Schäuble, for his part, said the money could be taken out of the E.U. budget. But if no deal can be found, he also continues to float the idea of Greece issuing IOUs to pay domestic bills, a measure that was famously used by California in the last decade but which many in Europe have sharply criticized as effectively pushing Greece out of the euro.
The euro group has abandoned one idea, which would be to use interest income earned on Greek government bonds by the ECB and national central banks of the euro zone; several member states have insurmountable legal hurdles blocking that, officials said.
Whatever short-term financing deal is reached, it will have to come quickly. A key payment to the European Central Bank is due on July 20. That is one bill that Greece cannot afford to miss.
Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Jan Hildebrand is deputy chief of Handelsblatt’s Berlin office, heading financial policy coverage. To contact the authors: email@example.com; firstname.lastname@example.org