IMF board split over bailout terms for Greece

7/2/2017

Stand-off with EU over ‘explosive’ debt path leads to public display of division

By Shawn Donnan

A stand-off with European authorities over the terms and future of Greece’s bailout has led to a rare public split on the International Monetary Fund’s board, amid growing questions over the fund’s participation.

European institutions and the IMF have for more than a year been at loggerheads over what the fund argues are far too stringent fiscal targets being demanded of Athens by its European creditors and calls by the IMF’s staff for Greece to receive more long-term debt relief.

The battle has raised questions over the IMF’s financial involvement in the current €86bn bailout, with German officials again on Monday saying that without the fund’s participation the rescue programme would end, potentially causing a new funding crisis for the government in Athens.

In an as-yet unpublished report on the Greek economy, the IMF’s staff argue that Greece’s debts are unsustainable and on an “explosive” path to reaching almost three times the country’s annual economic output by 2060.

But that report, seen by the Financial Times, has been labelled overly gloomy by European officials. Moreover, after a meeting to discuss it on Monday the IMF issued an unusual statement conceding that its board was split over its findings.

“Most” of the 24 board members “agreed with the thrust of the staff appraisal” contained in its regular “Article 4” review of the Greek economy, the IMF said.

However, “some . . . had different views on the fiscal path and debt sustainability”.

The IMF’s board usually operates on consensus, with its deliberations held behind closed doors. It rarely airs any differences in public.

The fund did not reveal which board members had objected. But the public statement illustrates the sensitivity surrounding the continuing Greek bailout programme. It also points to one of the main political challenges facing Christine Lagarde, the IMF’s managing director who has battled with European leaders over the Greek debt issue for almost two years.

The IMF has been the target of criticism since first joining the EU-led bailout of Greece in 2010, particularly over the strict fiscal targets it set early on. Economists have also blamed the IMF and its European partners for not doing enough to reduce Greece’s long-term debt load.

But the IMF has for the past two years insisted that Germany and other eurozone members needed to do more to tackle that debt. By labelling Greece’s public debt unsustainable, it has also made its own financial contribution to a bailout impossible under its own rules unless Athens’ debt is either restructured or forgiven in part.

In a nod to the stand-off with Europe, the IMF said “most” directors “agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date which is expected to bring the medium-term primary fiscal surplus to around 1.5 per cent of GDP”.

But, it added, “some directors favoured a surplus of 3.5 per cent of GDP by 2018” as required under the terms of the current €86bn bailout negotiated amid a 2015 political crisis.

“Most” directors had also offered their support for the idea that, “despite Greece’s enormous sacrifices and European partners’ generous support, further relief may well be required to restore debt sustainability,” the IMF said.

In an apparent dig at the IMF’s European partners, the fund said those directors had also “stressed the need to calibrate such relief on realistic assumptions about Greece’s ability to generate sustained surpluses and long term growth”.

The IMF said on Monday that Greece had made “significant progress” since the onset of the crisis in late 2009, although “extensive fiscal consolidation and internal devaluation have come at a high cost to society”.

The economy returned to “modest growth” of 0.4 per cent in 2016 and is expected to accelerate with the country’s output forecast to grow 2.7 per cent this year, according to the IMF.

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