Reuters — Greece needs “up-front, unconditional” debt relief and a sharply lower budget surplus target to make its bailout viable and its debt sustainable over the long term, International Monetary Fund staff said on Monday.
In a new debt sustainability analysis, IMF staff said few countries have ever managed to achieve the 3.5 percent primary budget surplus that European lenders have demanded. They added that this could not be sustained for long, and there is little political support for the deep cuts needed.
“In view of this, staff believes that the DSA (Debt Sustainability Analysis) should be based on a primary surplus over the long run of no more than 1.5 percent of GDP. This target would in staff’s view be within the realm of what is plausible,” the report said.
The new analysis was released a day before European finance ministers meet on Tuesday to review Greece’s bailout and discuss the potential for debt restructuring, underscoring the IMF’s hard line in bailout negotiations.
On Sunday, Greek lawmakers approved tax increases and a new privatization fund to help pave the way for disbursement of new bailout loans and debt relief.
But the IMF and European lenders disagree over the need for immediate debt relief, with Germany pushing to delay any decisions until the Greek bailout program ends in 2018.
In Monday’s report, IMF staff said the debt relief component needs to be completed before 2018.
“Providing an up-front, unconditional component to debt relief is critical to provide a strong and credible signal to markets about the commitment of official creditors to ensuring debt sustainability, which in itself could contribute to lowering market financing costs,” the staff wrote.
While a definitive deal on debt relief at Tuesday’s meeting appeared unlikely, some ministers hope to be able to agree that Athens has met the conditions for release of 10 billion euros in new loans to avoid another default in July.
IMF staff said lower targets would still be sufficiently ambitious for European lenders to support. They said that with the lower targets – and a better chance for success – Greece could meet IMF criteria for “exceptional access” lending criteria.
The staff report called for a “substantial reprofiling” of European loans, including a low, 1.5 percent interest rate until 2040. It said extending maturities by up to 30 years could reduce gross financing needs by 7 percent of gross domestic product by 2060. Deferring payments through 2040 could reduce gross financing needs by another 17 percent of GDP.
