I.M.F. Report Shines Uncomfortable Light on Greece’s Financing Gap
By JACK EWING
JULY 15, 2015
The I.M.F. was not saying anything different from what it and its chief, Christine Lagarde, had quietly told eurozone leaders last weekend.
But by going public with its warnings, the fund was putting the world on notice: Without some relief that might enable Greece to grow its way out of debt, the I.M.F. is unwilling to continue throwing good money after bad.
The question in the next couple of days will be whether that frank appraisal helps or hinders attempts to keep Greece in the eurozone.
The stark assessment could prove useful to the bailout debate if it leads to serious discussion about debt relief. But the report also raises the risk that lawmakers in countries like Germany, whose approval is required for any deal, will balk at the huge sums involved and prefer to cut Greece loose.
The size of Greek’s financing gap was not a surprise to eurozone leaders, who had the I.M.F.’s updated estimates in hand when they sat down in Brussels last weekend. Ms. Lagarde, the managing director of the I.M.F., took part in the all-night talks, although since it was a meeting of eurozone heads of state she was essentially an observer.
But while the agreement that was announced Monday morning in Brussels acknowledged the need for debt relief, the leaders offered few details and said they would not forgive any of Greece’s debt, a so-called haircut. By releasing the new estimates publicly late Tuesday, the I.M.F. put pressure on the eurozone countries that hold most of Greece’s debt to pay more attention to the issue as they discuss a new rescue package for Greece.
The I.M.F. said on Wednesday that it had been warning eurozone leaders for some time that Greece’s debt was not sustainable, and that the release of the updated report was not timed to put pressure on them.
Critics say the I.M.F. shares the blame for the Greek morass, saying that until recently the fund was complicit in the wishful thinking that has driven policy on Greece since the debt crisis began in 2010.
But as a result, after five years of rescue plans designed and financed with I.M.F. help, Greece is effectively back where it started — awash in debt and at risk of being flushed out of the eurozone.
“It has been a nightmare,” said Guntram Wolff, the director of Bruegel, a research organization in Brussels.
Besides threatening the unity of the eurozone, Greece has hurt the image of the I.M.F. and been a financial drain on the fund. Long a lender mainly to developing countries, the I.M.F. in the last five years has become the de facto eurozone bailout agency, with nearly two-thirds of its outstanding loans tied up in Greece, Ireland and Portugal.
Greece is the I.M.F.’s single largest debtor, owing the fund $23.6 billion, or 28 percent of the fund’s credits outstanding. And since June, Greece has fallen €2 billion behind on its payments to the fund, the largest arrears in I.M.F. history.
Mr. Wolff, an economist who has advised the I.M.F., was critical of the fund for agreeing to past plans that did not acknowledge the full extent of Greece’s debt problem. “They signed up to a program that was not sustainable,” Mr. Wolff said.
Responding to such criticism, Olivier Blanchard, the chief economist of the I.M.F., pointed out in a blog post last week that policy makers in 2010 were still fearful that Greece could be another Lehman Brothers, with the capacity to provoke a broad financial crisis. That made leaders reluctant to give Greece a big break on its debt.
“The risks were perceived to be too high to proceed with restructuring,” he wrote.
The release of the latest estimates on Greek debt was a sign that the fund has learned its lesson. A senior official of the I.M.F., speaking on condition of anonymity, said Tuesday that the fund would not be a part of any future plan that did not include serious debt relief.
On Wednesday, I.M.F. sources who insisted on anonymity said the statement was not meant as a threat, simply a reminder of the fund’s rules: It is not allowed to pour money into a hopeless situation.
Valdis Dombrovskis, a European Commission vice president responsible for the euro, said on Wednesday that debt relief was “back on the table” after the Brussels summit meeting.
“Certainly this issue is also going to be part of the discussions,” Mr. Dombrovskis said.
Greece’s debt may not be as insurmountable as it seems. Even if eurozone leaders do not forgive any of the debt, they could push payments so far out into the future that it doesn’t matter. The I.M.F. suggested as much in the report released Tuesday.
“You kick it two generations into the future,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “It essentially disappears, given the grace period.” Political leaders can still claim to their voters that Greece will have to pay back everything it owes — even if it might not be in many of the politicians’ or voters’ lifetimes.
Already, there were signals from Berlin on Wednesday that the German government was open to some form of debt restructuring, as long as it did not include outright forgiveness of the debt.
Mr. Kirkegaard predicted that the I.M.F.’s new appraisal of Greece’s debt needs would help push leaders toward a deal.
“The report shows what everyone knows,” he said. “It’s their job to use the megaphone and say, ‘This is the situation.’ I strongly applaud them for doing it.”
The risk is that members of the German Parliament, whose approval is needed for any new rescue plan, will not accept any debt restructuring. Already, a strong faction of political leaders and economists in Germany believe Greece is hopeless and should leave the euro.
There is only a short time left for Greece to fulfill tough conditions set by the European creditors, which they set as a prerequisite to any talks on debt relief. Greece faces a crucial deadline on Monday, when it must make a payment of €4.25 billion on bonds held by the European Central Bank.
Greece is expected to be a major topic when the central bank’s policy board, the Governing Council, meets on Thursday. Mario Draghi, the president of the European Central Bank, will hold a news conference afterward.
On Wednesday, Jacob J. Lew, the United States Treasury secretary, met with Mr. Draghi. Their handlers declined to say what the two men discussed, but Mr. Lew, who has been outspoken in pushing eurozone leaders to keep Greece in the currency bloc, planned to “discuss the path forward for Greece within the eurozone,” the Treasury Department said in a statement.
On Thursday, Mr. Lew was scheduled to meet in Berlin with Wolfgang Schäuble, the German finance minister, and in Paris with Michel Sapin, the French finance minister.
The Greek government will probably be unable to make Monday’s payment to the central bank unless it can secure some sort of temporary financing from the European creditors. Failure to repay the money might force the central bank to withdraw the emergency support that has been propping up Greece’s banks.
If the banks fail, it will intensify the downward spiral of the Greek economy — the crash that the I.M.F. is now sounding alarms about.
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