Debt Relief or a Fourth Financial Assistance Program for Greece?

Posted on by

Yves here. The difference between different flavors of austerity in Greece may seem like what the Japanese would call a height competition among peanuts. And it may seem even more peculiar to find the IMF trying to act as a moderating force on Germany.

The IMF has been pushing for some time for bona fide debt reduction for Greece, not more extend and pretend. As we’ve discussed at length in earlier posts, the staff at the IMF has been in an internal revolt over the Fund continuing in the Greece bailouts, to the extent of repeatedly leaking documents, like a program review that said in bureaucrat-speak that Greece couldn’t pay off its massive borrowings. The IMF’s rules require that loan be made to borrowers that look viable at the time of the loan, as they won’t require yet more lending to service outstanding debt.

While Greece not meeting that standard seems like a no-brainer, for the IMF to be revealed to be saying as much put the various European governments that have been telling their citizens otherwise in a hot spot.

With elections coming up this fall, Germany’s government is particularly loath to admit now that the loans to Greece need to be written down, even though this is a matter of loss recognition, not of the loans ever having a chance of being money good. The guest post below has some mind-boggling stats on how far the Greeks gone in squeezing their budgets to satisfy Troika paymasters.

The immediate pressure come from yet another bailout deadline, this one in early July. And a Financial Times story yesterday makes clear how important the optics in Germany are:

Eurozone finance ministers and the International Monetary Fund are exploring a compromise plan for Greece’s bailout that would provide much-needed funds this summer while delaying sensitive talks on debt relief.

Diplomats said the proposal, put forward by the IMF, would involve the fund taking a formal decision to join Greece’s bailout with the proviso it would not provide any money until the euro area gives further details on how it is prepared to ease Athens’ debts.

Supporters of the plan argue that it would deliver formal IMF backing for the Greek programme, which Germany has made a prerequisite for Athens to receive any further tranches of aid from its €86bn bailout. At the same time, the approach would buy time for politically sensitive talks on a debt relief package, which the IMF says is essential for Greece to recover…

The Washington-based fund had previously insisted it would decide to join the bailout only if the euro area provided much more detail on the debt relief it would give. But people involved in the talks said the IMF’s plan to initially withhold its bailout loans would remove this urgency and allow talks on debt relief after Germany’s elections in September.

Note that Greece met the conditions of its last bailout round, at even more domestic pain. The IMF will not join the July financing under the scheme sketched out above but has committed to participate if Europe, meaning Germany and other hard-core austerians like The Netherlands agree to, as opposed to make handwaves under duress about, debt cuts. While it still seems more likely than not that the IMF will blink in the end, sitting out a round of financing is a harder line than it has held so far.

By Zsolt Darvas, a Senior Research Fellow at the Corvinus University of Budapest. Originally published at Kathimerini; cross posted from Bruegel

The Eurogroup faces a difficult choice on Greece — implementing a debt reduction plan drastic enough to make a return to market borrowing possible, or agreeing to a fourth financial assistance programme and continuing to fund Greece at the preferential lending rate.

After long delays and tough negotiations, the Greek parliament has formally adopted the measures needed to conclude the current review of the third financial assistance programme, amid protests on the streets. The Greek government now expects the Eurogroup to come up with debt relief measures.

We have been here before. The conclusion of almost every review of the various Greek financial assistance programmes went the same way and left largely unfulfilled expectations for debt relief.

Meanwhile, even though almost two-thirds of the three-year financial assistance programme has passed, the IMF is still hesitating to join this third programme. Beyond various reforms, IMF demands lowered fiscal targets and debt relief – applied only to the European part of the official loans, not its own.

Debt relief measures were promised by European lenders at the inception of the current third financial assistance programme. Those measures were supposed to be specified toward the end of the programme, conditional on Greece implementing the programme conditions.

The programme ends in only about a year from now and Greece is implementing it, so it is time to think about what will come after.

There is certainly promising good news: economic growth in the past two years was much better than expected and growth is set to accelerate in the coming years. Unemployment is decreasing, though painfully slowly. The Greek government’s primary budget surplus well exceeded expectations and reached 3.9% of GDP in 2016. What’s more, since the Greek economy is estimated to perform well below its potential output level, the so-called cyclically-adjusted primary budget surplus reached an astonishing 8.7% of GDP in 2016, according to the European Commission’s May 2017 estimates. While the Commission’s cyclical adjustment methodology has a number of weaknesses (as I argued here), the 8.7% primary surplus estimate is remarkable. It suggests that, after all the negotiations and the pain, Greece has implemented major fiscal adjustments.

