Clock ticks for EU to reach IMF deal on Greece

Posted on November 23, 2016

The eurozone is running out of time to secure an agreement this year on International Monetary Fund participation in Greece’s €86bn bailout amid splits over the country’s economic reforms, budget targets and debt relief.

The fund still wants reluctant eurozone capitals to provide more detail about how far they will go to ease Greece’s mountainous debt burden.

Getting the IMF to take part in the Greek rescue has been a key objective for eurozone governments, notably Germany and the Netherlands, since the bailout was agreed last year. Berlin sees the fund’s participation as critical to convince sceptical German lawmakers of the rigour and robustness of the programme — but is also one of the governments most reluctant to grant Greece major debt relief.

People familiar with the talks also say a decision on IMF participation in the bailout is on hold until the latest progress review of the Greek programme, which began last month, is completed.

Officials are racing to make headway ahead of December 5, the last scheduled meeting this year of eurozone finance ministers. The IMF has indicated it will seek to decide by the end of 2016 on its participation.

EU officials negotiated throughout the night on Monday with Greek counterparts — with the IMF also present — to try to agree the reforms Athens must complete as part of the latest review of the programme.

Completing the review will clear the way for the IMF and eurozone authorities to try to address longstanding differences about whether economic assumptions underpinning the programme are realistic.

Time may be running out to get the IMF on board. If the fund is not able to agree its participation in the bailout by the end of the year, political obstacles loom on the horizon in 2017 including the inauguration of Donald Trump in January as US president, with potential knock-on effects on the US position regarding the fund’s lending practices in Europe.

The Dutch general election in March could end Jeroen Dijsselbloem’s tenure as the country’s finance minister, and president of the eurogroup of finance ministers. He is seen as a key dealmaker to get the IMF on board.

Failure to bring the fund into the Greek bailout could reduce the chances of winning approval in the German parliament for new tranches of aid to Athens.

According to people familiar with the talks, one option is for an extra finance ministers’ meeting later in December or January to hammer out an agreement that would make it possible for the IMF to participate.

At the heart of the disagreement is that the IMF considers as profoundly unrealistic a target built into the Greek programme that the country should hit a primary budget surplus in 2018 of 3.5 per cent of GDP and then sustain it for “the medium term”.

The fund has argued that planned reforms would only produce a far lower surplus of 1.5 per cent of GDP. Accepting that target implies the eurozone having to provide debt relief “going well beyond” what has so far been discussed.

While the IMF is preparing a new debt-sustainability analysis on Greece, linked to the second progress review, people familiar with the talks said this was not expected to change the fundamentals of the debate.

A key point in upcoming talks is expected to be how long Greece should have to maintain the 3.5 per cent surplus target. Eurozone governments are still expected to insist that the target be reached in 2018, raising the question of how long it will need to be sustained after that.

The EU argues that after two straight quarters of positive growth and brightening economic prospects for 2017, the target is realistic.

On the EU side, there is also exasperation about a statement from IMF officials in September calling for further tax and pension reforms in Greece, amid concerns this masks policy successes and drains attention away from other priorities.

A European Commission spokeswoman said that “good progress” was made in talks in Athens over the past few days between EU, IMF and Greek officials on the ongoing review of the country’s bailout programme. “The goal remains to reach an overall agreement on the second review … shortly,” she said. “The eurogroup meeting on December 5 will be a good opportunity to take stock of this process.”

A spokesman for the fund told reporters this month that the IMF does not have a “hard deadline” for taking a decision on whether to join the Greek programme, but that it hopes an agreement “can be reached very quickly” with the eurozone.

For the fund to take a decision it needed to see a “complete package” where planned debt relief measures, and required reforms, match Greece’s fiscal targets, he said.

“We need the policies and the debt relief to ensure the programme adds up,” he said. “We need to be able to explain to our board that there is broad agreement on the type and the scope of debt relief that would be provided.”

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