IMF Pushes Europe to Ease Greek Burden

The Long Goodbye

By MATTHEW DALTON And COSTAS PARIS

The International Monetary Fund, facing discontent among its members about the huge sums it has lent to the euro zone, is pushing the currency bloc's governments to take steps to lighten the burden of the bailout loans they made to Athens, officials familiar with continuing discussions said.

The IMF pressure—which officials said has been clear in private discussions among Greece's official lenders—comes in response to mounting evidence that Greece's deep recession has thrown the country's bailout program woefully off track from targets set earlier this year.

IMF officials maintain Greece's debt must be reduced to "sustainable" levels before the fund releases billions more euros to keep Athens from running out of cash, some officials said. The most effective way to do this would be for Greece's bailout lenders to forgive some of the debts Greece owes them.

Such a step would meet fierce resistance from euro-zone governments, such as Germany, which have already lent €127 billion ($157 billion) to Greece and are adamant that it shouldn't expect any more concessions.

The German government has said repeatedly in recent weeks that it expects Greece to uphold the program it agreed to in early 2012 and that no extra German financial aid will be made available. Any move to reduce Greece's debt to the euro zone would need to be approved by Germany's parliament, where lawmakers are increasingly impatient with Greece's desire for more-forgiving bailout terms.

An IMF spokesman declined to comment.

Exactly how to define "sustainable" will be the centerpiece of a debate expected to stretch for months over how to right the bailout program and keep Greece in the euro zone. The IMF now wants to see the government debt ratio close to 100% of gross domestic product in 2020, when Greece is supposed to have finished repaying €33 billion in loans to the IMF, officials said.

That would be considerably lower than a target of 120% of GDP agreed in February, when Greece, the euro zone and the IMF signed a new bailout agreement for the country that imposed sharp losses on the Greek government's private-sector creditors. The shift reflects concerns among fund staff that even the previous target won't leave Greece in a position to repay its debts by 2020.

The latent dispute provides an indication of the tensions that Greece, and its overbearing debt burden, will continue to generate among its official creditors if it manages to remain in the euro zone.

Since February, Greece's finances have deteriorated sharply. The economy is now expected to contract more than 7% this year, much more than the 4.7% drop forecast in February, and the recession is likely to continue into 2013. That has depressed tax revenue, boosted government safety-net spending and widened the gap in government finances that will need to be plugged.

The IMF has put forward several options for filling the hole that will also push Greece's debt closer to 100% of GDP, the officials familiar with the discussions said, but these ideas are meeting staunch resistance from the euro zone. The mildest would be another cut on the interest rate Greece must pay on the bailout loans from euro-zone governments. Greece is set to pay over €39 billion in interest payments from 2012 through 2014.

The more politically controversial options include having the European Central Bank and the euro zone's national central banks accept a 30% reduction in their Greek bonds, which have a face value of about €50 billion, said one official familiar with the discussions. Another plan calls for euro-zone governments to accept haircuts on the bilateral loans they have made to Greece. The IMF is Greece's most senior creditor and lends under the assumption that it won't accept write-downs on loans it has extended.

Under one measure that would dramatically lighten Athens's debt burden, the European Stability Mechanism, the euro zone's bailout fund, would take on the nearly €50 billion in debt that the Greek government is borrowing to recapitalize its banks. Euro-zone leaders in June agreed to allow the ESM to directly recapitalize euro-zone banks, and they said the ESM, once given that power, could use it retroactively for as much as €100 billion lent to Spain for bank recapitalization.

Doing the same thing for Greece would reduce the government's debt by 15% to 20% of GDP, said one euro-zone official.

These discussions won't gather steam for at least another month while officials from the IMF, the ECB and the European Commission, the European Union's executive arm, review the Greek bailout. Officials from the three agencies, the so-called troika, left Athens on Sunday, saying they would work on the review through August and return to the Greek capital in early September.

Euro-zone officials want to wait for a ruling from a German court in September on whether the ESM is constitutional, before they consider the controversial step of allowing the fund to take on even part of the cost of Greece's bank recapitalization, said one official.

To get any more help from the euro zone, officials said the Greek government will have to show that it has redoubled its efforts to pass so-called structural reforms—improving tax collection, further overhauling its labor markets and selling state-owned assets, among other measures.

"If it's another case of false Greek promises," said an official familiar with the talks, "what will happen is that the existing funding will stop and Greece will find itself outside the euro zone."

Greek officials have admitted that if progress isn't made in structural reforms, the funding from its creditors will stop and Athens will have little choice but to print its own currency and leave the euro zone.