October 11, 2012

IMF Says Greece Needs More Time, Possible Debt Reduction

German finance minister says European governments can’t accept Greek debt cuts

A New Democracy supporter waved a Greek flag during a rally in Athens before the recent election. (Photo: AP) A New Democracy supporter waved a Greek flag during a rally in Athens before the recent election. (Photo: AP)

Christine Lagarde and Wolfgang Schaeuble are locking horns over Greece. Lagarde, head of the International Monetary Fund (IMF), says that Athens needs more time to meet its fiscal targets and should be given two more years to do so. She also said that debt reduction might be necessary before the next round of bailout financing. Schaeuble, Germany’s finance minister, says no—that governments cannot accept any losses on Greek debt.

Bloomberg reported Thursday that Lagarde, speaking at a press conference in Tokyo before the beginning of the IMF’s annual meeting, said that Greece needed more leeway to meet its targets. She was quoted saying, “It’s sometimes better to have a bit more time. This is what we advocated for Portugal, this is what we advocated for Spain and this is what we are advocating for Greece.”

Comments during the past few weeks by IMF officials seem to indicate that before it releases to Athens its share of bailout funding promised last March, the fund will look for European policymakers to make commitments to help Athens in various ways—even in writing off debt or offering further loans.

The IMF has already said it won’t be lending any additional money to Greece. Still, Lagarde said in the report, “We will spare no time, no effort to actually do as much as we can in order to help Greece.” The purpose of the fund, she added, is “to make sure that Greece is back on its feet, that it can one day return to markets, that it doesn’t have the need for constant support.”

Schaeuble begs to differ. He was quoted saying, “At the International Monetary Fund, there are indeed considerations that if the total Greek debt was reduced by means of a haircut borne by public creditors, the gap would be easier to close” to make Greece’s debt more sustainable.

However, he went on to say that nearly all European member countries have rules in place that specify no loan guarantees without assurance that the loan will be repaid. If an official sector involvement (OSI)—a debt reduction—actually happened, he added in the report, “the preconditions for further guarantees or payments would be destroyed.”

While Germany has staunchly opposed any relaxation of terms on loans and austerity conditions, there are indications that that stance is beginning to soften. In a report in the German daily Die Welt, Rainer Bruederle, a former German economy minister who is now parliamentary caucus leader of Chancellor Angela Merkel’s Free Democratic coalition partner, was quoted saying that public creditors may forego repayment of some Greek debt.

Pimco’s Mohamed El-Erian has already spoken out about the possible efficacy of an OSI in the case of Greece. In a Financial Times commentary published Sept. 28, he said that European creditor governments need to consider such an option, along with its costs and benefits. He pointed out that the longer governments hold off on such an action, the more likely it is that debt reduction will occur anyway, in an unplanned and badly managed fashion.

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