Merkel, Lagarde Close Ranks on Debt Relief

Europe Greece Bailout
Ms. Merkel and Ms. Lagarde may have found common ground on Greece, Source: AP

A major breakthrough in the long-running dispute between Germany and the International Monetary Fund over Greece’s bailout program may be in the works.

IMF Chief Christine Lagarde left her meeting with Chancellor Angela Merkel feeling “much more optimistic” about finding a solution to Greece’s debt problem.

Speaking in an interview with German public broadcaster ARD, Ms. Lagarde wouldn’t reveal her reasons for being upbeat after butting heads for months with Berlin. But the change in tone likely has to do with what Ms. Lagarde heard from Ms. Merkel.

According to information obtained by Handelsblatt, Ms. Merkel signaled to Ms. Lagarde that she is willing to support some additional debt relief for Greece, agreeing to one of the IMF’s key demands.

Berlin, however, was skeptical about capping interest rates, voicing concern that such a move would effectively turn the euro zone into a transfer union.

The German government has publicly opposed debt relief in the past. In December, Finance Minister Wolfgang Schäuble said Athens needed to focus on structural reform instead. The IMF has threatened to walk away from the Greek bailout if the country’s debt isn’t made more sustainable.

But Berlin has changed its tune in private. Sources said Ms. Merkel and Ms. Lagarde discussed various options for easing Greece’s debt load. The German government could imagine extending the maturity of Greece’s debt. Berlin, however, was skeptical about capping interest rates – the IMF has called for interest on bailout loans to be capped at 1.5 percent – voicing concern that such a move would effectively turn the euro zone into a transfer union.

Debt relief for Greece would come in the summer of 2018 as agreed by the euro zone finance ministers last May. But Ms. Merkel has signaled willingness to draft concrete plans for debt relief before then, fulfilling another IMF demand.

While German support for debt relief will come as welcome news in Athens, there is an important catch. Greece first has to implement all of the structural reforms tied to its bailout and agree to additional reforms that will be implemented in 2019 and 2020.

That could create a political problem for Greek Prime Minister Alexander Tsipras, who faces domestic pressure to ease the conditions attached to its bailout. In particular, Mr. Tsipras wants implement controversial changes to Greece’s pension system only if Athens misses its budget goals. The IMF, for its part, doesn’t view the reforms as optional.

Ms. Merkel and Ms. Lagarde agreed that Mr. Tsipras should face increased pressure to implement all of the structural reforms. The major players would start drafting debt relief plans only after the Greek government has followed through with its obligations.

The parties would aim to finalize an agreement on debt relief before the IMF board meets to discuss participating in Greece’s bailout program. The next tranche of relief would be paid out afterwards.

The troika – the European Commission, the European Central Bank and the IMF – are set to arrive in Athens on Monday to discuss pension and tax reforms with the Greek government.


Martin Greive and Jan Hildebrand are political correspondents for Handelsblatt based in Berlin. To contact the authors: and

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