EU-IMF Spat over Greece Worries Investors

EU-IMF Spat over Greece Worries Investors

Spiegel Online
13 November 2012

Even as European finance ministers agreed with the International Monetary Fund on Monday to grant Athens more time to meet its budget reduction targets, a deep rift became apparent. Greece's overall debt load is massive, and the EU and IMF are in conflict over the best method and timeframe for reducing it.

Extraordinary European Union meetings are becoming downright ordinary as the euro crisis grinds into its fourth year. And euro-zone finance ministers on Monday set the date of yet another such gathering. Now, the Euro Group, as the minister club is called, hopes to be able to agree on the next tranche of emergency aid for Greece on Nov. 20.
But between now and then, the EU and the International Monetary Fund (IMF) have to set aside deep differences over the timeline for Greece to reduce its overall debt load from its forecasted 2013 level of 190 percent of gross domestic product to the target level of 120 percent of GDP by 2020. And given the open disagreement on display at Monday evening's press conference featuring Euro Group President Jean-Claude Juncker and IMF head Christine Lagarde, finding a common line might prove to be difficult.

"We clearly have different views," Lagarde said. "What matters at the end of the day is the sustainability of Greek debt so that the country can get back on its feet."

The press conference came on the heels of the Euro Group's announcement that it had agreed, as widely expected, to grant Athens two more years to meet its budgetary target. Instead of achieving a primary surplus (which excludes the cost of servicing debt) of 4.5 percent of GDP by 2014, the country now has until 2016.

The delay means that Athens is likely to need an additional €33 billion in aid from the European Union, on top of the €240 billion the EU has already pledged in recent years to keep Athens from descending into insolvency. But granting Athens two extra years, from the point of view of the euro zone, also means that it will take longer for Greece to reduce its debt load to the 120 percent of GDP mark, a level that has been identified as "sustainable."

'That Wasn't a Joke'

As such, Juncker insisted during the Monday press conference that Greece be given until 2022 to cut its debt, whereupon Lagarde demonstratively rolled her eyes and turned away. When the audience laughed at her antics, Juncker said: "That wasn't a joke." The IMF is firmly insisting on the original date of 2020, a deadline that most observers believe would require another debt haircut -- a move euro-zone finance ministers would like to avoid.

German Finance Minister Wolfgang Schäuble on Tuesday threw his support behind Juncker. Still in Brussels for talks on an EU banking union, Schäuble said that cutting Greek debt to 120 percent of GDP "is likely a bit too ambitious for 2020."

The delay in payment of the next tranche of aid, worth €31.5 billion, and the disagreement between the Euro Group and the IMF has unsettled investors. The euro this week has dipped to a two-month low against the dollar and interest rates on German sovereign bonds have ticked upwards. Athens had said that it would be in danger of insolvency if it didn't receive its next aid payment by this Friday due to €5 billion in debt which comes due at the end of this week. On Tuesday, however, Athens was able to raise some €4 billion by issuing short-term debt.

Few believe that the EU will ultimately withhold the money from Athens. But the Euro Group indicated that it was still checking Greek compliance on some areas of reform. "It clearly needs to be reviewed a little bit, to make sure that all prior actions contained in that budget law are actually taken," Lagarde said in reference to the new budget cuts passed by Greek parliament last week.

Of potentially greater importance, however, is the ongoing disagreement between the Euro Group and the IMF, one which goes deeper than just the timing of debt reduction. The "how" is equally important. The IMF is of the opinion that the only way for Greece to effectively reduce its debt level by 2020 is to default once again on a significant portion of its debt as it did this spring. Such a "haircut," however, would not focus primarily on private investors as it did last time, but on Greece's public creditors. Euro-zone member states, in other words, would lose some of the emergency aid money they have loaned to Greece.

Has Greece Delivered?

That is politically fraught, particularly in Germany where Chancellor Angela Merkel is up for re-election in 2013 and can hardly afford to tell her electorate that billions in taxpayer money must be written off.

European finance ministers hope that, if Greece sticks to its austerity program and no longer falls behind as it did in the last two years, the country's debt will sink to 144 percent of GDP by 2020. Granting the country an extra two years would reduce it further. In addition, Europe is considering other measures, such as cutting the interest Greece must pay on its emergency aid loans and extending the timeframe within which they must be paid back, to reduce the country's overall debt load.

Debt sustainability was also a top concern for German Finance Minister Wolfgang Schäuble on Monday. A report on Athens' progress on the issue had not been finished ahead of the Monday meeting in Brussels. "We first have to see if Greece has delivered," Schäuble said. "I have not seen this."