If there were any questions about where the IMF stands on Greece’s debt sustainability they were answered earlier this week when an updated version of the Fund’s Greek debt sustainability analysis was "leaked [6]" to Reuters on Tuesday morning. The document, which was made available [7] on the Fund's website later that day, said the country's debt "can now only be made sustainable through relief measures that go far beyond what Europe has been willing to consider so far." Recommendations for ameliorating the situation include "maturity extensions with grace periods up to 30 years, explicit annual transfers to the Greek budget or deep upfront haircuts." "The choice between the various options is for Greece and its European partners to decide," the Fund concluded.
The updated sustainability analysis was the latest suggestion from the IMF that its participation in a third Greek program was contingent upon debt relief for the Greeks - a conditionality that Christine Lagarde has threatened to stand by before but never entirely followed through on.
On Wednesday, the European Commission’s own report [8] on the prospects for Greek debt was published and indeed it too showed Athens’ debt load to be entirely unsustainable without "re-profiling" although unsurprisingly, upfront haircuts and budget transfers were not listed as options.
Finally, on Thursday, German FinMin Wolfgang Schaeuble said he doubted if Greece’s problems could be solved without a "real haircut." The problem, Schaeuble continued, is that a real haircut "is incompatible with membership in the currency union," meaning the only way to make writedowns possible is for Greece to take the now famous "time-out" which Schaeuble still contends [9] "would perhaps be the better way for Greece."
Now, with German lawmakers debating the new Greek package, the IMF is digging in on the debt sustainability issue. Speaking to Europe1 radio on Friday, Christine Lagarde said the new Greek deal is "quite categorically not" viable without debt relief. In case that isn’t clear enough, here are the highlights from Dow Jones:
- IMF'S LAGARDE: NO SOLUTION POSSIBLE FOR GREECE WITHOUT DEBT REDUCTION
- IMF'S LAGARDE: GREEK DEBT COULD BECOME SUSTAINABLE WITH RESTRUCTURING
That said, Lagarde now seems resigned to the fact that Germany and its allies in the bloc simply are not going to consider a traditional haircut.
- IMF'S LAGARDE: GREEK DEBT CAN BE SUSTAINABLE WITH MATURITY, RATE CHANGES
- IMF'S LAGARDE: GREEK DEBT'S DIRECT HAIRCUT SEEMS EXCLUDED
Yes, it does "seem excluded," but in case anyone wasn’t entirely clear on this issue, Angela Merkel can help:
- MERKEL SAYS GERMANY WON'T AGREE TO DEBT CUT FOR GREECE
And here’s Bloomberg on [10] Finland’s position:
Finland’s Prime Minister Juha Sipila on Thursday dismissed talk of debt reduction as "useless."
Yes, "useless", and almost as "useless" as the entire discussion around Greece’s funding needs because with the Greek economy in free fall, any estimate of what counts as "adequate" in terms of the size of a third bailout package is out of date the second it’s committed to paper and is ancient history by the time lawmakers across the currency bloc get around to deciding whether or not the Greek cause is worth still more taxpayer support.
All of the above helps to explain why Schaeuble would rather see the Greeks simply leave the currency union - that way, they could legally receive a debt haircut as a kind of parting gift and German taxpayers could be assured that this time truly is the last time.
And for all of the rhetoric out of Angela Merkel about the overarching goal being to keep Greece in the currency bloc, the real reason why Schaeuble’s plan is a non-starter (for now anyway) is rather simple (via Bloomberg):
French Finance Minister Michel Sapin says says he’s "radically against" a plan evoked by Germany’s Finance Minister Wolfgang Schaeuble that Greece could be temporarily put out of the euro currency
"Nothing can happen in Europe if France and Germany disagree," he added.
Perhaps Yanis Varoufakis was right [11] all along.
