IMF chief offers Eurozone time on Greek debt relief

Christine Lagarde

International Monetary Fund chief Christine Lagarde is offering to wait a little longer before Germany and other Eurozone countries come around to the IMF’s analysis on the Greek debt.

“If the creditors are not yet at that stage where they can agree on and respect our assumptions, if it takes them more time to get there, we can acknowledge that and give them a bit more time,” she told Handelsblatt on Tuesday.

The IMF and Germany are in a spat over Greece’s ability to repay its debt. Germany believes Greece can spend 1.5 percent of its GDP over the next 40 years on debt servicing. The IMF believes the figure is closer to one percent.

The difference between the two assumptions leads to wildly divergent conclusions over such a long time period.

A recent analysis carried out by the European Stability Mechanism, presently Greece’s biggest creditor, shows that depending on which of two growth scenarios one accepts, the Greek debt could amount to anything between 49 percent and 226 percent of GDP in 2060. The first scenario, based on the more optimistic assumptions of European institutions, forecasts average growth of 1.3 percent and a primary surplus of 2.2 to 2.6 percent. The second, favoured by the IMF, forecasts growth of one percent and a primary surplus closer to 1.5 percent.

The Eurogroup is scheduled to meet on June 15 to make another attempt at finding a compromise solution for Greece. Lagarde articulated the IMF’s position in favour of a debt package now, which would be implemented after Greece emerges from its current programme in August next year: “Our conclusion with total intellectual integrity is that the debt relief is needed - without implying a haircut, but with significant extensions of maturity and deferral of interest payments. That’s our preference and for that to be credible for the markets, for the investors, it needs to be articulated now. It doesn’t have to be delivered upon by the creditors until the end of the program, but it needs to be articulated very clearly now to be a game changer. So that markets can say: “That country’s debt is sustainable – therefore we can invest. We can buy their bonds, we can put our money in the country.”

Should the IMF’s scenario prevail and Greece be given until 2080 to repay its loans to its Eurozone partners, they would lose €123bn by some estimates. It is unlikely that German finance minister Wolfgang Schaeuble will agree to ask his parliament for such an arrangement before German elections in September. His party has promised taxpayers that Greece will repay its creditors in full. 

Greek finance minister Euclid Tsakalotos agrees with the IMF on the necessity of the debt rescheduling, and with Germany on the more optimistic growth scenario. Last week he ramped up pressure on the Eurogroup to agree with the IMF on a package that included approval of Greece’s second review and debt relief.