With major differences not so major, IMF departure from talks “wanted to pass messages to both sides”

(Source: Reuters) When the International Monetary Fund announced it had ordered its team home from stalled debt talks with Greece, the gesture of frustration was aimed at Athens but also at euro zone governments, sources familiar with the talks say.

“The IMF wanted to pass messages to both sides,” one Brussels source familiar with the IMF’s position said.

IMF spokesman Gerry Rice cited “major differences” over pensions, taxation and financing when he announced on Thursday that the global lender’s representatives had returned to Washington in the absence of progress in the negotiations.

The Greek government has rejected proposals by the creditors to scrap an income top-up for poorer pensioners and reduce state subsidies of pension funds, and refused to raise value added tax on electricity and other household necessities.

But by mentioning financing, the IMF also wanted to signal is exasperation at European governments’ refusal to discuss debt relief for Greece, without which IMF officials say the country’s finances simply won’t be sustainable. The IMF under its own rules cannot lend to a country if the debt is not sustainable. In 2012 Mrs Lagarde took a political decision to declare the Greek debt sustainable in order to remain part of the bailout. The European institutions had also made a commitment to discuss the debt when Greece achieved a primary. This they have refused to do.

In the Fund’s eyes, if Greece is allowed to make less of a fiscal adjustment than originally sought, someone else has to put in extra money or reduce debt costs to make the numbers add up. And that someone can only be European governments.

“The more distant the measures and targets from the original commitment made in 2012, the higher the need for additional financing and indeed debt relief to make Greece’s debt sustainable,” Rice told reporters.

A person familiar with the talks said the IMF has been telling euro zone creditors and the European Central Bank for months that a combination of restructuring existing loans and bonds and providing additional lending will be necessary to enable Greece to put its finances on a sound footing and stay in the euro zone.

“When we talk about debt relief, the Europeans just don’t want to listen,” the person said.


German Finance Minister Wolfgang Schaeuble has taken the lead in refusing to discuss any easing of Greece’s debt load until it has fully implemented the reforms promised by previous governments and completed the bailout programme.

German public opinion has become so negative about bailing out Greece that Schaeuble fears any mention of fresh money or write-offs for Athens could make it impossible to get the disbursement of the remaining bailout funds through the German parliament. The hostility of German public opinion towards a Greek debt write-off however,  is largely the result of Mr Shcaeuble’s own doing, whose statements and interviews in the German popular press have been misinforming the German public in the last few months, something that Mr Schaeuble, if he wanted,  could redress.

But behind the curtains, informal discussion of debt relief is taking place, one person familiar with the talks said.

“There is a conversation,” he said, without giving details.

The Fund sees its role as a truth-teller, ensuring that a borrowing country’s public finances are sustainable. That calculation combines loan maturities, interest rates, economic growth, productivity and the fiscal balance.

But unlike in dozens of bailouts around the world, the IMF is not in control in the euro zone, where it plays second fiddle to European governments, with the European Central Bank an uneasy third partner in trying to enforce the programme.

And having lent substantially more to Greece than in any previous bailout in its history, the IMF is unlikely to contribute money to any third programme, although it has not formally ruled that out. European creditors would insist that it continue to provide expertise and help monitor compliance.

In the case of Greece, which has a debt mountain equal to 185 percent of gross domestic product, sustainability requires running a significant budget surplus before interest payments. But with the economy back in recession and the government determined to avoid harsher austerity measures, the creditors are talking about reducing the primary surplus target.

Rice noted that pensions and wages account for 80 percent of Greece’s total primary government spending, so reforms are necessary all sides agree – but Athens refuses  further cuts to pensions the bulk of which are below the €600 a month mark.

“So it’s not possible for Greece to achieve its medium-term fiscal targets, without reforms and especially of pensions. I think it’s been acknowledged by all sides that the Greek pension system is unsustainable,” he said.

On taxes, Rice said Greece’s policy of imposing ever higher tax rates on a narrow tax base was unsustainable, so it was essential to broaden the tax system, by rooting out large scale tax evasion, something that was included in the Greek government proposals rejected by the lenders .

“Greece has among the largest gaps in the European Union on VAT revenues that are actually collected versus VAT that should be collected, given the rates,” he said. But Athens argues raising taxes without improving the collection mechanism will be ineffective and unfair.