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May 24, 2016


IMF stands its ground on debt relief

The IMF staff published its preliminary debt sustainability analysis (DSA), firming up its tough stance on debt relief ahead of the eurogroup meeting today. Greece needs concrete, realistic and upfront debt relief, so the report, and puts a concrete proposal onto the table. On its current pace, Greek debt is spiralling out of control, and the situation has clearly deteriorated since last year, at least according to IMF calculations:


The report says it is unrealistic that Greece can come up with the fiscal adjustment of 4.5% of GDP that it considers necessary to achieve a primary surplus of 3.5% of GDP, or that this can be maintained over a decade or more. The IMF advocates a 1.5% primary surplus instead. The staff also revised Greece's long term growth rate down to 1.25%, due to the prospect that weak banks will be unable to finance a strong rebound and that there won't be enough productivity gains due to lacklustre reforms.

To return to a sustainable path the paper suggests the following debt relief measures:


  1. A maturity extension of 14 years for EFSF loans, 10 years for ESM loans and 40 years for GLF loans. This could reduce gross financing needs and the debt ratio by around 7% and 25% of GDP respectively by 2060.
  2. Extending the grace periods by 6 years for ESM loans and 17-20 years for EFSF and GLF loans. In addition, the IMF suggests extending the current deferral on interest payments for EFSF loans by a further 17 years, coupled with interest deferrals on ESM and GLF loans by up to 24 years. 
  3. Most controversially, a cap on interest rates below 1.5% for an extended period, until 2040. Rates for EFSF and ESM loans would be locked in at the current long-term market rates and the spreads currently applied on GLF loans eliminated. But this would require a commitment by member states to compensate the ESM for the losses associated with fixed interest rates on Greek loans.

Given the IMF assumptions, the staff says gross financing needs need be brought down by around 20% of GDP by 2040 and an additional 20% by 2060. For this target, locking in interest rates at below 1.5% until 2040 is essential according to the document, as the extension of the grace period and maturity alone would not do the trick. Together these three measures would reduce Greece’s debt by 151% of GDP and its gross financing needs, the funds required to roll over its debt, by 39% in 2060.

The document also looks at an EU buyout of up to €14bn in IMF bailout loans, as the Europeans signalled they would be ready to support it. This would help to lower the bar, but Greece could still struggle, especially in the more pessimistic scenario.

There is one concession the IMF staff is willing to make to the Europeans. They accept that debt relief is conditional on the implementation of the bailout measures, but only up to 2018. After 2018, there should be no conditions, something that the Europeans might find impossible to agree to. This is also true for any agreement to back any losses from locking-in interest rates for Greece, which effectively is a subsidy. 

Macropolis notes that the report was distributed to its executive board but was neither discussed nor approved there. The move was controversial and a sign of the pressure Christine Lagarde and its staff are under from non European members, writes the FT.

Our other stories

We also have story on the whether Van der Bellen's anointment as Austria's president has been a Pyrrhic victory; on Merkel’s desperation to salvage her Turkey deal; on the IMF’s criticism of Italy’s fiscal policy; on the popping of the Veneto banking bubble; on the restructuring of BES; on EU regulation of bail-in-able securities; on why Spanish total factor productivity fell during the bubble; and on Adair Turner's deep thinking about helicopter money.

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