Depending on how you look at things, Greece either just picked up a powerful new ally in its bailout saga—or just had its hopes of staying on the euro unexpectedly undermined. The International Monetary Fund said Tuesday night that it would not back a new rescue package for the beleaguered country unless the deal included “debt relief measures that go far beyond what Europe has been willing to consider so far.” This is fairly powerful threat, since eurozone leaders are counting on the fund both to help finance and monitor the estimated €86 billion aid agreement they struck with Greece on Monday. It’s a bit like your head coach threatening to walk out one week before the season starts.
In a short memo it made public Monday, the IMF called Greece’s debts “highly unsustainable.” That’s a problem, because the fund’s in-house rules more or less bar it from lending to countries that it does not think can realistically pay back its loans. Worse yet, it notes that Greece’s economy and financial system are further deteriorating by the day thanks to the bank shutdowns and capital controls that have ground commerce to a halt. It also points out that Europe’s entire aid plan relies on some heroic assumptions about Greece’s future, such as the idea that the government can maintain unusually large budget surpluses for decades to come. “Few countries have managed to do so,” it notes wryly.
In the IMF’s view, Europe has a few options to make the math on Greece’s debts work. It can simply send more money to Athens each year to fund its budget. It could also offer Greece “deep upfront haircuts,” which is just technocrat speak for writing off a big chunk of the debt’s face value outright. If neither of those options is pallatable—and Monday’s agreement explicitly rules out a haircut—Europe might be able to accomplish the same ends by giving Greece more time to pay down its loans. How much more? The IMF suggests a grace period of 30 years. Since some of Greece’s loans already aren’t scheduled to mature for three decades, that’s akin to admitting that many of them will never be repaid in your or my lifetime, if at all. “The choice between the various options is for Greece and its European partners to decide,” the IMF writes.
This is all a somewhat ironic turn of events. Germany, along with its fellow Northern European hardliners, has adamantly opposed a write-down of Greece’s loans, arguing that it would violate eurozone rules. At the same time, Germany has adamantly insisted that the IMF take part in a new bailout, to the point where Chancellor Angela Merkel threatened to kill the deal entirely if Greece continued objecting to the fund’s involvement. Now, Berlin and the IMF are at odds. While the Monday accord specifically lays out the possibility that Europe will restructure Greece’s debts to make paying them back a bit easier, nobody seemed to be contemplating the sort of drastic measures the fund is demanding. Indeed, according to Reuters, a German spokesman said that while “extending debt maturities is an option … there must not be a haircut via the backdoor.” That’s essentially what the fund is calling for.
All of this may also make life a bit harder for Greek Prime Minister Alexis Tsipras, who is attempting to push a set of austerity measures through his parliament that Europe’s leaders have demanded as a prerequisite for further bailout discussions. The vote is scheduled for later tonight. And with the IMF injecting new uncertainty into what seemed like an almost done-deal, it may be even harder to round up support for what was already a deeply divisive proposal.
Could all of this cause the bailout bargain to unravel entirely? If the IMF and Berlin can’t resolve their differences, it’s possible. That said, some of Greece’s creditors have already embraced the fund’s memo—particularly France, which has basically played good cop to Germany’s bad throughout these talks. And sources involved with the talks seem to believe the parties will be able to reach some sort of compromise. Negotiators already knew about the memo during this weekend’s talks and relied partly on its financial estimates to determine the size of the loans Greece would need. Unless they were trying to sabotage the bailout altogether, it seems unlikely they would have crafted an agreement knowing a crucial player like the IMF could never accept it.
But, given how convoluted this saga already has been, maybe it’s best not to assume anything.