Schaeuble, Lagarde Seek to Bridge Greek Gap Amid Talks Deadlock

  • IMF reiterates assurances to join bailout in Davos meeting
  • German Finance minister said he’d balk at bailout without IMF

German Finance Minister Schaeuble on Greece

The International Monetary Fund sought to dispel concerns it won’t be part of the latest Greek bailout program.

A day after German Finance Minister Wolfgang Schaeuble hinted he’d discontinue the program that has kept the continent’s most indebted state afloat if the IMF walks away, the fund’s Managing Director Christine Lagarde assured him of her support.

Lagarde told Schaeuble in a meeting on Friday in Davos, that “the Fund will remain fully engaged in the discussions, with the aim of reaching early agreement on a program that could be supported by the use of Fund resources,” according to an e-mailed statement from the Washington-based institution.

The meeting took place after Schaeuble told Bloomberg’s editor-in-chief John Micklethwait that if the IMF declines to join the current arrangement of emergency loans, he would have to seek German parliament approval for a new lifeline that he may not himself support.

“I would not give the advice that we should try to get the permission of German parliament,” he said in an interview on Thursday. Lawmakers would say that if Greek authorities “are not able, with all the flexibility granted by European institutions, to stick to what they have approved, the precondition for a program is no longer” there, he told Bloomberg.

German Finance Minister Schaeuble on Greece

Source: Bloomberg

Greek government bonds fell on Friday, with yields on 2019 notes rising 6 basis points to 7.3 percent at 11:40 a.m local time in Athens.

Up to Greece

Auditors representing the European Commission, the European Central Bank, the European Stability Mechanism and the IMF are locked in talks over the terms attached to the latest round of emergency loans keeping Greece in the euro area. Even though the current facility is backed only by ESM loans, euro area governments have promised their voters the IMF will eventually join. Germany says that the credibility of the program rests on IMF participation.

Despite assurances, IMF staff say the current fiscal targets attached to the ESM-backed bailout are too ambitious and should be eased via additional debt-relief measures. The fund also accuses the Greek government of overtaxing businesses and the middle class to offer an unjustifiably high income-tax-free threshold and overly generous pensions.

“If Greece’s government will not stick to what they have agreed, and that is the reason why IMF is hesitating to join, it’s not the problem of the IMF, it’s the problem of Greek authorities,” Schaeuble said. “If that would happen, the program will be ended.”

Fiscal Gap

An official directly involved in the stalled Greek bailout review said European auditors want Greece to legislate additional belt-tightening measures of 700 million euros ($746 million) in order to meet its fiscal targets for 2018. About 500 million euros of these measures have been agreed to so far.

IMF staff claim the measures will yield 400 million euros, will only have a temporary effect on Greece’s budget in the medium term, and will take the primary budget surplus to 1.5 percent of its gross domestic product in 2018, not 3.5 percent envisaged in the ESM-backed bailout. The official asked not to be named, as discussions are ongoing and the figures aren’t final.

The Eurogroup of finance ministers from the currency bloc will on Jan. 26 discuss the state of play of the review, which is a year behind the original schedule. Completing the review is a condition for disbursing additional emergency loans to Greece, which was last able to tap international debt markets in 2014. It is also a condition for including Greek bonds in the ECB’s asset purchase program and hence smoothening its path back to bond markets.

The official involved said the current deadlock can only be resolved if Germany and other euro-area states agree to lower Greece’s budget surplus targets to 1.5 percent of GDP, as the IMF has been asking, in which case more debt-relief measures would be needed. The second option would be for Greece to legislate conditional fiscal measures, including pension cuts and a lower income-tax-free threshold, which will be triggered if the country fails to meet the target of 3.5 percent. The government of Alexis Tsipras, which has seen its popularity plunging in polls, has refused to legislate such measures.

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