Debt standoff leaves Greece at risk

In keeping with tradition, another bailout deadline was missed last week. The Greek government had insisted that it would complete the 15 program milestones by Thursday so the Euro Working Group could tick off Athens’s latest set of chores when it met on the same day. This did not happen as the coalition left three milestones to be rounded off this week. Close, but no 2.8-billion-euro tranche yet.

Greece’s goal is still to secure the installment when eurozone finance ministers meet on October 10, so in that respect the latest delay does not make any difference to the government’s funding plans. Its real impact is in keeping Greece and its lenders from focusing on the second review, which in turn means that the burning issue of debt relief remains a secondary matter.

The government has indicated that it wants the second review to be wrapped up by the end of October, allowing a full two months for the International Monetary Fund and the eurozone to discuss debt reduction measures so that the Washington-based organization can decide whether to join Greece’s third program before the end of the year.

Completing the review between October 10 and 31, especially given the politically sensitive nature of some of the issues to be discussed, seems an incredibly ambitious target. For instance, a government-appointed committee of experts delivered last week to Labor Minister Giorgos Katrougalos a set of proposals regarding Greece’s labor laws that appears to run counter to the demands for further liberalization being made by creditors, especially the IMF.

Katrougalos suggested the government’s tactic should be to “isolate” the IMF on this issue, as Athens feels the Fund’s ideas are more extreme than the European norms, if such a thing exists in this field. The problem with trying to marginalize the IMF is that it is the only friend Greece has left when it comes to the issue of debt relief.

The IMF prodded the eurozone on this matter just a few days ago, when it released a brief report following the so-called Article IV consultations in Athens. The Fund called for more significant and quicker debt relief than the Europeans have been willing to contemplate so far.

“Further debt relief will be required to restore sustainability, going well beyond what is currently under consideration, and it should be calibrated on realistic assumptions about Greece’s ability to generate sustained surpluses and long-term growth,” said the Fund, adding that primary surplus targets of 3.5 percent of gross domestic product from 2018 onward are “unrealistic.”

So far, the eurozone has only been willing to consider short-term measures, which involved technical steps being drawn up by the European Stability Mechanism (ESM), Greece’s largest single creditor. Speaking on behalf of the eurozone lenders, Berlin has made it clear that there is no prospect of a meaningful discussion on the kind of measures the IMF is talking about until after the current adjustment program has been completed in 2018.

Keeping to his role as party-pooper-in-chief, German Finance Minister Wolfgang Schaeuble suggested a few days ago that there is no reason to discuss Greek debt relief at the moment since its servicing costs are low and the emphasis should be on getting through the program of reforms that lies ahead.

Of course, what Schaeuble did not admit is that as the days go by, and the political challenges faced by German Chancellor Angela Merkel and her CDU party mount ahead of next year’s federal elections, so the appetite for discussing any policy that could be labeled as soft on the Greeks and hard on German taxpayers diminishes.

In this respect, the Greek government’s attempt earlier this year to sideline or even scapegoat the IMF appears shortsighted. The spat with the Fund allowed the eurozone to kick the debt question into the long grass, buying the time that Schaeuble and others wanted.

Those lost months could prove incredibly costly because European politics is shifting in a direction that does not favor Greece and its hopes of having its burden eased.

If the issue is put off for now, by the end of July 2018 (when the current program is due to end) France will have held a presidential vote and the Netherlands general elections, while there are doubts about what the political situation will be like in several other eurozone member-states, such as Finland and Spain. The German parliament, meanwhile, could look quite different, with the far-right AfD expected to make gains and Merkel’s center-left coalition partners, the SPD, struggling.

Athens could find itself staring across the table at a collection of governments that either as a result of a change in administration or because of the prevailing political wind in their countries – will have even less of an appetite to discuss the kind of debt relief measures that the IMF is advocating.

In the shorter term, the current program could hit a brick wall as a result of differences between the eurozone and the IMF. At the moment, the Fund does not seem willing to come on board unless serious debt relief is on the table, but the Europeans are reluctant to take on the political cost of fulfilling this wish.

Schaeuble, though, has promised German MPs that the IMF would be part of the third program for Greece. Without the Fund, he may not be able to secure new disbursements for Athens next year, which means Greece could be trapped in limbo or face the prospect of having to agree a totally new program with its eurozone partners.

In the meantime, Prime Minister Alexis Tsipras continues to repeat the mantra that there will be positive developments on the debt front before the end of the year. It is doubtful, though, if he will be able to sell some tweaking of interest rates and maturities (because it seems that is about the most he can expect) as a major breakthrough.

In other words, all the key players in the Greek crisis – Berlin, the IMF and Athens – appear to have shut their eyes and are hoping for the best. The history of the Greek crisis tells us that some unsatisfactory fudge will be reached but it is difficult to see at the moment how all this could end well, particularly for Greece.