6 May 2015

Greek government hits out at creditors

Despite some reports over the past few days over a more positive atmosphere and progress in the negotiations since the reshuffle of officials leading the Greek team, yesterday saw the leak of a document which may raise hostilities once again.

The document (in full here, translated by @Greekanalyst) argues:

The serious disagreements and contradictions between the IMF and the EU are creating obstacles in the negotiations, as well as high risks.

It goes on to note that the IMF has red lines on pension and labour market reform, while the Eurozone is refusing to budge on its insistence on a large primary surplus and has categorically ruled out any debt write down. According to the document this has created “red lines everywhere”. Numerous reports quote an unnamed official as saying, “against this backdrop, there cannot be a compromise”.

Is this all playing politics or does the Greek government have a point?

The first point to note is that this does seem to be an attempt to deflect attention away from the Greek government’s own failings in the negotiations and onto the creditors. Furthermore, it also fits with the Greek government’s approach of talking tough while providing some concessions on substance. This allows them to save face at home. Playing politics then certainly seems part of it then.

All that said, while we don’t often agree with Syriza, they do have a point here. But it’s not a new one.

The IMF and Eurozone have long been at odds over how to hand the crisis in Greece and the dispute has long centred on the need for debt relief and on making the debt position sustainable. As far back as October 2011 you can find clear evidence of disputes between the two sides in a Debt Sustainability Analysis where the IMF said a deeper debt write down was being considered but noted the ECB disagreed with the approach (the same approach was noted in a February 2012 analysis). This is exemplified by the IMF’s Ex-post evaluation of the first Greek programme in which it noted:

Yet in Greece, on the eve of the program, the authorities dismissed debt restructuring as a “red herring” that was off the table for the Greek government and had not been proposed by the Fund. In fact, debt restructuring had been considered by the parties to the negotiations but had been ruled out by the euro area.

Indeed, the working assumption for the IMF since the end of 2012 has been that Greece will get further debt relief to bring its debt level “substantially below” 110% of GDP in 2020, from an original forecast of around 124%. Clearly, this dispute has been simmering beneath the surface of the long running crisis in Greece and was always going to come to a head at some point.

Does this matter for the current negotiations?

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In the end, the Greek document and these discussions do conflate two different negotiations. The Eurozone has consistently tried to separate out the short term negotiations – which focus on the completion of the current programme and the release of the final €7.2bn in funds – and the longer term negotiations – which focus around how Greece will fund itself after June and whether debt is sustainable.

Theoretically the questions of debt relief and sustainability are longer term and should be dealt with in the negotiations around the post-bailout agreement in June. This was always likely to be the time when the divisions came to a head. While the reforms are things which are due under the current programme, as is a primary surplus target, and therefore should be handled in the short term negotiations and completed by the government immediately.

This has now been complicated by the IMF reminding everyone that it cannot release funds in the short term unless long term debt sustainability is assured (this is largely a technical point and approval cannot be given until it is ticked off). This makes the two issues harder to separate. Once again this process has previously caused the tension to come to a head. As mentioned above though, the IMF has managed to push it to one side with the Eurozone assurances of debt relief and the assertion of large lasting primary surpluses of 3.5% to 4.5% (it’s important to note that this was never a target or an agreement since it was in the post-bailout period but basically an assumption/assertion to make the debt sustainability work and was subject to huge uncertainty).

For now then these divisions are likely to be dismissed. They are seen as part of the longer term negotiations and the IMF has shown enough flexibility (for better or worse) to keep them there. But as we have warned before, questions over how to fund Greece and make its debt sustainable were always likely to come back to the fore. The fact the IMF and Eurozone have deep divisions over this issue highlight just how difficult negotiations in June will be, if and when the Eurozone eventually gets there.