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IMF and Europe in dangerous game of brinkmanship over failing Greek bailout IMF and Europe in dangerous game of brinkmanship over failing Greek bailout
(about 5 hours later)
The eurozone and the International Monetary Fund are engaged in a dangerous game of brinkmanship over how to respond to a Greek bailout that is going off the rails. The eurozone and the International Monetary Fund are locked in their worst showdown of Europe's three-year sovereign debt crisis, engaged in a dangerous game of brinkmanship over how to respond to a Greek bailout that is threatening to go off the rails.
It is now clear that Athens is highly unlikely to achieve the key IMF benchmark on the rescue of getting its national debt down to a "sustainable" 120% of gross domestic product by 2020. The IMF, it is understood in Brussels, is insisting that Greece's eurozone creditors and the European Central Bank write down or write off up to €30bn (£24bn) in Greek debt to close a funding gap in the Greek rescue plan which may need to be extended by two years.
The word in Brussels, based on assessments from the troika of European commission, European Central Bank and IMF officials scrutinising Greece's compliance with the bailout terms, is that Athens could overshoot the sustainability target by as much as 25% on current trends, begging the question of whether the IMF will remain a party to the rescue. Figures circulating in Brussels estimate Greece's national debt will be between 130-145% of GDP by 2020 on current trends. The showdown between the eurozone and the IMF is being described as eyeball-to-eyeball, a shouting match, and a contest to see who will blink first. It is expected to come to a head next month. The IMF is demanding that the eurozone and the ECB resort to a new policy of Official Sector Involvement (OSI), meaning a writedown or writeoff of Greek debt to its official creditors - a move that the ECB and the German government are resisting fiercely.
The showdown between the eurozone and the IMF is being described as eyeball-to-eyeball, a shouting match, and a contest to see who will blink first. It is expected to come to a crunch next month. The IMF is insisting that the eurozone and the ECB resort to a new policy of Official Sector Involvement (OSI), meaning a writedown or writeoff of Greek debt to its official creditors, a move that the ECB and the German government are resisting fiercely. Greece needs a cash payout from its previously agreed bailout of more than €30bn next month, without which it will go bankrupt and be unable to pay public workers or pensioners.
EU leaders meeting in Brussels for a summit next week are likely to shelve the problem, arguing that they need to wait until next month for the troika report on Greece before deciding their next moves. Greece needs a bailout disbursement of more than €30bn (£24bn) next month, without which it will go bankrupt. It is certain to get the money, it is said in Brussels, since, following chancellor Angela Merkel's fraught visit to Athens this week, no one in the eurozone or in Washington wants to let Greece go bust or exit the common currency. But a new report from the troika of European commission, European Central Bank and IMF officials suggests that Athens is highly unlikely to achieve the key IMF condition for Greece's second bailout of getting its national debt down to a "sustainable" 120% of gross domestic product by 2020.
The disbursement decision will be left to eurozone finance ministers rather than the EU summit which next week will shower Antonis Samaras, the Greek prime minister, with praise for the efforts he's making to tackle the crisis. The word in Brussels, based on assessments from the troika officials scrutinising and enforcing Greece's compliance with the bailout terms, is that Athens could overshoot the debt target by as much as 25% , putting in doubt whether the IMF will remain part of the bailout. Figures circulating in Brussels estimate Greece's national debt will be between 130-145% of GDP by 2020 on current trends.
Next month's crucial troika report will concede that Greece will not make the 2020 debt sustainability target, it is understood. The IMF is insisting that this admission should trigger a discussion among Greece's creditors over how and whether the €30bn-plus disbursement should be made, but the Europeans are seeking to decouple the two issues. EU leaders meet in Brussels for a summit next week, but are expected to shelve the problem, arguing that they need to wait until next month for the full troika report on Greece before deciding their next moves. Brussels officials insist Greece will get the cash it requires, since, following chancellor Angela Merkel's fraught visit to Athens this week, no one in the eurozone or in Washington wants to let Greece go bust or exit the common currency.
With a funding gap opening up in the Greek bailout trajectory of up to €30bn, the IMF is said to be arguing that the Europeans should foot the bill by writing down Greece's official debt. Other ideas being mulled over are to "extend" the €130bn bailout (Greece's second) or concoct a third rescue, all deeply unattractive options for Merkel who would need to return to an increasingly recalcitrant parliament in Berlin in an election year. The disbursement decision will be left to eurozone finance ministers next month rather than the EU summit next week when Antonis Samaras, the Greek prime minister, is expected to be showered with praise for the efforts he is making to tackle the crisis.
The row comes as divisions open up in public between the IMF and eurozone leaders over the merits of austerity, after an IMF study released this week found that it had underestimated the impact that fiscal cutbacks have on economic growth. This study has been rebuffed by some eurozone leaders, with commissioner Olli Rehn arguing that it would be a mistake to change course. "The EU cannot be making swift turns, rather it is a convoy and you have to carefully consider which policy turns are best," he said. Amid continuous speculation as to when Mariano Rajoy, the Spanish prime minister, will submit a request for the biggest eurozone bailout yet, it is also understood that he will resist pressure to table the bid at next week's summit after warnings from Berlin against asking for help yet.
Berlin is said to be telling Rajoy that Spain will fall on to a slippery slope and find itself cut out of the bond markets for years if it asks for a bailout
The row comes as divisions open up in public between the IMF and eurozone leaders over the merits of austerity, after an IMF study released this week found that it had underestimated the impact that fiscal cutbacks have on economic growth.
For Lagarde, though, the issue is clear. She reiterated on Friday that Greece should be given "a bit more time" to hit its targets.For Lagarde, though, the issue is clear. She reiterated on Friday that Greece should be given "a bit more time" to hit its targets.
Martin Koehring of the Economist Intelligence Unit argued that Greece must be given more debt relief, as the IMF cannot keep lending to Athens without a realistic prospect of debt sustainability.
"If the IMF were to withdraw from the Greek bailout deal, this could herald the collapse of the whole rescue mechanism for Greece and other vulnerable countries," Koehring added.