FT: IMF wants Europe to write off significant part of debt

(Financial Times) Greece is so far off course on its €172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors.

The warning, delivered to eurozone finance ministers by Poul Thomsen, head of the IMF’s European department, raises the prospect that it may hold back its portion of a €7.2bn tranche of bailout aid that Greece is desperately attempting to secure to avoid bankruptcy.

Half of the €7.2bn, which is the subject of intense negotiations between Athens and its creditors in Brussels-based talks that resumed on Monday, is due to come from the IMF.

Eurozone creditors, who hold the vast bulk of Greek debt, are adamantly opposed to debt relief. But IMF support is crucial both for its funds and to sustain political backing for the Greece bailout, particularly in Germany.

According to two officials present at a contentious meeting of eurozone finance ministers in Riga last month, Mr Thomsen said initial data the IMF had received from Greek authorities showed Athens was on track to run a primary budget deficit of as much as 1.5 per cent of gross domestic product this year.

Under existing bailout targets, Athens was supposed to run a primary surplus — government receipts net of spending, excluding interest payments on sovereign debt — of 3 per cent of GDP in 2015.

With the large surplus now turning into a sizeable deficit, Greece’s debt levels would begin to spike again. This would force either Athens to take drastic austerity measures or eurozone bailout lenders to agree to debt write-offs to get Athens’ debt back on a sustainable path, the IMF believes. Officials said Mr Thomsen specifically mentioned the need for debt relief during the three-hour meeting.

“The IMF thinks the gap between the two realities is very large right now,” said one senior official involved in the talks. He noted that both Athens, which was resisting new economic reforms, and eurozone creditors would probably fight the IMF on the issue.

A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough.

The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece’s debt to “substantially lower” than 110 per cent of GDP by 2022. It currently stands at 176 per cent.

Some EU officials hope to agree a statement that would allow the European Central Bank to relax the cap it has imposed on Greek sales of short-term debt.