IMF dubious

With Mr. Austerity gone, will Germany approve debt relief for Greece?

greece
Greeks protest pension reforms forced by austerity measures. Sourcec: Reuters

France and the European Union are pressing ahead with plans to implement debt relief for Greece now that Germany’s former Finance Minister Wolfgang Schäuble, who preached austerity instead of bailouts, is no longer holding the purse strings in the coalition government.

European finance ministers are scheduled to meet at an informal meeting in Sofia, Bulgaria at the end of the month, and there is growing hope that Germany’s new finance chief, Olaf Scholz, will be more flexible than Mr. Schäuble was in agreeing to debt relief. Greece’s debt-to-GDP ratio has risen from 160 percent at the end of 2012 to almost 180 percent this year and is becoming more untenable than ever.

Mr. Scholz, a former mayor of Hamburg and a Social Democrat, is believed to be more liberal on the Greek debt question. But if he too readily agrees to a compromise, he faces possible rebuke from his coalition partners in Chancellor Angela Merkel’s Christian Democratic Union as well as abuse from the opposition, led by the Alternative for Germany, a party of the populist far right.

Debt relief is not welcome to Ms. Merkel but also not ruled out.

Handelsblatt has obtained a working paper written by the European Stability Mechanism, an intergovernmental group set up in 2012 to provide financial assistance to EU governments in distress, which calls for extending Greece’s loans for a period of seven years and deferring €13 billion in interest payments for five years.

A French proposal goes even further, calling for extending Greece’s bailout loans by 12 years and capping interest on them at 2 percent, which would cut €18 billion that has to be paid back.

Both France and the ESM have put forward formulas that would reduce the amount Athens must pay if economic growth in the country, expected to reach 2.8 percent this year, starts to decline below certain thresholds.

Another key question is whether the IMF will return to lending Greece money after it defaulted on an IMF loan, prompting the aid agency to refuse to provide money as part of a third rescue package.

IMF officials told Handelsblatt that the agency is willing to go ahead with an already promised aid program totaling €1.6 billion, but only in the event that Greek debt is judged to be viable going forward. An IMF analysis of the debt situation is scheduled to be conducted in the summer.

But the initial signs are not positive. In fact, the IMF’s internal estimates about Greek growth and a government budget surplus are far more pessimistic than those calculated by officials at the ESM. The IMF thinks Greece needs much greater debt relief than officials in Europe do.

This poses a political risk for Mr. Scholz. The German public is likely to react negatively to a European debt relief package of €100 billion while the IMF is balking at contributing more than €1.6 billion.

While Mr. Schäuble, often depicted as Europe’s bad cop, was a reviled figure in Greece during the debt crisis with his demands for more austerity when 20 percent of the population could not afford to buy adequate food, his position was extremely popular in Germany.

It is by no means certain that Ms. Merkel, a wily politician who will make the ultimate decision on debt relief for Greece, will go along if public support has evaporated. Her apparent line is that debt relief is not welcome, but not ruled out entirely.

“Medium-term debt relief measures may be considered after the end of the (current) program if a debt sustainability analysis to be prepared shows a need for this,” said a spokesman for Chancellor Merkel.

Martin Greive is a correspondent for Handelsblatt based in Berlin and Jan Hildebrand leads Handelsblatt’s coverage of tax, budget and economic policy from Berlin. To contact the authors: greive@handelsblatt.com and hildebrand@handelsblatt.com

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