Lagarde Push for Greece Debt Relief Challenges Merkel

There Is Still a 60% Chance of ‘Grexit’: Gallo

Now that Greece is eligible again for loans from the IMF, getting any more money from the fund may hinge on a test of wills between Christine Lagarde and Angela Merkel.

The bailout of as much as 86 billion euros ($95 billion) proposed by European leaders this month assumes financing from the International Monetary Fund and is conditional on Greece seeking a new loan program from the IMF once the current one expires in March. The Washington-based IMF, which requires borrowers to have sustainable debt, has made clear it won’t ask its 187 other member nations to approve a deal until euro-area states significantly ease terms on existing loans.

That means that either Lagarde, the IMF managing director, or German Chancellor Merkel may need to cede ground if Greece is to receive bailout money from the IMF. Merkel has been reluctant to commit to debt relief, while Lagarde, asked in a French radio interview if the accord is viable without debt restructuring, said: “The answer is quite categorically not.”

“There will come a time in the next three months that there will be a tense moment between the IMF and Germany,” said Stephen Jen, a former IMF economist who is now managing partner at SLJ Macro Partners LLP in London. “They are basically telling the Germans there has to be a debt realignment before they would participate.”

IMF spokesman Gerry Rice said Thursday the fund’s participation in the new bailout is contingent on a balanced approach that includes both Greek reforms and a commitment to the required financing. “We’ve said pretty clearly that debt relief is required,” Rice told reporters in a regular briefing in Washington.

Parliament Action

Greece’s parliament early Thursday passed a second bundle of measures demanded by the country’s European creditors as Prime Minister Alexis Tsipras urged lawmakers to stop the country from being forced out of the euro. Tsipras won the support of 230 lawmakers in the country’s 300-seat legislature for a bill that will simplify court decisions and apply European rules to failing banks.

The push by Lagarde, who was previously French finance minister, sticks Merkel with the choice of bending to the IMF’s terms or potentially driving the fund away from the bailout. The chancellor sought IMF participation in 2010, over the initial objections of Finance Minister Wolfgang Schaeuble, to secure the fund’s expertise in restructuring struggling countries and benefit from its reputation as a guarantor of strict terms and enforcement.

While Merkel hasn’t signed on to debt relief for Greece, she hasn’t ruled it out. The chancellor told German broadcaster ARD on Sunday that euro-area leaders will discuss extending debt maturities and lowering interest rates “when the first successful assessment of the program being negotiated now is completed.” She dismissed the prospect of a “haircut,” or principal reduction.

Greek Haircut Won't Happen, Germany 'Entrenched': Teneo

Lagarde’s Choice

If Greece fulfills its end of the accord, and Europe fails to agree on debt relief or offers less-generous terms than the IMF says are needed, then the choice will rest with Lagarde. In 2010, the IMF bent its rules by lending to Greece even though staff questioned whether the country’s debt was sustainable. At the time, fund officials were worried about the financial contagion a Greek default would unleash.

Greece needs debt relief “far beyond” what European creditors have been willing to consider, either by extending repayment for decades or effecting deep writedowns on the value of Greek debt, the IMF said in a staff analysis distributed to the fund’s board on July 10.

The fund estimated Greece’s debt will peak at close to 200 percent of gross domestic product in the next two years, compared with 170 percent forecast in an analysis dated June 26.

Without the 17 billion euros still available under the IMF’s 2012 Greek bailout, or money that may arrive next year in a new program, prospects of an exit from the currency zone may rise.

If Greece fulfills its end of the accord, and Europe fails to agree on debt relief or offers less-generous terms than the IMF says are needed, then the choice will rest with Lagarde
If Greece fulfills its end of the accord, and Europe fails to agree on debt relief or offers less-generous terms than the IMF says are needed, then the choice will rest with Lagarde
Qilai Shen/Bloomberg

Reconciling Positions

There’s still time for the IMF and European positions on debt relief to be reconciled. While ruling out principal reductions on the European-held debt, the leaders’ proposal says euro-area nations are willing to consider longer grace periods and maturity extensions.

The IMF probably won’t provide new financing in the first round of the European bailout, Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. If Greece demonstrates it can deliver on promised reforms, and if European leaders follow up with debt relief, the fund could be in a position to disburse more aid in the first quarter of next year, he said.

“I actually don’t view the European and IMF positions to be that far apart,” Kirkegaard said.

The biggest challenge to the new bailout could be Greece’s ability to deliver on reforms without a collapse in support for Tsipras’s Syriza party, which campaigned on an anti-austerity agenda, said Martin Edwards, an international-relations professor at Seton Hall University in South Orange, New Jersey.

“Tsipras is going to have to do something to shore up his support,” said Edwards, who has researched IMF lending programs. “He may be politically spent, having gone through all this brinkmanship.”

Current Greek Government Won’t Survive Long: Smith

Read this next:

Before it's here, it's on the Bloomberg Terminal. LEARN MORE