So what’s next? While Greek public debt is expected to fall, it remains very high. The European Commission’s most recent projection foresees a decline from 179.0% of GDP in 2016 to 174.6% in 2018. Even if Greece maintains an overall budget balance, new borrowing will be needed, because a large amount of debt will mature in the coming years which will have to be repaid (see here). Given the high level of debt, the dominant share of official creditors in Greek debt and all the uncertainties that characterise the Greek economy and politics, it is unreasonable to assume that Greece will be able to return to market borrowing at an affordable rate in the foreseeable future.

This leaves bitter choices for the Eurogroup: implement a debt reduction plan drastic enough to make a return to market borrowing possible, or to agree to a fourth financial assistance programme and continue to fund Greece at a preferential lending rate. None of the options is attractive to euro-area lenders.

Greece has suffered a dramatic economic and social collapse since 2008 and all Greek governments have bowed to the decisions of the Eurogroup. It is now time to fulfill the promise of debt relief and thereby offer more hope for the future.

Print Friendly, PDF & Email


  1. bmeisen

    Originally Greece agreed to create a land registry and a just system of tax collection. Arguably if they had not made these promises the banksters would have had more difficulty screwing them. The ECB and Eurogroup smiled a self-satisfied smile welcoming the original Europeans and turned to the next task at hand. The Greeks still have neither a land registry nor a basis for just collection of taxes. They do have neo-calvinist northerners turning the screws and wimpsters holding worthless paper. It’s a complete mess. Those such as the author of the post above who portray the Greeks as victims ignore the dysfunctionality at the heart of public finances in Greece. The Greeks have no basis for issuing public debt other than their tourism posters and the promise they made more than 20 years ago to create a land registry and a functioning internal revenue service.

    1. Disturbed Voter

      Like Exodus, “let my people go” … except they are already in their promised land. Let the EU governments eat the entire expense … let the Greek state fail and start over from scratch. Greece will be out of the EU permanently, and out of the Euro, never to return. The UN can pay to carry them thru the worst of it, until they can establish a new political economy, free of the EU and the US.

      So what can the EU do? Mint a trillion Euro coin, and put it in a vault in Berlin or Paris or Brussels. Britain needs to do the same thing, complete cut off of all relations with the EU and the Euro … they are also a failed state, but they can recover more easily. EU should have no political, economic or financial relations with either country … they have damaged them enough (revenge for WW I and WW II and continuing occupation by Nato. And end Nato already. Bring all the Americans home, except as Blue Helmets, we have no business being in Greece or Britain either.

    2. Si

      Maybe – but the Greeks have a history of defaulting so it should not have come as any surprise. The Greeks are victims of predatory lending of sorts. They have been loaded up with debt they cannot possibly pay.

      Dont forget that the vast majority of the bailout money goes to the banks. The reasons the Germans don’t want to let Greece of the hook is because their banks are up to their necks in Greek debt.

      They should have been allowed to leave the EU long ago. Back to their own currency which would have helped their tourism industry.

    3. templar555510

      Absolutely right. Getting the Greeks into the Euro was just another piece of hedging by the Goldmanites and their accomplices within Greece . This can never end well, but just where and when and how it will end who knows . Certainly not the politburo that is the EU.

  2. paul

    “the greeks” is too broad a definition.
    My last visit to athens presented me with competing bin dippers and people lucky enough to have a matress on the street.
    I do not speak greek, so I cannot report how much responsibility they felt for the ongoing vivisection.

  3. ChrisAtRU

    Pure psychopathy … this is why I am doubtful of any relief for the Greeks or of any attempts to reform the EU/EZ from within (of the sort presented by Varoufakis, for example). If driving Greeks to the point of escalating suicide rates and being too poor to bury their dead hasn’t elicited sympathy and and urgency to change the structure of the Euro then nothing will.

    1. Si

      I used to like what Varoufakis said before he was elected (and just after … he didn’t last long though), but now he contradicts himself too much. His insider view of what it was like to deal with Schauble is instructive.

      The EU is the proverbial Hotel California.

      There will be bailout 4, then 5, then…….

      And for the Greeks the situation will get worse because the money is for those who hold the debt.

    2. UserFriendly

      I just don’t understand what Germans are expecting out of this. If I was a young greek just starting out I would hate Germans with a passion right now….. A resentment I imagine most of southern europe to have by this point.

  4. dereinsameschuetze

    Greece will continue to be broken on the rack of austerity by the banksters until all that’s left of their country is the stinking carcass of a failed state at the Balkan Doorstep of Europe…

  5. RBHoughton

    I remember way back in 1970s when Greece was first getting into the EU there was skullduggery going on. At that time the global textile industry was subject to quotas and Greece was the route into Europe to avoid them.

    I suspect the country has always been one of those places where the rules don’t work; where the pleasure of avoidance is more fun than compliance.

Comments are closed.