Could a potentially damaging leaked document from the International Monetary Fund (IMF) threaten the already delicate Greek bailout deal agreed to this week?
The document reveals a secret IMF study in which it suggests Greece will not survive on the proposed funds that Europe and Germany are offering to them.
The leaked document shows the IMF is extracting a hefty price for taking part in a third Greek bailout. In effect, the IMF is giving Europe a choice of whether it wants to give Athens a 30-year holiday on all interest and debt repayments, or else accept savage write-downs on the loans it has made to the debt-ravaged country.
And it leaves German Chancellor Angela Merkel with an invidious choice
Merkel – who has consistently promised German taxpayers that bailing out Athens will not cost them a euro, and has refused to discuss renegotiating Greece’s debts until the country shows progress in implementing reforms – could decide that she will proceed with a Greek bailout without IMF support.
But going ahead without the IMF could make it very difficult for her to win approval in the Bundestag for a new Greek bailout deal.
What’s more, excluding the IMF from Greece’s third €86 billion ($127 billion) bailout would also put a heavier burden on eurozone countries. In the past, the IMF has picked up the tab for about one-third of the cost of eurozone bailouts. If the same formula applied in Greece’s third bailout, the IMF would contribute about €29 billion.
And other eurozone hardliners – particularly Finland, the Netherlands, the Baltic countries and Slovakia – could refuse to take part in Greece’s bailout without IMF involvement.
During acrimonious meetings on the weekend, eurozone finance ministers warned that they would not go ahead with a new rescue plan for Greece without the IMF’s involvement.
The IMF, which is headed by Christine Lagarde, had taken the position that it would not be involved in a new rescue plan for Greece because Athens had defaulted on a €1.6 billion debt repayment it was due to make to the fund at the end of last month.
But eurozone finance ministers exerted pressure on the IMF, saying its involvement was a prerequisite for a third bailout deal.
Merkel also insisted on the IMF’s participation in Greece’s next bailout on the weekend, overriding the objections of Greek leader Alexis Tsipras.
But the IMF – aware of its pivotal role – is extracting a high price for its involvement. In a leaked three-page memo sent to European officials on the weekend, the IMF said Greece needs a 30-year grace period during which it is not required to pay interest or repayments on its debt. (As Greece already has a “grace period” until 2023, this means that the country would not make a single interest or debt repayment until 2053).
Alternatively, Greece’s creditors will have to accept “deep upfront haircuts” – banker jargon for big write-downs – on their existing loans. A final and equally unappealing option would be for eurozone countries to transfer money to Greece each year to enable the country to pay its debts.
Under the IMF’s rules, the fund is not allowed to take part in a bailout if the country’s debt is considered unsustainable.
Brussels is scrambling to find enough cash to keep Athens going for the next few weeks while the country’s third bailout is negotiated.
Athens needs about €7 billion this month (which will enable it to meet a €3.5 billion repayment due to the European Central Bank next Monday and also to repay the €1.6 billion it owes to the IMF). Next month, it needs a further €5 billion.
One possibility is to transfer to Athens the €2 billion profit that the ECB made last year on its holdings of Greek bonds. But that won’t be enough to cover Greece’s needs.
A second possibility is to use the €13 billion left in the European Financial Stabilisation Mechanism, a rescue fund backed by the European Union’s budget.
But Britain’s Treasury chief, George Osborne, has rejected this possibility, saying the idea “that British taxpayers will be on the line for this Greek deal is a complete non-starter”. Other EU countries – such as Sweden, Denmark and Poland – have voiced similar concerns.
A final alternative is for countries such as France and even Italy, which have been fervent supporters of Greece remaining within the eurozone to provide bilateral loans to Athens. Not surprisingly, this has met little enthusiasm.