Greek Debt Relief 2.0 Is Coming as IMF Rips Euro-Area Offer

Inside the EU and IMF Dispute Over Greece
  • Finance ministers meet Tuesday in Brussels to discuss aid
  • Greece’s 321 billion euros of debt on the group’s agenda

Five years after handing Greece the biggest sovereign-debt write-off in history, European policy makers have come full circle to the point they had all hoped to avoid: a real discussion on debt relief. 

Despite all the efforts to shrink Greece’s debt since the start of the financial crisis, the country’s economy has shrunk at a faster pace, so its obligations have become increasingly onerous. With the country’s debt-to-gross domestic product almost 70 percent larger than it was in 2008, the International Monetary Fund is insisting that more restructuring is required to make the nation’s finances sustainable. With almost all of Greece’s debt now held by official lenders, it’s taxpayers who will be footing the bill rather than investors.

Euro-area finance ministers convene in Brussels on Tuesday, primarily to discuss the disbursement of a proposed 11 billion euros ($12.3 billion) in aid for Greece, but also for talks on how to ease its 321 billion euros of debt through lengthening loan maturities, lowering interest rates and postponing payments. The IMF and officials from European creditors will join the ministers to wrangle over the scope of relief with the Washington-based fund urging for the most drastic measures.

“Everybody agrees that Greek debt needs to be sustainable,” European Commission Vice President Valdis Dombrovskis said in Brussels on Monday. Finance ministers will “assess Greek debt and look at some measures for the short, medium and long term.”

Tuesday’s meeting may become a showdown between the IMF and euro-area nations led by Germany that are restrained by domestic electorates that have grown weary of helping the Greeks, with elections due next year in the Netherlands and the region’s biggest economy.

The European hard-liners are resisting the fund’s demand that debt forgiveness be nailed down before Greece’s bailout program ends in 2018, fearing that without that carrot, Greek authorities could take their foot off the gas. The IMF argues that clarity is necessary to restore investor confidence.

“Debt relief conditional on policy implementation should not extend beyond the program period,” the IMF said in its preliminary debt sustainability analysis for Greece published on Monday.

Greece’s Targets

The IMF and the European creditors are also at odds over the length of loan-maturity extensions, the postponement of payments and the future strength of the Greek economy -- with the fund disputing the euro area’s assumption that Greece can sustain a primary surplus of 3.5 percent of GDP.

“Hopefully there will come an agreement and, with that, confidence from investors in Greece will return,” Dutch Finance Minister Jeroen Dijsselbloem, who is leading Tuesday’s meeting, said at Leiden University in the Netherlands on May 23.

The gathering will be the first time that finance chiefs and creditors will discuss Greek debt “seriously,” he said.

In the third quarter of 2008, Greece’s government obligations were 106 percent of its gross domestic product. Today, five general elections and three international bailouts later, it has rocketed to 177 percent. When the bonds were restructured in 2011, the officials planning Greece’s financial recovery were targeting debt at 120 percent of GDP by 2020.

Paying Greece

Greece’s 10-year bonds rose to their highest level in six months after lawmakers passed additional austerity measures Sunday night. Greece’s 1.5 billion euros of 3 percent notes due 2026 rose 0.2 cents to 76.1 cents on the euro at 10:58 a.m. in Athens, adding to a gain of 1.38 cents on Monday.

Nearly all of the austerity conditions that Greece had to meet to get its hands on the next loan have been delivered, paving the way for finance ministers to approve the release of the latest aid installment. It comes from the 86 billion-euro rescue agreed on last year and will help Greece clear its arrears and cover debt-servicing needs.

The latest disbursement would include enough for a 2.3 billion-euro payment scheduled to the European Central Bank in July, according to a draft of the Commission’s compliance report for the Greek economic program seen by Bloomberg News.

“Upon the full implementation of prior actions by the Greek authorities and full completion of the relevant national procedures” euro-area finance ministers have said they will support the new disbursement for Greece, European Commission spokesman Margaritis Schinas told reporters in Brussels. “The commission also stands ready to assist in the discussion on debt measures which it supports.”

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