Editorial Board

Greece: The Implacable Meets the Incorrigible

It's hard to imagine things could get worse between Greece and its creditors, but they just did and the possibility of default is closer. The Greeks have been exasperating, but the IMF and the EU are as much to blame. The solution remains available and clear: reform for debt relief.

Patience with Tsipras is starting to flag.

Photographer: LOUISA GOULIAMAKI/AFP/Getty Images

It's hard to believe that the talks between Greece and the European Union could get any more acrimonious without punches being thrown. This week it almost came to that. The prospect of default followed by Greece's exit from the euro zone moved a step closer.

On Thursday, the International Monetary Fund said it was pulling its staff out of the talks -- a measure of exasperation at the failure of the Greek government to engage. EU President Donald Tusk rebuked Greek Prime Minister Alexis Tsipras in unusually forthright terms. "There is no more time for gambling," he said. "The day is coming, I am afraid, that someone says the game is over."

Greece's Fiscal Odyssey

Tsipras and his team have been both devious and incompetent, uniting their creditors in the view that they're impossible to reason with. Iteration towards agreement seems beyond them: Concessions are offered, and then withdrawn. Until recently the European Commission had taken a more accommodating line. That too seems to be over. Commission President Jean-Claude Juncker says Greece has "lost the European Commission."

Yet the blame is not all on the Greek side. The substance of the creditors' demands was misconceived from the outset. They insisted that the current bailout arrangement, which runs out at the end of this month, be honored, even though it's a widely acknowledged failure. The successor agreement, if any, will be a failure as well, unless it includes new debt relief. At Germany's insistence, the creditors have refused to talk about this.

Related: Greece Default Watch

Tsipras faces a severe test in selling any agreement that demands further sacrifice to his country, and more particularly his party. The creditors responded as though that were his problem, which is hard to square with Europe's supposed commitment to solidarity. Rather than show concern for the plight of ordinary Greeks, or help Tsipras make a case to his voters, the creditors chose to insist that he cross his party's red lines in areas such as pension reform.

The IMF's role has been unhelpful. Europe is rich and Greece is tiny: The EU didn't need IMF funds to resolve this crisis. The fund's job was to act as a fiscal disciplinarian, ruling on whether Greece's promises would be sufficient to make the country's debt sustainable.

That put the IMF in an awkward position, because its doubts on the sustainability of Greece's debts cut two ways. Either Greece, burdened with massive unemployment, would have to raise taxes and cut public spending further; or some of its debt would have to be written down. As an independent analyst, the IMF might have given more weight to the second option. As a creditor, it was obliged to make common cause with the EU, whose leaders -- for reasons of politics -- had set their faces against further debt relief.

The compromise capable of resolving this crisis hasn't changed: a moderation of the fiscal austerity imposed on Greece, a credible commitment from the government in Athens to undertake further long-term reform, and new debt relief. An outcome lacking any of these components will fail. It is Europe, as much as Greece, which is opposing a settlement of this kind.

If Greece defaults and Grexit follows, the Greeks will find to their horror that their suffering can still get worse. If the EU lets this happen, it will be making its worst mistake since the creation of the euro.

    -- Editors: Clive Crook, Marc Champion

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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