Latest Turn in Greek Debt Crisis Is Kafkaesque: QuickTake Q&A

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  • 2017-04-25|Bloomberg|Article

Greece’s next dollop of bailout money is caught in an international dispute with no clear resolution. The heavily indebted Mediterranean nation needs the next installment of about 7 billion euros ($7.6 billion) to repay lenders in a few months, but some euro-area governments, notably Germany, refuse to supply more money until the International Monetary Fund comes on board. The IMF, in turn, is refusing to join the creditors’ club until Greece’s debt burden is eased -- which Germany refuses to do. Franz Kafka would appreciate the absurdity of the latest twist in the Greek debt crisis, though investors aren’t amused.

1. Isn’t it the IMF’s job to help countries in distress?

Yes, but having come to Greece’s rescue twice in the past, this time it’s hesitating. The IMF says two conditions must be met before it co-finances the country’s ongoing third bailout. First, Athens must agree to a set of credible reforms, particularly of its pension and tax systems. Second, the IMF insists that the euro area ease Greece’s debt burden. While neither condition has been fully met, talks have advanced on the fiscal policies Greece needs to implement to get fresh bailout loans.

2. Why is the IMF so concerned about the debt burden?

Like all creditors, the IMF wants to be repaid. More importantly, the fund’s own credibility is on the line. Its rules don’t allow it to finance countries with unsustainable debt loads. Having to answer to 189 member-states, the IMF doesn’t want to be seen giving Greece special treatment. Doing so could tarnish its reputation, which has already suffered from its seven-year involvement with the country.

3. Why is Germany insisting on IMF involvement?

Germany and other euro-area governments think IMF participation strengthens the credibility of the Greek bailout. They see the fund as impervious to political interference and possessing the technical expertise to push for deep structural overhauls. Having the fund on board also gives European elected officials political cover in the eyes of their taxpayers. But German Finance Minister Wolfgang Schaeuble has been equally adamant that Berlin won’t grant the kind of debt relief the IMF demands. Backing down could be politically costly for him and Chancellor Angela Merkel before September’s elections.

4. Does Greece really need debt relief?

It depends whom you ask. The country already enjoys favorable borrowing terms on its European loans, as well as grace periods on its repayments, so most euro-area creditors say enough has been done for the time being and the matter should be revisited in 2018, when the current bailout expires. Also, if Greece manages to maintain high primary surpluses (which exclude interest payments), as it has promised to do at least for the next few years, the need for debt relief could be smaller, they say. But the IMF has consistently had a more pessimistic outlook, and doesn’t share the view that the reforms already agreed to will yield the savings the Europeans expect. It isn’t realistic, the IMF says, to expect Greece to service its debt by maintaining a stellar budget performance in perpetuity.

5. How much debt is Greece carrying?

The latest figures show Greece’s debt stands at 179 percent of its gross domestic product, or about 315 billion euros. By comparison, the U.S.’s public debt stands at about 77 percent of GDP. Currently the country owes about 216 billion euros to the European Stability Mechanism, the euro-area bailout fund (and its predecessor), as well as to other euro-area countries.

6. How is Greece’s economy doing?

The IMF in April cut its forecast for 2017 economic growth to 2.2 percent from 2.8 percent. Analysts expect the government to miss its official target of 2.7 percent growth. The pace at which the government had been trimming its bad loans has slowed, and arrears to domestic suppliers and vendors are growing. Prolonged negotiations over whether Greece is abiding by the terms of its bailout have also raised uncertainty about the economy. But both Greek authorities and creditors believe that if the review is successfully concluded in May, recovery will get back on track.

7. What kind of debt-relief measures are being tossed around?

Both the IMF and the euro area have ruled out a nominal haircut to the face value of Greek bailout loans or bonds held by private investors, while any further debt-relief measures would apply only to loans Athens has received from the euro area. Last May, euro-area finance ministers agreed on the outlines of a possible package with short- and longer-term measures. The short-term measures, which are already being enacted, focus on improving Greece’s debt management, mainly by shielding the country from future interest-rate increases. The longer-term steps, which won’t kick in until the end of the bailout in 2018, include capping interest payments and extending loan maturities and payment grace periods. Other options include using money from the euro-area bailout fund to repay IMF loans earlier, and applying profit that euro-area central banks earn on their Greek bond holdings to the country’s future financing needs. The IMF wants these measures to be implemented to the greatest extent possible, and has been asking for longer extensions and grace periods than the euro area has so far been willing to commit to.

8. What’s Greece likely to get in the end?

So far the IMF has been asking for more than what the euro area is willing to give. It remains unclear how the parties will resolve the conundrum -- getting the fund on board without new debt relief -- and how far the euro area would have to move, if at all, from what it committed to last May. As negotiations restart in Athens this week, the issue will loom over the talks. The government of Alexis Tsipras has said it will only enact additional belt tightening if debt relief is also agreed to.


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