IMF pushes Europe for formal restructuring accord on Greek debt

Euro-area countries must commit to a formal restructuring of Greece’s debt before the International Monetary Fund will lend new money to the country, according to one of the IMF’s top officials.

Pledges to review Greece’s debt servicing won’t be enough unless they’re accompanied by specific terms for paring back the borrowing burden, David Lipton, the IMF’s first deputy managing director, said in an interview in Washington. Greece received an 86 billion-euro bailout in August from the 19-nation currency bloc, which now wants the IMF to provide further support.

“We want a debt operation agreed between Greece and its creditors,” Lipton said. “For us to go forward, we want more than a general assurance that the matter will be handled, with enough specific details on how it will be handled to assure the fund that Greece’s debt service will be on a sustainable path.”

Greek Prime Minister Alexis Tsipras has requested a new IMF program, which would replace a dormant one that’s on track to expire in March. Any new IMF program would have to be approved by an executive board representing the fund’s 188 member nations. Lipton said the amount of new IMF funding hasn’t been decided.

Germany and other creditor nations say the Washington-based IMF, which lends to countries with balance-of-payments troubles, should play a financial and technical role in shoring up Greece’s economy and restoring the nation’s access to financial markets. As a result, fund participation is a central goal in the euro area’s bid to make Greece’s third bailout its last.

Three rescues

The bailout loans Greece has amassed over its three rescues are the focus in the debt relief talks, since Greece’s private sector debt was already restructured in early 2012. Many euro- area nations have said writing down the principal of the loans would be a “red line,” while indicating they might agree to better servicing terms like lower rates and longer loan maturities that would reduce how much Greece has to pay back over time. A technical group in Brussels is studying details.

Greece in June became the first advanced country to miss a debt payment to the IMF. The country cleared its arrears to the fund in July.

In 2010, worried that a Greek default might trigger a European banking crisis, the fund’s board agreed to waive a condition of IMF bailouts that required Greece’s debt to be sustainable. But member countries outside the euro zone are unlikely to give Greece special treatment this time.

Lipton said the IMF has four priorities for a new program: implementation of policy pledges, fiscal structural policies needed for medium-term sustainability, fixing the banking sector, and addressing the debt. In addition to the debt relief talks, the financial sector has become more prominent and was a top discussion topic at the IMF annual meetings in Lima in October.

Asset-quality review

“There’s a lot of work to be done to ensure that the banking system is sound and well governed,” Lipton said. “The Europeans share that concern with us, and that’s why so much attention is being placed both on the asset-quality review and on the recapitalization or buffer requirements.”

Since Greece struck its latest euro-area deal, the IMF has been helping European authorities set Greece’s aid milestones and monitor progress. Lipton said the fund can’t get more involved until there’s a deal on easing the debt, although “the timing of it is another matter.”

So far, European discussion has focused on Greece’s servicing commitments rather than its cumulative red ink.

“We are going to look at how Greece can manage its debt on an annual basis, debt service,” said Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area finance chiefs, in an Oct. 8 interview. Speaking at the IMF’s Lima meetings, he said Greece’s debt management “should be OK” because of what the euro area has already done to ease bailout loan terms.

Unlikely to satisfy

That’s unlikely to satisfy the IMF, which has made debt relief its price of admission for joining the new rescue effort, said Andrea Montanino, a member of the fund’s executive board from 2012 to 2014. He said the IMF now needs euro-area officials to act, not just offer pledges similar to the currency zone’s November 2012 promise to ease Greece’s debt if certain conditions were met.

“The Europeans would prefer not to have a debt restructuring, for many reasons, particularly for political reasons,” said Montanino, now director of the Atlantic Council’s global business and economics program in Washington.

When Greece agreed to a 28-billion-euro loan program with the IMF in 2012, the loan documents said Greece would require “debt relief and long-term transfers from its European partners.” This commitment was essential to win the support of nations outside the euro area, said Montanino.

“Among Europeans, it was very clear this was just a political statement, nothing more,” he said. “There was never a real commitment, but the fund needed to include that sentence, otherwise the other countries would have not supported the program.”

‘The right one’

The U.S., the IMF’s largest shareholder, may back the fund’s push to tackle the debt concretely. The approach to the August bailout appears to be “the right one,” assuming all sides can make good on the strategy, Nathan Sheets, the U.S. Treasury’s undersecretary for international affairs, said in an interview on Oct. 30.

“It’s imperative that all the major participants follow through on their commitments,” Sheets said. “Now we’re in a place where the two sides need to actually implement those commitments, and so for Greece, it means continuing to move toward the reforms, and for Europe, that means kicking off the conversation on a debt restructuring.”

A study released in January by Bruegel, a Brussels-based research group, found that Greece could gain a 31.7 billion-euro benefit in net present value if euro-area creditors agreed to three measures: more interest-rate reductions on loans from Greece’s initial bailout, extending the maturity of those loans by 10 years, and extending the loans from Greece’s second rescue program.

Creditors have been considering similar steps since at least 2013, when they weighed extending Greece’s bailout loans to 50 years from about 30 years, as well as cutting interest rates on the loans from the initial aid package.

[Bloomberg]