IMF urges eurozone to ease Greece’s debt pile with interest cap
The International Monetary Fund confronted Germany over Greece’s unsustainable debt burden, issuing a bleak assessment of its financial future just as eurozone finance ministers prepared for a crunch meeting on debt relief.
As detailed talks begin on Tuesday to resolve a long-running stand-off with Berlin, the IMF signalled it would be standing its ground, calling for European creditors to forgo any Greek debt payments until 2040 and, most controversially, to fix interest rates at 1.5 per cent over that time in a move that could require other eurogroup members to plug yet more Greek gaps in the future.
While officials involved with the talks were upbeat about a deal taking shape that could be completed on Tuesday, negotiators have dug-in on specifics. Some eurozone officials are also disappointed Christine Lagarde, the IMF director and a key figure in brokering previous political deals over Greece, will be in Kazakhstan and unable to attend.
Analysts said the move to release the paper ahead of Tuesday’s eurogroup meeting was controversial but also a sign of the pressure Mrs Lagarde and the IMF’s staff were under from its non-European members to abide by the Fund’s rules and not to grant Athens or its European creditors any special treatment.
“It is very provocative,” said Andrea Montanino, a former Italian representative to the IMF now at the Washington-based Atlantic Council. “You have the IMF telling the Europeans what to do on their own debt. [Yet] in the whole document there is no word on what to do with the IMF debt.”
In its publicly-released paper, the IMF also gave little hint of compromise on its core assessment of the Greek economy, concluding in its debt sustainability paper that the Greek bailout programme’s budget surplus target of 3.5 per cent of gross domestic product was overambitious and unrealistic.
“In all key policy areas — fiscal, financial sector stability, labour, product and service markets — the authorities’ current policy plans fall well short of what would be required to achieve their ambitious fiscal and growth targets,” IMF staff wrote.
Most contentiously for Germany, the IMF called for a more “plausible” surplus target of 1.5 per cent, supplemented by extensive debt relief. A large part of that debt relief would come from fixing interest on all eurozone loans until 2040 at current market rates of about 1.5 per cent.
Both the IMF and eurozone officials believe the market for long-term fixed rate paper could not absorb the €200bn of debt that would have to be refinanced at that rate, meaning eurozone countries would need to offer a fiscal subsidy that Germany insists would be contrary to EU treaties.
“The fixing of the interest rates would in effect require a commitment by member states to compensate the ESM for the losses associated with fixed interest rates on Greek loans, or any similar commitment,” the IMF paper said. “This would clearly be highly controversial among member states in view of the constraints — political and legal — on such commitments within the currency union.”
The IMF also warned that “even under the proposed debt restructuring scenarios, [Greece’s] debt dynamics remain highly sensitive to shocks” and that European creditors could be forced to make even greater concessions down the line.
A modest slip in Greece’s long-run economic growth from 1.5 per cent to 1 per cent would yield a “downside scenario” that would make both its debt and gross financing needs “unstable” and could require European institutions to forgo any interest on Athens’ debts until 2050.
One live option remains the possibility of drastically scaling back the IMF’s exposure to Greece, potentially through an EU buyout of up to €14bn in IMF bailout loans.
Such a move could lower the debt-sustainability bar on future IMF loans. But even after a buyout, Greece may struggle to meet the IMF’s normal lending standards, especially in more pessimistic economic scenarios.
While Berlin is open to the idea of an IMF buyout, it wants the commitment to be tied to conditions Athens must fulfil, and only made at the end of Greece’s rescue in 2018. Wolfgang Schäuble, German finance minister, wants to avoid taking any big concessions or changes to the Bundestag before the 2017 federal elections.
The IMF did open some ground for a compromise. Its paper called for “an upfront unconditional component to debt relief” to reassure markets. But given Greece’s patchy reform record, the IMF says it “understands and supports” the eurozone’s desire to “make further relief contingent on programme implementation”. Its main stipulation is that any conditions should end in 2018 — a position that sits uneasily with Berlin.
The IMF concluded that Greece’s debt-to-GDP ratio would hit 174 per cent of GDP by 2020 and rocket to 250 per cent by 2060, assuming no relief. Greece’s gross financing needs — the funds it requires each year to roll over debt — would reach 30 per cent of GDP by 2040.
IMF’s debt restructuring options
In its report, the International Monetary Fund presented a number of debt restructuring options to ease Greece’s financial burden.
Extending maturities
The IMF suggests extending loans from the ESM and EFSF, the eurozone’s two bailout funds, by 10 years and 14 years respectively, and extending loans owed to Greece’s fellow eurozone governments (known as the Greek loan facility) by 30 years.
This would reduce Greece’s gross financing needs by 7 per cent of gross domestic product and its debt by 25 per cent of GDP by 2060 but would be “insufficient to ensure sustainability”.
A moratorium on payments
Another proposal is for “payment deferrals” until 2040 — which would mean Greece would pay none of the costs of servicing any of its bonds or loans for the next 24 years.
This would mean extending the grace period on its existing European Financial Stability Fund loans by another 17 years, ESM loans another 6 years, and loans owed to member states by 20 years.
In total, these measures would help reduce the country’s payments bill by 4.5 per cent of GDP over the next 24 years, according to the IMF.
Capping interest rates through debt swaps
The biggest concession to Athens proposed by the IMF would be to allow Greece to pay no more than 1.5 per cent of its GDP every year to service the costs of its ESM/EFSF loans until 2045 and a similar rate on loans to other countries.
The fund proposes this be done by swapping about €200bn of debt into longer term paper with lower repayments.
Earlier this year, the ESM tapped the market with a 2055 bond which yields 1.56 per cent while an ESM bond maturing in 2032 is returning 0.97 per cent to investors.
But the market may not absorb €200bn. So guaranteed low rates of interest could require eurozone governments to in effect pay a subsidy to Athens, a move that is likely to be highly controversial — and legally contentious — with some creditor countries, above all Germany.
Still, the fund says this option would drastically reduce Greece’s financial burden, reducing Greece’s debt by 151 per cent of GDP and its gross financing needs by 39 per cent by 2060.