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The IMF Is Playing Hardball Over Debt Relief for Greece

The Davos World Economic Forum 2015The Davos World Economic Forum 2015
Your move, Angela...Photograph by Simon Dawson — Bloomberg via Getty Images

It could be the gambit that breaks the deadlock over Greece (or that breaks the Eurozone, depending on how badly this year’s round of bailout poker is played.

The Wall Street Journal reported Tuesday that the International Monetary Fund wants to let Greece skip paying either interest or principal on its bailout loans until 2040. That’s a much more far-reaching rescheduling of its debt than key creditors such as Germany have so far been willing to accept.

According to the WSJ, the IMF wants Greece to have until 2080 to pay back its loans, and it wants the interest rate on loans from Eurozone countries, which now make up the bulk of Greece’s national debt, to be fixed at 1.5% for 30 to 40 years.

The IMF has been arguing for major debt relief for Greece since well before its second bailout deal back in 2012: its charter forbids it from lending to insolvent countries, and the economic assumptions underlying Greece’s three bailout deals have been increasingly heroic. The IMF’s managing director, Christine Lagarde, recently called the country’s debt burden “highly unsustainable.” Gross public debt, as a percentage of GDP, has risen from 109% in 2008 to 178% as of the end of last year, according to IMF data. After appearing to stabilize at the end of last year, the country’s economy shrank again in the first three months of 2016.

Eurozone countries, led by Germany, have fiercely resisted any form of aid to Greece that looks like an outright transfer to the country, even though Eurozone officials and economists routinely argue that the area would ideally have a ‘fiscal union’ to complement its monetary one.

Rescheduling the debt as the IMF wants wouldn’t formally turn the bailout loans into transfers, but it would badly blur the line between the two. By 2080, when the IMF wants to see the last bailout loans repaid, almost all of the taxpayers who grudgingly went along with Chancellor Angela Merkel’s bailout proposals will be dead. In addition, fixing the interest rate so low for so long makes it highly likely that other governments would be borrowing at more expensive rates at some time during the tenor of the loans to Greece–creating a fiscal subsidy in all but name.

As such, giving in to the IMF’s demands would risk bolstering support for anti-bailout parties such as Germany’s Alternative für Deutschland, which has already come from nowhere to be the country’s third most popular party (one recent poll put its support at 13%).

However, if the Eurozone doesn’t agree, then the IMF may drop out of the bailout, forcing the Eurozone to fund the whole $95 billion program itself, and creating a toxic binary dynamic between creditors and debtor that is more likely to end in Greece leaving the currency area.