IMF Seeks to Keep Wiggle Room While Backing Greek Debt Deal

Greek Debt: Has the Can Been Kicked Down the Road?
  • More details on Greek debt relief needed, fund official says
  • IMF could grant new loan to Greece by the end of this year

The IMF sought to maintain leverage in Greek debt talks after the lender retreated from a key demand and agreed to work on a new loan to the country to support its latest bailout accord with Europe.

International Monetary Fund staff want to see more details from the Europeans on their Greek debt-relief plans before presenting the loan proposal to the fund’s executive board later this year, an IMF official told reporters Wednesday on condition of anonymity. The board retains ultimate authority to approve the deal and the IMF could potentially judge that the European measures aren’t sufficient, the official said.

The preliminary accord reached earlier in the day by finance ministers in Brussels paves the way for Greece to receive a 10.3 billion euro ($11.5 billion) payout under a bailout from its European creditors. The agreement doesn’t require euro-area governments to provide debt relief before Greece receives the money, as the IMF had argued was necessary to keep the country’s borrowing burden sustainable.

All Engaged

“There’s plenty of wiggle room for everyone to stay engaged,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “For an organization like the IMF, whose business it is to be preferably the only global financial-crisis firefighter, to walk away from a country as high profile as Greece would be very damaging.”

For a quick guide to Greece’s financial odyssey, click here.

Still, he predicts the fund’s involvement will be relatively limited compared with past bailouts.

“The IMF will remain involved financially, but overall their involvement will be scaled back dramatically.”

The Washington-based fund has clashed with Europe over the future of Greece’s economy, raising doubts about whether the IMF will finance the nation’s recovery. The fund continues to believe Greece’s budgetary targets under the European bailout are impractical, according to the IMF official. Germany, the currency zone’s biggest economy, has resisted any debt relief until Greece delivers on reforms.

“If you look at what the IMF was at least publicly trying to achieve and what Germany was trying to achieve, the outcome was closer to Germany’s wish list,” said Diego Iscaro, senior economist at IHS Inc. in London.

Conference Call

Only last month, the chances of a new IMF loan for Greece looked remote. Greek Prime Minister Alexis Tsipras and IMF Managing Director Christine Lagarde exchanged sharply worded letters after the leak of a conference call by fund officials on the Greece negotiations. Lagarde said then that a new loan remained a “good distance away,” adding that the fund “can only support a program that is credible and based on realistic assumptions.”

A new loan would be a fresh test of credibility for the IMF, which has been burned by Greece in the past.

Worried that a Greek default might trigger a European banking crisis, the fund’s board agreed in 2010 to waive a condition of IMF bailouts that requires the borrowing nation’s debt to be sustainable. The use of a loophole known as the “systemic exemption” allowed Greece to borrow 30 billion euros over three years.

In an analysis released earlier this week, IMF staff listed a number of factors that caused Greece’s debt to spiral, including a deeper-than-expected recession and the failure of the Greek government to follow through on reforms.

Missed Payment

Last year, Greece became the first advanced economy to miss a payment on IMF debt, joining the historical ranks of delinquents from Cuba to Zimbabwe. Greece repaid its arrears to the IMF after securing an 86-billion-euro bailout from its European creditors.

This time, the IMF won’t be able to use the same systemic exemption. In January, the fund scrapped the clause at the behest of U.S. Republican lawmakers, who felt the IMF shouldn’t bend its lending rules.

The fund’s latest move to bail out Greece “raises doubts as to the IMF’s independence from euro-zone politics and institutions, as well as its stewardship of U.S. taxpayer resources,” Michigan Representative Bill Huizenga, Republican chairman of a House subcommittee that oversees IMF issues, said in a statement on Wednesday.

The fund could still grant Greece “exceptional access” -- meaning it can borrow more than it would be normally allowed, based on its share of IMF capital -- even if Greece’s debt is found not to be sustainable with a high probability. But in that case, the executive board will have to be convinced that Greece is undergoing a sufficient easing of its debt burden to protect the IMF’s resources.

European Commitment

IMF staffers may face skepticism about a new Greece loan from board directors representing emerging markets such as China and India, said Domenico Lombardi, director of the global economy program at the Centre for International Governance Innovation in Waterloo, Ontario. But their concerns will probably be mollified by the relatively small size of the funding request, as well as the debt-relief commitments secured from the Europeans, he said.

“With this agreement, Lagarde can credibly say that the IMF has laid down an exit strategy for Greece,” Lombardi said.

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