Exclusive: IMF, EU clash over Greece's bailout prospects

ATHENS/WASHINGTON Wed Sep 26, 2012 9:59am EDT

1 of 4. German Chancellor Angela Merkel (L) and the Director of the International Monetary Fund, IMF, Christine Lagarde, chat as they arrive for the 70th birthday reception for German Finance Minister Wolfgang Schaeuble, unseen, in Berlin, September 26, 2012.

Credit: Reuters/Michael Sohn/Pool

ATHENS/WASHINGTON (Reuters) - Greece's international lenders are at loggerheads over how to solve Athens' debt crisis, threatening more trouble for the euro as the IMF demands European governments write off some of the Greek debt they hold.

Officials from Greece and the "troika" of European Union, European Central Bank and International Monetary Fund have told Reuters that tensions among them have increased of late as the Washington-based Fund has played tough.

It has been pushing to restructure debts Athens owes to public-sector foreign creditors. EU leaders prefer to give Greece more time to meet bailout goals.

While strains between Greece and its would-be saviors have been evident, as significant are frictions among the lenders.

"The problem is not between the IMF and Athens, it's between the IMF and the EU," one Greek official said, speaking like others on condition of anonymity. That view was confirmed by sources familiar with thinking in Brussels and Washington.

Already facing an electoral backlash over bailouts and austerity, and unsure what may be needed to defend the creaking public finances of heavyweights Spain and Italy, EU leaders do not relish IMF proposals that they swallow tens of billions of euros of losses on their holdings of Greek government bonds.

"Europe wants more time to see what will happen with Spain and Italy, perhaps even after the German election in 2013," the Greek official said. "The IMF wants Europe to come up with a comprehensive solution to its problems now."

The Fund, brought in for its expertise, global financial firepower and reputation for imposing fiscal discipline, is for its part keen to protect the hard-earned credibility it put on the line by joining in a bailout package that set Greece a target of cutting its deficit to under 120 percent of GDP by 2020.

Amid European political wrangling, the Fund, whose biggest shareholders are the United States and Japan and also include the likes of China, Russia and Saudi Arabia, believes a debt restructuring is now essential for Greece to meet its goals - although IMF officials say no formal proposal has yet been made.

FUND'S PATIENCE TESTED

German Finance Minister Wolfgang Schaeuble, whose own creditor government has been concerned at slippage in Greece's efforts to cut spending and raise taxes, gave a rare public hint of IMF concerns last week: "You should ask around about what the mood is like in the IMF," he told reporters in Berlin, "In having to deal constantly with these European problems and the repeated failure of the Europeans to meet agreed targets."

A restructuring - essentially requiring the ECB and European governments to take losses on nearly 200 billion euros in Greek debt they hold - could ease Greece's burden.

Private investors took such a "haircut" this year, but with reforms being held up and a recession much deeper than expected, Greece seems likely to have to suffer more pain itself, or inflict more on its creditors, if it is to put its finances on a sustainable footing and resume market borrowing.

Out of the Greece's 204 billion-euro official debt, 20 billion is owed to the IMF, which would be repaid in full in the event of an official-sector restructuring. The ECB has so far refused to face any losses on the bonds it has purchased over past years to prop up Greek debt, estimated at about 50 billion.

With the Greek public pushing its government to resist more austerity, Finance Minister Yannis Stournaras's frustration at demands from lenders for sharper cuts prompted him to threaten resignation at one point last week, sources in Athens have said.

"It is now clear to the IMF that Greece will need more time or more money or both," a troika official told Reuters.

Greece has asked for an extra two years to meet interim targets and European leaders appear to agree. Stournaras, the finance minister, told Reuters on Tuesday that such an extension would cost an additional 13-15 billion euros, which could be covered without further pain for European taxpayers.

Such a gap could be covered through the issuance of more short-term debt, by seeking lower interest rates from the ongoing bailout loans or a rollover of debt held by the ECB.

France has backed the two-year pause; a euro zone official said Germany is not opposed, provided Athens shows results soon.

TENSIONS HIGH

A senior Greek government official told Reuters, however, that the IMF preferred to see Europeans take losses on some of their previous loans to Athens, blocking any agreement: "The IMF wants an official-sector restructuring but we can't do that," the official said. "No one else wants it."

