“The Greek debt will have to be addressed,” IMF Managing Director Christine Lagarde said in Washington yesterday. The IMF has indicated that additional aid for Greece will have to come from Europe, suggesting that the euro area may need to consider losses on bonds held by the European Central Bank or loans extended by governments.
Greece’s financing gap won’t be solved with the budget measures being discussed because its growth prospects are too weak, Lagarde said at the Peterson Institute for International Economics in Washington. She said efforts to find 11.5 billion euros ($15 billion) in additional savings won’t be enough to shore up the bailout jointly supervised by the IMF, the European Commission and the ECB.
The comments by Lagarde, who is scheduled to meet German Chancellor Angela Merkel in Berlin tomorrow, put pressure on the euro zone to grant Greece further relief by restructuring its debts. Greece has received 240 billion euros in aid pledges in a pair of bailout packages. Investors took losses in a debt exchange this year, losing 53.5 percent of the face value of their holdings and reducing the country’s debt by about 100 billion euros.
Because there is so little debt left in private hands, Europe may now need to pick its moment to tackle so-called official-sector involvement, said Carsten Brzeski, senior economist at ING Groep NV in Brussels.
“This is exactly the road we’re taking, but it is politically very, very touchy,” Brzeski said in a telephone interview today.
Brzeski estimated the ECB holds about 40 billion euros in Greek debt acquired through its Securities Market Program, which so far has maintained seniority over other creditors, as well as more bonds accumulated through other operations. Euro-area nations provided about 53 billion euros in bilateral loans to Greece as part of an initial bailout program.
German officials so far have ruled out debt writedowns. Michael Meister, finance spokesman for German Chancellor Angela Merkel’s Christian Democratic Union, dismissed speculation that Greece’s official creditors will be forced to write off some of their exposure.
“How could we possibly do that,” he said in a Bloomberg Television interview yesterday. “Where would it stop? We’re talking about loans from as recently as last year. The German parliament would not go with it.”
Greece must keep cutting its debts as a condition of accessing its bailout funds while its economy remains mired in a fifth year of recession. Two Greek elections have produced a shaky governing alliance of pro-euro politicians under constant attack from the anti-bailout opposition.
The so-called troika that represents international lenders has agreed to take a week-long break from inconclusive talks with Greece to carve out the new budget package. Lagarde’s comments suggested an agreement may have to go beyond these measures.
Lagarde signaled that the IMF won’t budge on Greece’s targets, which call for reducing debt to 120 percent of its gross domestic product by 2020. This goal “is still clearly the horizon that is set in order to measure the efforts to be undertaken by then,” she said in yesterday’s speech.
She continued to indicate that Greece may get more time to meet its obligations, noting that the IMF has recommended slowing the pace of fiscal adjustment for Portugal and Spain. At the same time, Lagarde said the euro area needs to find a permanent solution.
“The last thing we want is for programs to be off track and off track and off track again,” Lagarde said.