Schaeuble, IMF close to compromise that will delay decisions on Greece debt relief

German finance minister Wolfgang Schaeuble and the International Monetary Fund have reportedly found a solution to the Greek debt relief problem. The solution can be described in one single word: DELAY.

According to German Handelsblatt, several unnamed sources said that Berlin and the IMF are very close to a solution that will save face both for the German finance minister as well as for the Fund.

According to this solution scenario:

1. The IMF will make a commitment to participate in the program technically and later financially. The financial participation will be possible once the Fund have its report about the Greek debt sustainability at the end of the current program in august 2018.
2. Schaeuble will keep insisting on the IMF participation and therefore gain time.
3. The ESM will disburse the 7-billion euro bailout tranche in July.

It is not clear, whether the German side believes that the IMF financial participation will be accompanied with a new Memorandum of Understanding, which will be an additional austerity package for the drained Greeks. Most likely, however, there cannot be new IMF loan without a new austerity package.

The German finance ministry has been insisting that there cannot be any possible debt relief before the Greek program concludes. According to a ministry spokesman, Schaeuble would need a new mandate by the Bundestag, the German parliament, should a decision be taken now. Formally, the IMF’s participation in the current aid program remains indispensable, the spokesman added.

A Bundestag voting for Greece’s debt relief just a few months before the German elections? This is politically not possible.

In its “Greece – Preliminary Debt Sustainability Analysis (DSA)” published on 23 May 2016,  the International Monetary Fund had stressed the need for an unconditional debt relief.

“Greece needs “unconditional” debt relief if the country is to get its finances back under control and return to fiscal health.”

“Debt was deemed sustainable, but not with high probability, when the first program was adopted in May 2010. The much deeper-than-expected recession necessitated significant debt relief in 2011–12 to maintain the prospect of restoring sustainability. Serious implementation problems caused a sharp deterioration in sustainability, raising fresh doubts about the realism of policy assumptions, especially from mid–2014. Developments since last summer suggest that a realignment of critical policy, and DSA assumptions can no longer be deferred if the DSA is to remain credible. Staff believes that revised program targets remain sufficiently ambitious to warrant continued support from Greece’s European partners.”

Greek prime minister Alexis Tsipras had warned that the austerity measures the Parliament adopted on May 19  will not be implemented if no debt relief measures.

What will the Greek prime minister do once he finds out that the Eurogroup on June 15 that there will be comprehensive solution that will contain conclusion of second review, loan tranche disbursement AND debt relief measures?

Government spokesman Dimitris Tzanakopoulos said Thursday, he was confident Greece will get a debt deal on June 15.

Speaking to Star TV, Tzanakopoulos said “On June 15 there will be a solution that will cover all sides.” He stressed that Greece will test the return to bond markets. “We have to be ready because we will have to finance our debt through the markets as of August 2018,” he added.

The adopted austerity package of 4.9billion euros is to be implemented in 2019 and 2020. the Greek government has time too.

I’m afraid the maximum we can expect on debt relief on June 15 is a sentence saying the partners commit to discuss the issue in 2018. In this case, Greece will have got 2 in 3.

PS Schaeuble may not be finance minister after September 2017, but provided that Merkel wins the elections again – which most likely happen-  he will have left a very well-trained successor in his position.