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IMF and Greek debt

Gero Schliess, Nils ZimmermannJuly 8, 2015

The latest IMF report said Greece needs massive debt relief. A US economist says this doesn't really change anything - privately, eurozone negotiators already acknowledge Greece can't repay the bulk of its debt.

Anti-IMF graffiti behind a pensioner in Athens
Image: picture-alliance/epa/O. Panagiotou

On the evening of June 25, with the clock set to run out on negotiations between Greece and the eurozone, the Greek government unexpectedly announced a referendum to be held on July 5 that would throw the decision on whether to accept its creditors' final offer to the electorate. Syriza urged Greeks to vote 'No.'

On June 26, the IMF dropped what many saw as a bombshell into the acrimonious debate. IMF staff published a "#link:http://www.imf.org/external/pubs/ft/scr/2015/cr15165.pdf:preliminary draft debt sustainability analysis#," developed over the preceding weeks in the course of policy discussions with Greek authorities, that concluded Greece's debt was not sustainable.

"Very significant changes in policies and in the outlook since early this year have resulted in a substantial increase in financing needs," the report said - amounting to about 50 billion euros in extra funding needs for the Greek state between October 2015 and the end of 2018.

Moreover, "given the fragile debt dynamics, further concessions are necessary to restore debt sustainability," the report added. That would mean restructuring existing debt to make it easier to repay over a longer time horizon.

DW interviewed Jacob Kirkegaard, a Danish economist at the New York based Peterson Institute for International Economics, to ask his views on the IMF report and its implications for ongoing negotiations between Greece and its official creditors.

DW: The IMF agrees with Athens that Greece urgently needs major debt relief - but eurozone finance ministers have shown little willingness to concede this key point. How substantial is this rift amongst the creditors?

Kirkegaard: I don't actually think it's that substantive, because if you ask euro area members off the record, they will tell you that much of the money Greece owes them is lost. It will not be repaid, and the debt will need to be restructured. So it's not really a question of if, but rather how and when restructuring will be considered.

DW: How does the IMF's report influence what might happen going forward?

The real rift between the IMF and the eurozone is that there are some in the IMF who believe debt relief should be immediate - that it needs to happen now to kickstart the Greek economy and provide the context needed for growth.

I don't think it's fair to say this is a unified IMF position, though; there's another group within the IMF whose views are closer to the Eurogroup's, who say that debt relief should only be granted when Greece has done its homework and lived up to the reform commitments they've entered into - and thereby done their part to put in place the foundations for future growth.

At the end of the day, what will have to be restructured is Greek debt owed to European countries and institutions, so the decision on restructuring is going to lie with the European authorities, not with the IMF. So I expect the European position to prevail. Debt relief is not going to be given to Greece until after they have credibly implemented the demanded reforms.

Kirkegaard: the differences between the official IMF and Eurogroup positions aren't substantial - but there are divergent views within the IMFImage: PIIE

DW: Doesn't the IMF staff report strengthen the Greek negotiating position and weaken the eurozone's and, above all, the German negotiating position?

Maybe the report's being released before the referendum generated a risk of its having an influence on the outcome of the referendum - but given how big the 'No' vote victory was, I don't think it changed the outcome in the end.

The IMF report helps Alexis Tsipras domestically in Greece. It helps him explain why he's holding out - why he's subjecting Greeks to all this economic hardship by the banks being closed. He can tell them he's doing it because Greece needs debt relief, and say the IMF to some extent supports that.

But the report won't help him much where it really counts - with the other European governments. They all have their own domestic constituents, among most of whom bailing out Greece isn't a popular proposition. I don't think, in the end, that the report will help Greece get a better deal from the Troika.

DW: Won't the lack of unity amongst the creditors complicate the negotiations?

It may make it slightly more complicated if the Greeks manage to successfully play the creditors off against each other. But we have to ask: who benefits from a delay? Nobody. Who is hurt by a prolonged delay in these negotiations? Unambiguously the Greeks - because it's the Greek banks that will remain closed until an agreement is reached. It's the Greeks who need a deal as soon as possible.

DW: Does the IMF report and its plea for additional debt relief for Greece reflect the American position on this issue?

I think the report's call for debt relief is closer to the known US position. But note that the report doesn't specify whether debt relief should be immediate or not. It just says that debt relief will be necessary at some point for Greece's debt load to be considered sustainable, and Greece won't be able to return to market financing. And the US position isn't clear on when or under what conditions debt relief should be offered.

But I think the content and particularly the timing of the release of the report highlights the IMF's institutional independence from European authorities.

DW: The "New York Times" wrote in an editorial that European authorities had mismanaged the crisis and made it worse. Do you think that view mirrors that of the Obama administration and of US financial circles?

There's a widespread view in the US that they want the Greek and the euro crisis to go away. The US is unhappy if the crisis gets dragged out, if European authorities can only focus on this one issue around what happens to a small country with just two percent of Europe's GDP.

That means Europe doesn't pay enough attention to Ukraine, to fighting ISIS, to Syria - to a lot of other things that are more on the minds of US authorities than Greece. There's a certain level of irritation that the European authorities haven't managed to end this crisis yet.

That doesn't mean the US authorities think Europe should just have given in to Greek demands or given debt relief to Greece a long time ago. Keep in mind that the US government influences policy on Greece most directly through the US's voice in the IMF.

Given that the IMF has been directly involved in the design and implementation of the Greek reform program, and is part of the Troika, it's fair to say the US has supported that reform agenda - irrespective of occasional rhetoric coming from President Obama that has been critical of austerity policies. That rhetoric has really been aimed at the domestic US debate on these issues.

Jacob Funk Kirkegaard has been a Senior Fellow at the Peterson Institute for International Economics think tank since 2002. Kirkegaard's current research includes a focus on European economics and reform.

The interview was conducted by Gero Schliess. Additional reporting by Nils Zimmermann

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