October 09, 2015
The eurogroup started the debt relief talks with an opening bid to cap debt servicing costs at 15% of GDP, Jeroen Dijsselbloem said in an interview with Reuters. There is, of course, no way the IMF will accept this ludicrously high number. It may constitute the IMF"s theoretical upper limit, but it will not accept this in the case of Greece given the state of the Greek economy. Any signficant debt servicing would not start until the payment holidays are over, currently 2023 for the ESM loan, but it is hardly credible that Greece could shift from very low debt servicing costs to such high levels overnight. It is possible that Dijsselbloem only used this number as an upper limit, but that would be entirely meaningless, as the real negotiation about debt relief takes place well within those limits anyway.
Dijsselbloem also indicated that there are ongoing discussions on whether relief should be granted up-front or over time under certain conditions. He said it does not make sense to agree on a complete debt relief plan now when the first financial difficulties are expected to happen in 15 years.
The IMF has been pushing for a debt haircut for Greece, but eurozone creditors continue to resist, arguing the only thing that matters are that debt servicing costs do not choke the Greek economy. Some EU officials privately point out the IMF was pushing for debt relief for Greece while expecting to be paid back in full itself. Dijsselbloem did not comment on this but said that the new bailout is to pay back the IMF loan, because it is (four times more) expensive than the eurozone loan. But he insisted that the IMF needs to stay involved even if they are not lending money, for the credibility of the programme and the support of Germany.
we also cover the latest austerity measures discussed in Greece; more evidence of a weakening German economy; that Ciudadanos appears set to do very well in the larger, urban provinces in the Spanish elections; a discussion by Dirk Schoenmaker and Guntram Wolff on European deposit insurance; what the World Economic Outlook has to say on the impact of exchange rates on net exports; Cristóbal Montoro's rebuke of the Commission; and Lorenzo Codogno on the expansionary Italian budget and why fiscal flexibility is not some kind of a discount, but merely a temporary deviation in an adjustment path.