EU and IMF split over debt relief for Greece

Greece’s government was to meet Eurozone finance ministers Monday to review economic reforms passed since last summer’s bailout deal. For the first time in six years and after three massive international bailouts, debt relief is on the agenda in talks bringing out divisions among the country’s creditors.

Greek Prime Minister Alexis Tsipras defends tax and pension forms in Greece's parliament, 8 May 2016. Reuters/Alkis Konstantinidis

The Eurogroup meeting of Eurozone finance ministers came a day after the Greek government passed highly unpopular pension and tax reforms that Prime Minister Alexis Tsipras defended, saying they were both “sustainable” and helped to put debt relief on the agenda for the first time.

“When they [Tsipras’s governing Syriza party] fought for re-election last year, they were basically opposed to many of the things that have been implemented,” says Diego Iscaro, principal economist at IHS Global Insight in London.

Olivier Vardakoulias, New Economics Foundation

“The one prize they are after is debt relief, and we’ve been hearing the IMF [International Monetary Fund] quite strongly voicing the opinion that Greece’s debt is not sustainable without some kind of relief.”

Greece defaulted on loan repayments last July before agreeing to a rescue package worth 86 billion euros in August – its third bailout since 2010 – and with another major repayment is due this summer, the IMF and other creditors in the European Union are putting the Greek government under pressure to reign in public spending.

Greece is already looking to implement cuts that will amount to 3 percent of its GDP, around 5.4 billion euros, by 2018, while the EU and IMF are demanding an additional four billion euros in cuts.

But the IMF’s calls for relief are both raising the latest hopes of an end to Greece’s economic struggles and suggesting friction between creditors.

“The Europeans didn’t want to hear about a potential debt haircut and a partial default in 2010,” says Olivier Vardakoulias of the London-based New Economics Foundation. “The IMF played the game, but now it has very clearly stated that it will not continue being part of the program if there is no debt relief.”

Debt relief would bring a welcome change for a Greek state saddled with multiple debt burdens it has struggle to pay back.

“The Greek debt and future payment would need to be brought down, in the immediate and long-term future, and this would be effectively very positive news for Greece,” says Vardakoulias. “But the problem here is that many European governments, obviously among them the German government, do not want that.”

By passing reforms like those debated over the weekend, the Greek government certainly has adopted a softer approach to negotiating with lenders than the combative posture of 2015.

Still, at this point, the Eurogroup meeting expected in the coming weeks and months could go any possible way.

“For Germany in particular, debt relief is a politically difficult issue, but there should be some common ground,” says Iscaro. “Given that the IMF has mentioned they’re not looking for a nominal cut in the value of Greece’s debt, […] re-profiling should be enough. That should be easier for countries like Germany to sell to their electorates.”