Thursday

19th Sep 2019

Analysis

Greek debt deal doesn't solve the problem

  • The IMF, led by Christine Lagarde (c), had to give in to German finance minister Wolfgang Schaeuble (r) (Photo: Council of European Union)

Eurogroup participants said the outcome of Tuesday's (24 May) meeting was "a breakthrough", a "decisive agreement" and a "very important moment" in the Greek bailout programme.

For the first time, the representative of the International Monetary Fund (IMF) said, all Greece's creditors "recognise that Greek debt is unsustainable and that Greece needs debt relief".

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Concrete measures were detailed to reduce the cost of debt repayment in the short and medium term, and "possible debt relief" was promised for the longer term.

But the 2AM agreement is not so new and it is not decisive. It looks more political than a guarantee that Greece's debt problem is going to be solved.

"It's a face-saving exercise," a source told EUobserver.

Sources from different institutions admitted that all sides needed an agreement just before the G7 summit in Japan this week and to avoid a new Greek crisis at the same time as the British EU referendum and the Spanish election in June.

As a consequence, "the agreement is not credible," economist Zsolt Darvas told EUobserver.

Darvas, a senior fellow at the Bruegel think-tank in Brussels, said that the Eurogroup's statement was "not realistic" when it said that debt measures would "facilitate a gradual return to market financing" for Greece.

At the start of the meeting, Eurogroup president Jeroen Dijsselbloem asked participants if they had a spare shirt because they would not leave before a deal was done.

The strongest pressure was on the IMF, which had said it would stay on board of the bailout programme only if "upfront unconditional" debt relief was granted to Greece.

'Major concession'

In the end, the IMF representative, Poul Thomsen, had to agree that debt relief will be approved at the end of the programme, in 2018, and only after an assessment of Greek debt sustainability.

It's a "major concession," Thomsen told journalists. It means that for now, debt relief for Greece is only a possibility that will be discussed in 2018.

In short, the IMF had to give in to German finance minister Wolfgang Schaeuble, the most powerful man in the room.

Schaeuble refused any debt relief before the end of the programme, in order to be sure that Greece will do what is required from it. Debt relief measures would also have to be adopted by the German parliament, which is something the government in Berlin wants to avoid before the 2017 general election.

The Eurogroup's statement did not explicitly say that the Greek debt was not sustainable. It said on the contrary that it was "confident" that short-term measures and the bailout programme "will bring Greece's public debt back on a sustainable path".

It is not the first time that Greece's creditors mention the sustainability of the debt.

When eurozone leaders agreed on a new bailout last year, they said that there were "serious concerns regarding the sustainability of Greek debt".

Prior to that, in 2012, the Eurogroup had already said that it would consider "further measures … if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio".

Not 100 percent sure

They added that the Eurogroup was "ready to consider, if necessary, possible additional measures … aiming at ensuring that gross financing needs remain at a sustainable level".

At the same time, Tuesday's agreement is not definitive.

The IMF only said that it would recommend to its executive board to stay in the bailout programme, and that decision will come after a new debt sustainability assessment (DSA) is done later this year.

"The IMF will participate provided that a revised DSA suggests that measures are sufficient to conclude that debt is sustainable," Thomsen said.

Dijsselbloem admitted on Wednesday that is was not 100 percent sure that the IMF would stay in the programme.


That means that when the new IMF's DSA is ready and if it says that the Greek debt is still not sustainable, the debt relief discussion could be back on the Eurogroup's table before the fund's executive board takes its decision.

Measures agreed on Tuesday may not change the IMF assessment.

While talks on long-term debt relief measures are postponed until 2018, short and medium-term measures "cannot really [be] quantified", Klaus Regling, the head of the ESM, the eurozone emergency fund, said on Tuesday.

Bruegel's Darvas said that before the Eurogroup meeting, "the IMF had very strong demands, and the agreement contains nothing they were asking".

Financing for decades

He said that a "solution closer to the IMF's solution” would require much stronger restructuring of the debt and lower fiscal targets for Greece.

EU sources say that the political will at the IMF to stay in the programme, as shown by the fund's director Christine Lagarde and its most powerful member states - the US and European countries - will ease the next discussions and that the fund will compromise again on debt relief.

But when the programme ends in 2018, Greece and its creditors could be faced with a familiar alternative.

"Debt sustainability is likely to be still at risk," Darvas said. The choice would then be between a haircut (a reduction of the debt with losses for lenders) or a fourth bailout programme.

"Unless there’s a very big restructuring of the debt, Greece will need continued financing for decades," Darvas said.

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