Athens’ lenders are at loggerheads over whether or not to grant the debt-ridden nation a haircut. But is there more to the transatlantic tiff than a tempest in a tea pot? DW’s Zhang Danhong dissects their differences.
It’s time to cut Athens some slack. That was the message the International Monetary Fund (IMF) sent to Brussels last month after an internal report warned that Greece’s debt-to-GDP ratio was racing towards the 200-percent mark. The debt load had become so unsustainable, the Washington-based lender said, that it wouldn’t back another rescue package unless EU leaders agreed to help reduce the burden.
But why the about-face? Where was this insistence on debt sustainability back in 2010, when the IMF first agreed to join the troika aimed at getting Greece back on its feet? After all, it was clear already then that Athens wouldn’t be able to shoulder the weight of its public debt.
The explanation is simple, said Rolf Langhammer of the Kiel Institute for the World Economy:
“The IMF is under considerable pressure from its shareholders. Especially from many developing and emerging countries that feel they had to meet much tougher requirements than Greece does.”
However, he added, “a country should be thought of as a never-ending investment project. So what’s important is not that a nation repays its debt, but that it is able to meet its daily obligations,” Langhammer told DW. The IMF, he argued, appears to have ignored this when it did its calculation.
Small burden, extended deadlines
By some measures, Greece’s odds are, if not favorable, then at least not terrible. Interest repayments are made in line with a country’s economic growth, and that’s something that Greece currently isn’t seeing a whole lot of. What’s more, the interest rates on Athens’ emergency loans are nothing if not favorable – its European lenders offers it considerably better terms than they do other crisis-hit countries. In fact, out of all the creditors, the IMF charges the highest interest rates.
Moreover, few countries ever fully pay back their debts. Instead, many governments’ aim is to service their debt just enough that they can replace existing credits with new ones – something they can do freely in the capital market. That avenue isn’t open to Greece, which instead depends on its bailout partners to keep it afloat. But even here, its European creditors have been comparatively accommodating, giving Greece until 2021 to begin servicing its debt.
In contrast, the IMF has proven much less flexible, insisting on tough repayment regimens and high interest rates on the remaining 21 billion euros ($23.1 billion) still outstanding.
So would a haircut help Greece? Only minimally, Langhammer told DW: “Greece has an extremely weak export base. Without a significant improvement in export capability, Greece will not be able to meet its obligations.”
The only other way out of the country’s financial hole would be to cut spending, Langhammer said. Its creditors have tried to make Athens do both in recent years. But the responsible governments have only reluctantly implemented austerity measures, and chosen to kick the can down the road when possible. This has helped trip up the rescue efforts.
Unlike Portugal and Ireland, Greece has shown that it is does not want to change, argued Langhammer. Last month’s referendum demonstrated that “neither the government nor the population back a reform process,” he said.
That is why the current tension between IMF and Europe can best be described as a squabble – an argument about technicalities, such as the effects of a debt cut and whether it would violate the no-bailout rule of the monetary union. The real problem is that Greece lacks a business model, which will generate growth.
Kicking the can
While Langhammer predicted that there will be a third bailout package, he warned that it would likely only lead to more can-kicking. And despite not seeing eye-to-eye with Brussels, he said the IMF was likely to get behind the rescue mission sooner rather than later:
“If the IMF got out now it would only lose face, because it would mean incurring huge losses.”
Much of the pressure to stay onboard will come from within Washington, as US President Obama continues to urge Greece’s creditors to keep Athens afloat. The German government will also do everything in its power to make sure the IMF doesn’t back out. After years of working together, Berlin has come to value the Washington-based institution for its expertise, money and toughness – cherished traits Germany hasn’t always counted among the European Commission and the ECB’s strongest suits.
Ultimately, German Chancellor Angela Merkel knows that if she loses the IMF, she’s likely to lose the support of her own party, which she desperately needs to approve a bailout and keep her from going down in history as the Chancellor who kicked Greece out of the eurozone.