Greek Debt Relief Deal Fails In Last Minute, As Germany, IMF Clash Again

Stop us if you've heard this story before.

Insolvent Greece, having last week voted itself into even more austerity in hopes of unlocking some of the money promised it by Brussels so it can then use it to repay debt maturities owed to the ECB (whether it will actually follow through with said austerity measures remains unclear, though most likely not), is dragged to the finish line of yet another Euro finance minister negotiating session with promises that this time a debt relief deal is virtually guaranteed, and then... it all falls apart.

That's what again happened today, when Euro-area finance ministers gathered in Brussels with hopes, at least for the Greek delegation, to come home with a signed agreement, only to fail to break the impasse on debt relief for Greece, delaying the conclusion of the country’s bailout review and the disbursement of fresh loans needed to repay obligations in July.

“The Eurogroup held an in-depth discussion on the sustainability of Greece’s public debt but did not reach an overall agreement,” said Jeroen Dijsselbloem, the Dutch finance minister who presides over meetings with his euro-area counterparts, and who again failed to reach a solution after another hardline stance by his German colleague, Wolfgang Schauble, prevented any potential concessions. As a reminder, ever since the 3rd Greek bailout in the summer of 2015, rhe IMF and Germany have been at odds over Greece’s economic outlook and the amount of debt relief required to assure economic stability: it was the same debate, that prevented a deal from being inked on Monday.

The big issue is what happens to the Greek economy after 2018, when the current bailout expires. The IMF, which has demanded debt haircuts in order to fund the ongoing bailout, has repeatedly raised doubts about Greece’s ability to maintain such an optimistic budget performance for decades - it's like Bank of America's forecast for US GDP through 2027 which anticipated precisely zero recessions; meanwhile, key creditors are pushing for a more positive outlook (guess who will be wrong). The reason is that less ambitious fiscal targets would increase the amount of debt relief needed, meanwhile the Greek population continues to suffer.

As Bloomberg explained after the latest meeting, the debt measures proposed by euro area finance ministers were not enough for the IMF to come on board the Greek bailout, and unequivocally say that Greece’s debt is sustainable, according to an official familiar with the discussion.

There was some movement, though not quite enough, official says, asking not to be named as Eurogroup meeting wasn’t public There’s some frustration with the IMF among euro area finance ministers, pressure on Fund to move will increase over the coming weeks

In any case, work will continue in the coming weeks with the aim of reaching a conclusion on June 15 at the next meeting of ministers, Dijsselbloem said.

Last May, Euro-area finance ministers committed to a set of measures to ease the repayment terms on Greek bailout loans after the end of the program in 2018, but the degree to which these measures will be implemented is still a subject of contention. 

Among the options listed is the extension of maturities on euro-area loans to Greece, as well as the capping and deferral of interest payments. The IMF has said it wants these options to be specified further, so that numbers “add up” and annual Greek debt refinancing needs are kept below clearly defined thresholds

According to Bloomberg, after eight hours of talks and multiple draft compromises, Athens and its creditors couldn’t reach an accord that would ease Greece’s debt and that would convince the International Monetary Fund to agree to help finance the country’s bailout. The IMF has been seeking more debt relief for the country, pushing euro-area creditors to ensure the sustainability of Greece’s €315 billion ($354 billion) of obligations before it participates in the program. Some nations including Germany object to a debt restructuring while also insisting that the Washington-based fund join the program to lend credibility to the bailout.

The reason why the can was kicked again is that Greece doesn’t have a large maturity deadline until July, when €7 billion euros in obligations come due, and Europe has a habit of waiting until the last moment before disbursing the funds that Athens will then turn around and use to repay the ECB.

Delaying resolution of the program review adds to months of uncertainty that have taken their toll on the Greek economy - which has slipped back into recession --and kept the country from returning to the bond market.

Recession notwithstanding, Dijsselbloem also said the parties agreed on a target for Greece’s primary surplus, which excludes interest payments, of 3.5% of gross domestic product until 2022. Which is funny: it was Mario Draghi's secret deals with Greece when he was still part of Goldman, that masked the Greek debt mountain, and made the country's surplus appear artificially high. The eventual result was not one, not two, but three Greek bailouts.

“The Greek authorities are taking their responsibilities and I think the partners of Greece are also taking their own responsibilities,” European Union Economic and Monetary Affairs Commissioner Pierre Moscovici said. “There’s been a shared effort to narrow the gap between positions -- we haven’t yet concluded but I hope under the guidance of the president of the Eurogroup it will possible three weeks from now.”

Additional debt relief is also needed for the ECB to include Greek bonds in its asset purchases program, which would ease the country’s access to bond markets, and is the reason why last week, Greek lawmakers approved more austerity measures in hopes of mollifying creditors, including pension cuts, tax hikes and other structural economic reforms. The resulting hope that Greece would be included in the ECB's QE was the longest winning streak in Greek capital markets in years.

For now, however, Greece has to wait, most likely until the very last minute before the €7 billion in July obligations come due.