Participants said tension was high during a meeting between officials from Greece and the troika last week to thrash out an additional 11.5 billion euros worth of savings measures; at one point Stournaras threatened to quit if Poul Thomsen, the Dane who runs the IMF's relations with Greece, pressed for more cuts.

"Nothing pleases Thomsen any more," another Greek official said. "Last time the troika was here we agreed 5 to 5.5 billion euros would come from salary and pension cuts. Now we have come up with 7.5 to 8 billion, and they are not enough."

If Greece deviates substantially from the terms of the rescue package, the Fund, led by former French finance minister Christine Lagarde, could face questions from other members about slipping controls or double standards for borrowers. Analysts said it might even consider pulling out of the Greek commitment:

"In theory, the IMF could withdraw from the deal if it is not satisfied the bailout fulfilled the ... criteria," said Ben May of Capital Economics. "In practice, it isn't so black and white and there is obviously potential for some kind of fudge."

Disputes within the rescue mission, however, also reflect deeper concerns about Greece's ability to slash its debt-to-GDP ratio from a current level around 160 percent and to recover the confidence of private investors willing to buy its bonds.

"There is potentially quite a big standoff," said May of Capital Economics. "I don't see the bailout lasting to the end of its duration and it could break down at any time.

"Lots of ... bankers in the chorus seem to indicate they would be quite happy for Greece to leave the euro."

(Additional reporting by Noah Barkin in Berlin and Jan Strupczewski and Luke Baker in Brussels; Editing by Jeremy Gaunt and Alastair Macdonald)

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Comments (7)
prepare_now wrote:
We all remember Monopoly right? You know the game we played as kids,now lets recall the player that was always going bankrupt!!! The only way to keep the game going was to continue to lend “that” player more money so we could all get on the with game of MAKING money,hoping that at some stage down the track they would come good and repay what was owing.

Of course as we all remember that never happened,and in the end the other players realised that the money that was lent would never be repayed.Thus within a short time the game became unplayable,and in the end the only way to break the deadlock was to start a new game!
Well folks guess what? We have approached “unplayable” the only differnce is, unlike monopoly we cant wipe the board and start again.

The world has entered a “period” that it has never seen before,their is no answer to the predicament that we all face,if their was we would have known about it by now,the can is no longer kickable, watch this space.

Sep 26, 2012 10:24am EDT  --  Report as abuse
DanAllen wrote:
The IMF MUST fudge it. Why? Because it went along with a plan that the IMF’s own handbook describes as leading to failure. Slashing 40% of gov’t expenditure WITHOUT currency devaluation is something, the IMF says, no one should ever undertake. The IMF has gone against its own precepts from the start, so to say that the current situation (i.e. Greece not meeting its targets) is somehow a violation of the IMF’s standards is to ignore that the IMF has been violating its standards from the start in its negotiations with Greece.

In other words, this article is nonsensical.

Sep 26, 2012 11:02am EDT  --  Report as abuse
dareconomics wrote:
The Greek people have drawn a line. I do not think they will abide further attempts at austerity. Samaras is losing control of the coalition as PASOK and the Democratic Left object to further budget cuts without additional concessions from the troika.

The reason why negotiations have been put on hold for the last few days is that a screaming match erupted between the Greek finance minister and the leader of the troika negotiating team. The time off from negotiations until the 3oth is supposed to be a cooling off period.

In light of this tension, what is the IMF trying to do by stating that Greece cannot meet its objectives? If the IMF believes that a country cannot stick to its program, then it is supposed to withdraw financing. The IMF backing out of the Greek bailout will cause Greece to default.

Even though Greece being booted out of the eurozone keeps being mentioned by German politicians, a Grexit would be very expensive for Germany and its eurozone partners. This could be a Lehman situation where Greece is allowed to fail causing much greater pain than anticipated, but I believe that the Germans are posturing for political points at home.

The IMF is saying that the current plan is unsustainable; however, if the eurozone countries and the ECB write down the Greek debt they own, the plan still has a chance of working in the long-term. Perhaps, this is what the IMF is trying to accomplish.

dareconomics.wordpress.com

Sep 26, 2012 12:52pm EDT  --  Report as abuse
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