Messy Greek debt deal leaves key questions unanswered

25/5/2016

By Alex Barker, Mehreen Khan and Shawn Donnan

Face-off with creditors defused but measures are only a temporary fix

The call to Astana was not getting through. At a critical moment in the saga of Greece’s debt talks, Christine Lagarde, the International Monetary Fund managing director, was in Kazakhstan and nobody could reach her.

For almost four hours on Tuesday evening, finance ministers cooled their heels waiting for Ms Lagarde to be consulted on a draft compromise, which would clear the political space to keep Greece afloat, at least for a few more months.

The final deal came at about 2am. It was a messy and protracted end to a messy and protracted negotiation, which defused the face-off between Greece’s international creditors but left open some of the most contentious points on how to reduce its debt pile. “If it looks like we are kicking the can down the road, that is because we are,” said one senior eurozone official.

Many ambiguities remain. A target was set to maintain Greece’s gross financing needs — its deficit plus the funds it needs to roll over its debts — at no more than 15 per cent of national income until 2030. Debt relief measures were outlined, including maturity extensions and a possible buyout of IMF loans in 2018. The caveat: no numbers were agreed on what relief the measures would actually deliver.

The IMF dropped its most ambitious debt relief demands — including its insistence that relief meausures automatically kick in when Greece exits its programme in 2018. However, to participate financially in the programme before the end of the year, the IMF would need to approve a new debt sustainability analysis (DSA) on Greece that would meet its normal lending standards. If they want the fund involved, eurozone finance ministers may be forced to break their debt relief as soon as this autumn.

IMF officials made concessions on the timing of decisions. But they insist there willl be no change to the economic and budget assumptions that underpinned the aggressive debt relief recommendations they issued on Tuesday. That leaves a serious chance that the IMF would not be able to participate.

“If we come to the conclusion measures don’t add up there will have to be another eurogroup meeting to discuss what to do before we go to our board,” a senior IMF official said.

For Germany too, the deal amounted to a trade-off. Wolfgang Schäuble, German finance minister, met his two main red lines: no haircuts and no Bundestag votes before the German federal elections in 2018.

But to secure the IMF’s political participation, he made a concession: an implicit commitment to meeting the IMF’s conditions on Greece’s debt pile. The eurozone also agreed to review in 2018 the exacting requirement that Athens run a budget surplus of 3.5 per cent of gross domestic product for at least the next 10 years.

For these interlocking political reasons, negotiators see the deal as more ambitious than the absence of figures suggest.

“Don’t be fooled,” said Jeroen Dijsselbloem, the Dutch chair of the eurogroup of finance ministers who was instrumental in brokering the deal. “If we need to put more on the table we would, and make it sizeable enough to make it fit the new DSA.”

The terms, he added, had a level of ambition that only a month ago he “could not imagine”.

Significantly, the deal charts a course to a potentially drastic scaling-back of the IMF’s involvement in the Greek programme in 2018.

This would lighten Greece’s debt load because the IMF loans are far more expensive than eurozone equivalents.

On top of that reducing IMF exposure may allow it to relax some of its debt sustainability requirements, thereby closing the gap with Germany on how much relief is necessary.

But officials on both sides still doubt whether that gap can ultimately be bridged. A debt relief clash this autumn may not just endanger the IMF involvement in future loans, but convince Berlin that it may be wise to part ways with the fund.

Eurozone officials hinted that was possible on Tuesday. When talks were tough, officials privately threatened to move ahead with a statement simply “inviting” the IMF to take part in the next programme — a move that would have put Ms Lagarde on the spot at a Thursday meeting of G7 leaders in Japan.

For most of the evening the talks were held between three people: Mr Dijsselbloem, Mr Schäuble and Poul Thomsen, IMF director for Europe.

For the others present, the tedium gradually turned to farce as they passed the midnight hour. The strut of “Zorba’s dance” rang out across the room from one mischievous official’s iPad, only to be clapped on by colleagues. The deal came soon after, but most negotiators knew they would be back for another debt dance soon enough.

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