IMF calls for ‘unconditional’ Greek debt relief

23/5/2016

The International Monetary Fund has called on European creditors to provide upfront and “unconditional” debt relief for Greece, in its latest incendiary intervention in the country’s bailout talks.

In its first official debt sustainability analysis since last summer, the IMF said Greece should receive immediate concessions on its new loans, through longer maturity dates, payment deferrals and fixed interest rates, writes Mehreen Khan.

This would “provide a strong signal to markets about European partners’ commitment to deliver on all the elements of the restructuring”, said the IMF.

But in perhaps the most incendiary suggestion, which is set to meet opposition in creditor states such as Germany, the IMF also called for a fixed interest rate cap of 1.5 per cent on Greek loans from the eurozone’s rescue funds until 2040.

Such a measure, which would replace current floating market rates with a fixed rate, “would in effect require a commitment by member states to compensate the ESM for the losses associated with fixed interest rates on Greek loans”, said the IMF.

The fund admitted that such a proposal to effectively guarantee Greek debt payments, would face opposition in member states:

This would clearly be highly controversial among member states in view of the constraints—political and legal—on such commitments within the currency union.

In a series of stark calculations, without restructuring measures, the fund said the country’s debt mountain, which currently stands at 180 per cent of GDP, would balloon to 250 per cent by 2060.

Financing costs – the amount the country would need to service its debt – would soar to 60 per cent of entire economic output by 2060, three times above the 20 per cent maximum needed to ensure debt sustainability.

Should the Greek economy under-perform expectations, with growth falling to around 1 per cent on average, the IMF warned that even its bold measures would mean debt sustainability “could no longer be ensured”. In this scenario, Greece would need to pay zero interest on its loans until 2050, recommended the analysis.

The IMF’s pessimistic view on Greece’s debt burden comes from its calculation that the economy will not be able to maintain a primary budget surplus – which excludes debt costs – of 3.5 per cent from 2018. This target had been agreed by Athens and its European creditors under its €86bn bailout deal but was described as unrealistically “heroic” by the fund:

Even if Greece through a heroic effort could temporarily reach a surplus close to 3½ percent of GDP, few countries have managed to reach and sustain such high levels of primary balances for a decade or more, and it is highly unlikely that Greece can do so considering its still weak policy making institution

The analysis added:

Providing an upfront unconditional component to debt relief is critical to provide a strong and credible signal to markets about the commitment of official creditors to ensuring debt sustainability, which in itself could contribute to lowering market financing cost.

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