IMF angry at Greeks but frustrated at euro zone too

12/6/2015

By Anna Yukhananov

When the International Monetary Fund announced it had ordered its team home from stalled debt talks with Greece, the gesture of frustration was aimed chiefly at Athens but also at euro zone governments, sources familiar with the talks say.

The pullback partly reflected exasperation at the chaotic way in which the talks have been conducted, with technical experts denied access to Athens' public accounts, kept cooped up in hotels and latterly forced to cool their heels while talks moved to a political level involving government leaders.

"The IMF wanted to pass messages to both sides," one Brussels source familiar with the IMF's position said.

IMF spokesman Gerry Rice cited "major differences" over pensions, taxation and financing when he announced on Thursday that the global lender's representatives had returned to Washington in the absence of progress in the negotiations.

The leftist Greek government has rejected proposals by the creditors to scrap an income top-up for poorer pensioners and reduce state subsidies of pension funds, and refused to raise value added tax on electricity and other household necessities.

But by mentioning financing, the IMF also wanted to signal is exasperation at European governments' refusal to discuss debt relief for Greece, without which IMF officials say the country's finances simply won't be sustainable.

In the Fund's eyes, if Greece is allowed to make less of a fiscal adjustment than originally sought, someone else has to put in extra money or reduce debt costs to make the numbers add up. And that someone can only be European governments.

"The more distant the measures and targets from the original commitment made in 2012, the higher the need for additional financing and indeed debt relief to make Greece's debt sustainable," Rice told reporters.

A person familiar with the talks said the IMF has been telling euro zone creditors and the European Central Bank for months that a combination of restructuring existing loans and bonds and providing additional lending will be necessary to enable Greece to put its finances on a sound footing and stay in the euro zone.

"When we talk about debt relief, the Europeans just don't want to listen," the person said.

TRUTH-TELLER

German Finance Minister Wolfgang Schaeuble has taken the lead in refusing to discuss any easing of Greece's debt load until it has fully implemented the reforms promised by previous governments and completed the bailout programme.

German public opinion is so negative about bailing out Greece that Schaeuble fears any mention of fresh money or write-offs for Athens could make it impossible to get the disbursement of the remaining bailout funds through the German parliament.

But behind the curtain, informal discussion of debt relief is taking place, one person familiar with the talks said.

"There is a conversation," he said, without giving details.

The Fund sees its role as a truth-teller, ensuring that a borrowing country's public finances are sustainable. That calculation combines loan maturities, interest rates, economic growth, productivity and the fiscal balance.

But unlike in dozens of bailouts around the world, the IMF is not in control in the euro zone, where it plays second fiddle to European governments, with the European Central Bank an uneasy third partner in trying to enforce the programme.

And having lent substantially more to Greece than in any previous bailout in its history, the IMF is unlikely to contribute money to any third programme, although it has not formally ruled that out. European creditors would insist that it continue to provide expertise and help monitor compliance.

In the case of Greece, which has a debt mountain equal to 185 percent of gross domestic product, sustainability requires running a significant budget surplus before interest payments.

But with the economy back in recession and the government determined to avoid harsher austerity measures, the creditors are talking about reducing the primary surplus target.

Rice noted that pensions and wages account for 80 percent of Greece's total primary government spending.

"So it's not possible for Greece to achieve its medium-term fiscal targets, without reforms and especially of pensions. I think it's been acknowledged by all sides that the Greek pension system is unsustainable," he said.

According to the IMF, the government spends 10 percent of GDP subsidising pensions, compared to a 2.5 percent average in the euro zone. The average pension in Greece is only slightly lower than in Germany, although Greeks retire on average six years younger and Greek GDP-per-capita is half that of Germany.

On taxes, Rice said Greece's policy of imposing ever higher tax rates on a narrow tax base was unsustainable, so it was essential to broaden the tax system.

"Greece has among the largest gaps in the European Union on VAT revenues that are actually collected versus VAT that should be collected, given the rates," he said.

Beyond differences of specific measures, IMF officials say they worry that even if there is a deal, the Greek government is fundamentally unwilling to take ownership of a reform programme, preferring to depict it as a cruel imposition by foreigners, and hence it is unlikely to implement it.

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